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Perfect storm as bill for costly casualties coincides with empty pockets
Hefty rate rises could not come at a worse time for an industry that is already struggling with a dire financial environment.
The perfect storm is a tempting metaphor for tumult in the shipping industry but for the 2013 renewal of protection-and-indemnity (P&I) cover, it for once appears to not be an exaggeration.
Shipowners are facing substantial general increases, with a further rise in reinsurance costs on top at precisely the time they are least able to pay.
The higher premiums are driven by claims trends, with the more costly casualties showing the most adverse development.
And to complete the bad news, investment returns are low, so are no longer capable of bailing out underwriting losses.
The conjunction of adverse factors means shipowners are facing one of the most difficult renewals in living memory in less than a month’s time.
General increases range from 5% to 15% across the clubs, with a rise in reinsurance rates averaging 4% on top.
The general increase averages out at about 8%, so the total increase is around 12% for the average owner.
But for some owners — ironically those who have performed best in the past — the increases will be much more onerous.
Although the average premium across the clubs is about $2.5 per gross ton (gt), there are a number of large bulkers paying only $1.00 per gt and some VLCCs on $1.50 per gt.
Some owners will pay double
The mathematics of the reinsurance tariff means that owners of tightly rated tonnage will be paying as much as twice the average rate rise once the general increase is included.
The total P&I premium for a low-paying 180,000-dwt capesize currently on a $90,000 to $100,000-a-year premium could go up by as much as 25%.
A VLCC owner who might be paying a premium of less than $200,000 at the moment could face an increase of more than 15%.
And there may well be howls of protest from ferry operators that they are being penalised for a cruiseship casualty, with the reinsurance cost alone for a 15,000-gt ferry, maybe trading in the Mediterranean on a less-than-lucrative route, going up from $21,000 to $47,000 a year.
So it is not surprising that a very contentious renewal is in prospect.
Renewals are about to finally get underway, now that owners and brokers have had a chance to digest the reinsurance tariff announced a fortnight ago. So it remains to be seen exactly how confrontational the renewal will be.
There are also a few other squalls looming on the horizon for owners and the clubs.
While the clubs’ total premium income has been increasing, it has been declining in risk-adjusted terms as a result of growth of the world fleet and new vessels being insured at lower rates than older vessels — the long recognised problem of churn.
The clubs also appear to be facing a threat from failing to achieve anything like the rate rises general-increase announcements suggest they should be getting.
A recent report from the Arthur J Gallagher broking group suggests there has been an overall reduction in the premium of the clubs of 4.7% on a dollars-per-gt basis.
The same broker also suggests that the forces shaping next month’s renewal are not going away.
Tough renewals ahead
So owners need to be ready for a succession of tough renewals.
Just about the only positive factor present ahead of the 2013 renewal of P&I cover in a month’s time is that club reserves are at record levels of about $3.9bn at the start of the current P&I year.
But the clubs’ financial strength may sit badly with owners who see big increases arising from cruise and containership casualties hitting vessels of all kinds.
And in the current state of shipping markets, there may be owners in a “can’t pay” rather than “won’t pay” position.
P&I accounts for 40% to 60% of most owners’ insurance bills, with the figure usually higher for owners of crude tankers compared to bulkers or other dry vessels.
Questions about the fairness of the huge increases facing many shipowners seem unlikely to go away. Is it right that bulker owners are picking up most of the bill for the 2013 reinsurance renewal? Is it equitable that ferries are being hit as hard as cruiseships? Is it right that there remains no differentiation in the reinsurance tariff between bulk carriers and containerships?
It is possible to imagine a wreck removal on the scale of the Costa Concordia involving a mega-boxship but it is difficult to envisage a truly massive claim arising from a bulker unless one gets into the most remote of possibilities, such as a mass poisoning from a contaminated food cargo.
But the reality is that there are just not enough cruiseships around to pay for the Costa Concordia or containerships to pay for the Rena and Bareli.
But dry-cargo vessels and crude tankers account for more than 80% of the world fleet by tonnage, so there is little alternative to these ships paying up.