Staying on an even keel

Staying on an even keel

Last year was a generally good year for marine insurers, and most expect more of the same in 2004, according to a survey by the American Institute of Marine Underwriters. Can the industry handle its newfound prosperity?

David French thinks the answer is yes. French is president of American International Marine Agency in New York and chairman of the American Institute of Marine Underwriters, which represents about 90 percent of the companies providing marine insurance in the U.S. market. He said signs point to stable premiums for customers and continued close attention to underwriting standards that will permit insurers to earn a profit.

Cargo insurance, the largest line in marine insurance, has been a bright spot. "There's no reason to believe that the cargo market will deteriorate in the near future. The economy is coming back," French said. "We expect shipment volumes to increase as a result of the improvement in the economy, which translates into more premiums for underwriters."

Marine underwriters say their combined ratios, which measure revenue against losses and expenses, will improve this year. As a result, rates are likely to remain the same or increase only moderately, insurers believe.

The London hull and protection and indemnity markets have not fared as well. High-profile ship accidents during the last few years and diminishing investment income have battered the industry. The North of England P&I Club suffered an overall underwriting loss of $338 million in 2002-03, equivalent to 24 percent of premium income. The club expects premiums to increase 15 to 20 percent early this year. Premiums for hull and marine liability, which have seen double-digit rate increases, will continue to rise.

While financial results appear mixed, most insurers believe new security rules will benefit underwriters. With container ships vulnerable to terrorist attack, "a lot more attention is being paid to the handling of cargo and to people doing the handling," said James Craig, president of the AIMU.

Ian Lush, marketing director for the London-based TT Club, which insures containers and other marine equipment, agrees. "People are gradually becoming more aware of the risks they have to watch out for," he said. The TT Club is stepping up the degree and frequency of its inspections and surveys, he said.

Vessel and cargo security rules may help insurers, but other anti-terrorist legislation may impose additional burdens on the industry. Insurers' financial transactions, such as payment of insurance claims, will have to follow new rules designed to block payment to terrorists.

The new rules require insurers to screen claimants against a list of "specially designated nationals and blocked persons." French said the AIMU supports the principle behind the rule but needs to know what level of due diligence is necessary and also whether "inadvertent failure to comply" will be considered a mitigating factor. Penalties include fines of up to $1 million and up to 12 years in prison. To assist its members, the AIMU has created a software program that allows underwriters to crosscheck claimants against the State Department's list of suspected terrorists.

Industry leaders are watching other trends in marine insurance. Several executives say they worry that new underwriters lack the training and experience required in the highly specialized, sometimes arcane marine-insurance field, and that cost-cutting is preventing new underwriters from being properly trained.

And in insurance, prosperity can be an enemy. When their market improves, as it has during the last two years, insurers worry that the result could be complacency in underwriting. "We need to get back to the basics," said Richard DeSimone, president of Global Marine, a New York-based subsidiary of St. Paul Cos.

In contrast with much of the 1990s, insurers no longer can assume that rising financial markets will enable them to recoup underwriting losses through investments. Even in a rebounding stock market, insurers will have to show an underwriting profit.