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Operators’ inability to maintain funds to pay losses due to accidents and large claims is already observed.
Shipowners experienced a marginal increase in maritime insurance costs last year, marking the end of a six-year run of declining premiums, according to Drewry’s Ship Operating Costs Annual Review & Forecast , as the values of the assets recovered and the insurance market showed signs of a new direction.
The change in market confidence and the increase in claims in related sectors is driving up costs, which leads many to wonder why the insurance market is changing, at what cost increases and for how long. Drewry points out that we are at the end of the cycle that began to fall in 2013. In the last four years, the protection and indemnity insurance (P & I) has decreased in price by 30-40% and the market of Hull and Machinery (H & M) much more and for longer as demonstrated by the continuous negative returns. But as repeatedly predicted by the consultancy, all this will change with important implications in the operating costs of the ships for the shipowners, of which the insurance represents up to 10%.The latest annual P & I premium renewal round indicates that clubs enjoy a credit rating that has prevented all but one of them from requesting a general rate increase.
In general, shipowners with high claims records have seen their premiums increase, while the rest have enjoyed “as is” renewals. In addition, there has been very little turnover among clubs, with few eye-catching movements by large fleets and specific rate increases. Another feature of the renewal period has been that clubs enjoy organic growth, with the result that the strongest half of this industry has reported growth of up to 5% in both revenue and tonnage.
However, Drewry does not expect such benign conditions to remain for long. It is expected that the club’s free reserves will be eroded in the next two years, which will lead to rate increases and general increases. Until now, the pressures on P & I insurance are more evident in the fixed premium market, where consolidation and saturation are leading clubs to acquire more of this fixed premium business. From Drewry they expect this trend to persist for at least the next two years.
Changes in the market An advance of what can affect the P & I insurance is already taking place in the H & M market, where 75% of the fixed expense in maritime insurance is made. Here, the signs of change in the market are more evident, as insurers react to the large losses of the reinsurers of the maritime market as a result of natural disasters, losses of ships and shipyards, as well as the general inability of the operators of maritime insurance to maintain sufficient funds to pay for losses due to accidents and large claims of owners.
The loss of overall attractiveness of the sector with its long recent history of losses has caused some disappointment. There has been a reduction and even outright closures, especially in the Lloyd’s market, where some well-known insurers have left the sector to a large extent.As a result, there is a marked change in the appetite of reinsurers for the H & M marine market in 2019. Previously, they were attracted by attractive solvency rules that allowed the subscription of mobile properties, such as ships, without the need to match the funds of claims reservation as necessary for other types of property.
Drewry expects the rate increases for this year and the hardening of terms and deductibles to continue for at least two more years, before a general softening begins. It is expected that H & M’s premiums will increase up to 10% year-on-year for acceptable businesses and perhaps up to 20% for ship owners of bad records in the coming years.Similarly, inflationary pressures in the reinsurance market will force P & I Clubs to increase coverage rates in subsequent years, as well as double-digit percentage increases in some cases.
For Drewry, the inflation of the operating costs of ships will be accelerated by higher maritime insurance premiums, particularly for those owners with poor claim records.