Car carrier casualties prompt increased concerns among IUMI leadership

Associations, Car trade, Conferences, Seminars, Forums, Marine Insurance, Maritime Accidents, Markets, News — By on February 2, 2015 at 12:42 AM
Dieter Berg

Dieter Berg

Car carrier casualties prompt increased concerns among IUMI leadership

By James Brewer

Marine insurers are sharpening their focus on the safety and stability of pure car carriers after the Hoegh Osakagrounding in January 2015 underlined that a casualty of the kind could cause a $100m loss.

With operators favouring increased sizes of this vessel type, in common with the ordering trends for containerships and other categories, leaders of the International Union of Marine Insurance are displaying anxiety. They are sharing their worries with others in the industry and will report to the 2015 annual conference of IUMI in Berlin in September.

The January 3 incident in which the master of the Hoegh Osaka manoeuvred the ship into a grounding to avoid what would have been a far more dangerous capsize was cited by IUMI president Dieter Berg and ocean hull committee chairman Mark Edmondson as among a series of concerns discussed during the IUMI winter meeting in London.

Mr Berg spoke of ever-larger vessels being used to transport high value new cars, with the latest car carriers being designed with a capacity of up to 8, 000 vehicles.

He said that the 1, 400 vehicles on the Hoegh Osaka included 1, 200 luxury models. Some of the cars have been rescued and driven off, but if they had been written off, the potential insurance cost could have been around $100m.

Of other car carrying ships involved in large claims, the Asian Empire which was hit by fire off Tokyo in April 2014 resulted in a loss estimated at €70m to €80m, and the Baltic Ace sank in the North Sea in December 2012 after a collision with a containership. The Cougar Ace listed off the coast of Alaska in 2006, with 4, 700 Mazda cars on board. Carrying 2, 871 cars, the Tricolor sank in the English Channel in December 2002 within half an hour of a collision with a cargo ship.

Mark Edmondson

Mark Edmondson

Mr Edmondson, who is marine hull class underwriter at Chubb, said that regulators had addressed the design of roll-on, roll-off/passengerships, but pure car carriers had a unique configuration which was not comparable, “so these things can happen.”

The ocean hull committee chairman warned of claims volatility overall and said that over the next 20 years, average vessel size was set to increase significantly. “Underwriters need to think a bit more carefully when they do their pricing in the future.”

Claims frequency had reduced, but the size of any of claims generally speaking had increased. He went on to express concern about the growing gap between salvage capability and the risks insured. As vessel size grew, the situation became more complicated. If you looked at container vessels of 4, 000 teu upwards, the risk profile was much wider than might be expected. “You have seen what happened to the Rena, ” said Mr Edmondson. The modestly sized ship, of just over 3, 000 teu, broke up on a reef off New Zealand in 2011 and costly wreck removal has pushed total claims costs to an estimated $425m.

Among other leading topics for IUMI this year will be container vessel safety and fire prevention. Mr Edmondson pointed to the effort to unify rules for boxship construction. Introducing rules for new vessels was one thing, but it was important to make sure there was no significant legacy risk with the fleet that is in operation. He forecast that “the regulators will be crawling over the Norman Atlantic casualty particularly because the evacuation procedure was singularly unsuccessful.” The Italian-owned ferry was overcome by fire on December 28 2014 after leaving a Greek port, and although 400 people were rescued, there were 13 deaths.

Mr Edmondson listed among a catalogue of key problems cyber risk, and trying to identify exactly what might be the parameters of a cyber attack. In terms of tackling the issue, “we certainly watch with interest IMO’s efforts to develop voluntary guidelines. What you see today [in terms of risk] may not be what you see in 18 months’ time.”

On regulatory attempts to prevent damage to ships’ engines from catalytic fines in bunker fuel, he said: “I think we need to revisit that to find out how effective that has been.”

Mr Edmondson said that hull underwriters had enjoyed a relatively benign 2013-14, “but the absence of claims does not mean the absence of risk. Even in the past several weeks, we have seen how the position can change quite quickly. My feeling is that we are in a market that is much less elastic than it used to be, much less driven by loss history.”

 Simon Williams

Simon Williams

In terms of the continuing soft insurance market, he said “you have to recognise that market conditions are unlikely to change. There have not been many new entrants, but that does not mean there has not been an increase in capacity.” He did sense however that underwriters had been more disciplined in setting rates in recent times.

Marine and energy insurers are alert to the potential of new influxes of capital militating against their attempts to raise rates. IUMI leaders said that low interest levels in capital markets had made insurance an attractive proposition as an investment. The financial crisis was not over, so many companies were getting into marine insurance as a diversification tactic.

As a result, many lines of business, marine and non-marine, were suffering. The global marine market has failed for 17 years in a row to make an overall profit.

Even though the Costa Concordia insurance bill reached nearly $2bn, insurance market pricing was largely unmoved. Now the cargo market, a “bread and butter” source of income, had been worsening amid strong competition.

Mr Berg spoke of the impact of hailstorms. Since 2004 there were 20 major hail events in Europe which produced losses for the marine insurance industry. The worst case scenario of a European hailstorm indicated a loss of €500, 000 to €1.5bn. It was important for insurers to control accumulation of losses and to implement as reliable catastrophe modelling as was possible. The IUMI president referred to the $650, 000 damage to vehicles in storage on the east coast of the US during Superstorm Sandy in 2012.

Mr Berg, a senior executive at Munich Re, said that insurance companies were well capitalised and hungry for business.

Simon Williams, chairman of IUMI’s offshore energy committee, said the plummeting oil prices would have a huge impact generally, but it was too early to establish what it would be on energy insurance. Crude oil had fallen from $115 in July 2014 to around $48 at the time of speaking. Mr Williams, who is head of marine and energy at Hiscox, said most energy companies purchase their cover during the first six months of the year, so a clearer picture would emerge later.

There could be fewer construction orders for some yards, and many clients would start to look at valuations of their assets, although many projects had a long lead time and were funded by the big oil companies. “We could start to see, I think, more units being laid up.”

But “the product is still in the ground, it is not disappearing” and there would be those who wanted to put that asset into production. “A lot of the oil companies focus on hedging, so there may well be some stability.”

In insuring the major projects, most of the energy companies take a huge amount of cover on their own books. “It is comforting for insurers that these people have skin in the game, ” said Mr Williams.

He said that recently energy insurance has experienced a benign environment of losses.

Patrizia Kern, who chairs the IUMI facts and figures committee, spoke of a difficult atmosphere for insurers. “There is light economic growth globally with the exception of China; the challenging macroeconomic environment persists, and this is posing a lot of challenges for us. The ships that are underutilised create overcapacity and increase moral hazard.”

Ms Kern, head of Continental Europe marine at Swiss Re, said that all lines of business faced higher capital costs and other expenses. These burdens could push a loss ratio of close to 80% towards a final result of 100%.

She said that business had shifted to Asia and Latin America, driven in particular by large broking houses increasingly placing business locally as opposed to traditional hubs.

IUMI has determined that the common theme for its 2015 annual conference in Berlin (September 13-16) will be “Technical, Financial and Human Factors – is there a New Normal?”

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