Isolated by mighty seas on all sides of our island nation, Australia is as reliant on ocean freight as any other country on earth.
In fact, more than 99% of Australia’s international trade by weight is carried by ship. That means last financial year Australian ports managed more than $400 billion worth of cargo.
Add to the value of the cargo the untold millions of dollars in ships and port infrastructure and you are looking at an insurance market with enormous sums insured, as well as enormous exposures. It’s also a market with estimated gross written premiums of between $500m and $700m.
Zurich Australia Head of Marine Matthew O’Sullivan says although it was largely left out of the resources boom, the marine sector has been growing steadily, with strong trade conditions with Asia the main driver.
“Like the non-marine market, consolidation of major companies and the emergence of underwriting agencies has tightened competition, putting brokers in a strong position to be very good advocates for the customers,” he says. “Insurers need to maintain close relationships with them while continuing to provide value-added solutions to their customers, not just compete on price.”
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Ron Johnson, Allianz Marine Specialty Regional Underwriting Manager, says the aging of the marine insurance workforce is also changing the industry. He says marine insurance is regulated by a Marine Insurance Act more than a century old. “Young people moving into the sector don’t even know of its existence and the fact it may be the defining legislation on a particular matter when it comes to marine,” he says.
“Technical specialists in the marine insurance sector are aging very quickly, with few new entrants resulting in the broking sector having very few specialists left. Coupled with the diminishing revenue base from marine cargo, the broking sector is increasingly moving toward standard templates and treating marine as a minor line of business.”
The mix of marine liability
The range of marine operations that require liability cover is broad-ranging, including charterers, cargo owners, stevedores, ship repairers, ship builders, and marina and terminal operators to name a few. Zurich’s Matthew O’Sullivan says the main trends in liability all come down to increasing complexity.
“Many of these industries are becoming more regulated, more complex in terms of operations, and so the liability exposure of the insured is constantly changing,” he says, pointing to the example of logistics, where logistics liability insurance increasing in popularity. It combines the insurance lines of carriers’ liability, warehousemen’s liability and general liability and is designed to cover the exposures faced by logistics operators, including haulers, storage and distribution operators, freight forwarders, non-vessel operating common carriers and railway operators.
“Companies are developing inter-modal distribution centres, sophisticated storage and distribution operations, high-tech cargo-handling facilities and more,” he says. For example, carriers are becoming involved in distribution and warehousing, so we developed a product to cater for this evolution.
“The contracts the insureds are engaged in with their customers are becoming more complex and onerous, therefore the liability policies that cover their insureds for potential breaches of these contracts need to evolve as well. Brokers need to partner with insurers that understand the market and provide no-gap solutions,” O’Sullivan says.
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AIG Australasia Marine Manager Grant Sheppard says environmental risks should also remain high on a broker’s list of concerns.
“While most marine liability offerings will cover pollution liability arising from a sudden and accidental event, consideration should be given to liabilities arising from exposure to ‘gradual’ seepage and pollution,” he says. “Specialist environmental impairment liability solutions are certainly also worth considering.”
Sunderland Marine specialises in fishing and aquaculture and Australian Branch Manager Chris Kennedy says claims are increasing in both cost and frequency due to environmental concerns and an increasing public interest in areas such as marine parks.
JOIN the club
Allianz’s Ron Johnson says many commercial vessel owners in Australia will seek liability protection through an entry into Protection and Indemnity (P&I) Clubs in London that can offer very big limits, for example $500m.
A P&I Club is a mutual insurance association that provides risk pooling and insures for open-ended risks that traditional insurers won’t cover, such as a carrier’s third-party risks for damage caused to cargo during carriage, war risks and risks of environmental damage such as oil spills and pollution. The clubs use a complex system to determine liability and combine to provide funds if there is a large claim. Originally the club members were shipping-related entities but freight forwarders and warehouse operators have more recently been joining.
Even though the marine sector accounts for less than 1% of the overall market, it bore more than 10% of the losses encountered in superstorm sandy.
Entry fees are usually based on an estimate of liabilities for the year but disaster events such as the wreck of the Costa Concordia can result in the need to make additional subscription calls on members.
Sunderland’s Chris Kennedy says grounding from navigational error, mooring failure or engine failure are the most frequent causes of loss. “A good understanding of the area of operation and nature of the business, plus operator experience, contributes to management of these events,” he says.
Zurich’s Matthew O’Sullivan says there are specific risks associated with brown-water (coastal) and charter vessels relating to the type of vessel, its usage and trading conditions.
“Vessels operating in remote areas have specific maintenance exposures and potential increased salvage costs; and charter vessels have additional exposures to passengers. There is not a generic set of factors applicable across the whole sector outside the specific risk factors.”
Further from the coast, piracy remains a risk. According to Allianz Global Corporate and Specialty research, pirate attacks worldwide declined by 11% during 2014 to their lowest level in six years, but a hotspot close to Australia, Indonesia, recorded 106 attacks, marking a 700% increase in five years.
“The shift of the piracy focus from the Gulf of Aden to a new hotspot in Indonesia should be of concern to all businesses in the Pacific region involved in international trade as all shipping between the region and Asia has to transverse these waters,” Johnson says.
Although most of these piracy incidents remain low-level, opportunistic thefts of crews’ cash and valuables rather than kidnapping, there is the potential that attacks may escalate into a more organised model of piracy if they are not controlled.
Cargo insurance forms the basis of the contemporary understanding of underwriting for risks, with the first policies being issued more than 400 years ago from the famous Lloyds Coffee House in London.
Australian cargo insurance broker Cargo Safe, states that as these first policies were issued on marine cargo risks, the laws affecting transit between territories, jurisdictions and over water were based on marine terms, and ‘marine cargo’ remains the term mainly used in cargo insurance wordings for other transit methods such as air, road and rail.
There are two main types of cargo insurance:
Open or annual cover, mainly for regular shippers such as importers and exporters: this is the most common form, frequently used by freight-forwarding agents where a policy is issued to cover a number of consignments shipped between various ports and destinations within the year. The policy may have a specific value requiring renewal once the insured amount is exhausted, or an open policy for an agreed period.
Single cargo shipments for one-off ‘voyage specific’ shipments: this is usually taken by individuals and small businesses. The cargo is priced and covered as one shipment from a specific point of departure to a destination (a.k.a. ‘warehouse to warehouse).
Allianz’s Ron Johnson says one of the most significant new risks in cargo transit has been created by the overseasconstruction of enormous machinery or module for mining and other resource industry projects.
These modules can sometimes exceed 2000 tonnes in weight and may often need to be moved hundreds of kilometres more overland to site after arrival at port. The potential knock-on effect to revenue streams arising from a delay in start-up of a specific project if one of these critical modules is damaged en route has led to an increase in demand for insurance protection for this exposure.
The financiers for projects requiring this sort of machinery are increasingly insisting on minimising these sort of risk by purchasing insurance protection for delays in start-up insurance protection, for debt servicing costs at least.
With the frequency and magnitude of extreme weather events such as cyclones and storm surges increasing, you would expect shipping to be affected and insurance premiums to be sensitive to losses at sea. But in reality it is ports and the aggregation of cargo – bottlenecks in the supply chain – that keep insurers awake at night, says AIG’s Grant Sheppard.
“It’s not possible to accurately model the true extent of cargo accumulation at one time,” he says. “Cargo policies themselves recognise the quirks of this by including an accumulation provision. This is where the insurer’s limit of liability under the policy is typically doubled – in the event of an accumulation of cargo in the course of transit which is beyond the control of the insured.”
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2012’s Superstorm Sandy in the US is an example of the risks of cargo accumulation. Even though the marine sector accounts for less than 1% of the overall property and casualty market in the US, it bore more than 10% of the losses encountered. The Brisbane floods of 2011 also caused large claims in distribution centres.
Allianz’s Ron Johnson says: “With cargo being shipped all around the world, one of the challenges for cargo underwriters is to be able to determine their scale of cargo accumulation to ensure adequate levels of reinsurance protection are in place.”
He says extreme weather is so far not causing an obvious increase in claims, although severe storm patterns appear to be coming later in the season and often in the form of super-typhoons throughout Asia.
More sophisticated weather monitoring and early-warning systems onboard vessels can, however, enable ships to change course to avoid the worst weather conditions. “Generally a specialist marine risk consultant would be engaged who would track online the weather patterns of vessels carrying critical cargoes. This is even more important when it comes to the vast mining modules being shipped in open ocean waters by barge tow.”
Chris Kennedy of Sunderland says weather risks are certainly an issue for aquaculture, where increasing water temperatures, wind and storm surge have contributed to claims in recent times.
“In respect of small vessels, well-designed marinas, approved storm moorings and diligent ownership are factors we check in respect of risk assessment.” he says.
“We contribute towards annual mooring surveys in some areas because this is also a key factor in ensuring vessel security”.