The global marine insurance industry is facing increasing risks due to the increasing size, value and complexity of vessels, according to Wang Xing, Chief Marine Insurance Officer at Swiss Re Asia, in partnership with the General Insurance Association of Singapore (GIA).

This increase in potential severity has a significant impact on the market, especially when large losses occur.

Data from the International Union of Marine Insurance (IUMI) confirms the significant impact that major losses have on the hull insurance market. From the underwriting years 2013 to 2021, only 2% of reported losses exceeded $10 million, but they accounted for 29% of the total loss amount.

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This illustrates the disproportionate impact of large losses compared to smaller, more frequent losses, Xing points out.

The fact that a third of these losses are classified as major losses highlights their significant impact on the market. Insurers often find that a large portion of their premiums are not allocated to depletion losses – those smaller, more frequent losses during the life of the insurance – but to cover the potential risk of major losses that could occur at any time.

This scenario creates a market where infrequent but severe claims significantly impact premium calculations, affecting all participants, regardless of their individual loss history.

The hull insurance market has historically proven to be prone to huge losses. For example, the Costa Concordia disaster in 2012 resulted in losses of around $522 million, affecting more than 10% of the European hull insurance market.

Similarly, the 2021 blockage of the Suez Canal by the Ever Given, although the hull insurance claim could be managed, had significant implications for global trade and supply chains, with financial impacts far beyond the shipping industry.

While it may not always be possible to estimate the severity of losses for each underwriting year, it is possible to measure the impact of major losses over a longer period, Xing points out. Data from IUMI and Nordic Marine Insurance Plan (CEFOR) indicate that the average major loss to hull book value ratio is around 13% per year for the years 2013-2022.

This figure, although dynamic, indicates that a major loss ratio of between 10% and 20% is generally accepted in the cost of hull insurance, both in direct insurance and reinsurance portfolios worldwide.

If major losses are excluded, the depletion loss ratio tends to be more stable and predictable. However, there can still be fluctuations, as in the case of the higher depletion loss ratios during the 2014-2018 financial years.

Xing attributes this to additional factors such as fluctuations in hull values, changes in direct insurance capacity in the market, and broader economic influences such as inflation, all of which contribute to performance volatility within the marine insurance cycle.

The interaction between major losses and the marine insurance cycle is critical to understanding the volatility of the hull insurance book. Major losses impose a great deal of unpredictability, making it difficult to accurately forecast near-term performance.

A long-term perspective is essential to mitigate the impact of large losses and provide a more stable view of a portfolio’s performance over time.

IUMI’s insurance statistics reveal specific challenges in the marine hull insurance market, especially during weak cycles. These cycles, driven by factors such as hull depreciation, premium rates and excess capacity, continually impact market performance.

Over time, shifts in reinsurance market capacity and intense competition contribute to these cycles, complicating the landscape for hull insurers.

Xing and Swiss Re Asia, in collaboration with GIA Singapore, continue to stress the importance of understanding these dynamics as the industry navigates the challenges posed by an increasingly complex and evolving marine environment.

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