How marine became a catastrophe class of business
With two $3 Billion losses under its belt, the marine and cargo insurance industry has awoken to the real potential of major catastrophe losses. The challenge for an industry dealing with multiple pressures is how to measure, manage and price for these growing pressures
When Superstorm Sandy bore down on the Eastern Seaboard on October 27, 2012, it quickly became apparent the event was not just a major property loss but would also heavily impact the marine and cargo market. Total marine claims eventually came in at around $3 billion, according to Risk Management Solutions Inc (RMS), with $2 billion of those falling to the cargo sector. The largest-ever marine natural catastrophe loss, it effectively wiped out 2012 U.S. marine market premiums.
Less than three years later, the sector was hit by another $3 billion loss, when an astonishingly powerful chemical blast at the Port of Tianjin de stroyed warehouses, shipping containers and thousands of new cars. Taken together, these events raised awareness of the sect or’s exposure to catastrophic losses, both natural and man-made, an exposure that is increasing as insurers strive to better understand their risk accumulations.
From a catastrophe loss perspective, Superstorm Sandy changed everything, thinks Rob Hawes, head of global marine, London, Crawford. “Sandy changed a lot of people’s views in the marine market,” he explains. “It was the biggest-ever marine market loss for various reasons.
There were two major claims in New Jersey – organizations which accumulated imported goods including motor vehicles and bottled alcohol – that were upwards of $200 million.”
While man-made severity losses have always been a feature of the market, losses have continued their steady rise, with Costa Concordia and Tianjin stealing the limelight from other major events.The market has received a number of significant claims that have remained somewhat beneath the radar in recent years. “There are others over $100 million that you don’t hear about,” says Hawes. “There were some huge misappropriation of aluminum losses in Southeast Asia a couple of years ago, for example, and some pre-launch satellite losses, which fell into the cargo market.”
There are significant challenges with handling larger marine claims from a loss adjusting and claims management perspective, explains Hawes. “These larger losses require specialist brokers, loss adjusters and marine claims handlers with the right level of expertise to handle them effectively.”
The politicized aspect of major claims such as Costa Concordia adds another dimension. “You have to be extremely careful that the information flow is managed correctly and that confidentiality, data protection and compliance come to the fore,” says Hawes.
“It’s also understanding the client’s pressures, because they’re not only dealing with a large loss, but also a high-pressure situation with lots of media and political scrutiny.” “As a loss adjusting entity, severity losses are all about resource planning, making sure we’ve got the right expertise in the right expertise in the right locations,” he adds. “Marine by its nature is a truly international business and it’s critical that you’ve got a network you can call upon. Very large losses are sporadic – so it’s about having the resources ready to deploy to wherever they are needed when disaster strikes.”
Super-sized container vessels
Factors contributing to the growth of marine catastrophe claims include globalization, the increasing value of assets at risk and huge accumulations of cargo – both in ports and on super container ships. Maersk Triple E class container ships can carry more than 18,000 containers (or TEUs), representing massive aggregations of risk. Many of these carry high value goods, including aerospace parts, chemicals and electronics.
“Twenty-five years ago, the biggest container ships were seven or eight thousand TEUs,” says Hawes. “It’s crept up-and-up and now the accumulation on board one ship is huge. So if it sank, that cost and accumulation problem could be very significant.”
Aggregations at major ports are also a growing concern. “The ports have had to grow to accommodate these mega vessels, creating more portside storage locations and higher values at risk,” explains Ed Messer, catastrophe modeler at Aon Benfield. “The Port of Singapore is a prime example of this, with the new Tuas Terminal eventually expected to handle 65 million TEUs of cargo annually – nearly double what Singapore handled in 2014.”
Last year, RMS identified the top ten ports globally at greatest risk of catastrophe loss. While the two riskiest ports are in Japan and China, six are in the U.S. and the remaining two in Europe (see table). The study took into account both the accumulation of as sets and the size of the ports, in addition to exposure to natural hazards. “Surprisingly, a port’s size and its catastrophe loss potential are not strongly correlated,” says Chris Folkman, director product management at RMS.
“For example, while China may be king for volume of container traffic, our study found that many smaller U.S. ports rank more highly for risk, largely due to hurricanes.” “Our analysis proves what we’ve long suspected – that outdated techniques and incomplete data have obscured many high-risk locations,” he adds. “The industry needs to cease its guessing game when determining catastrophe risk and port accumulations.”
RMS has partnered with leading marine insurers and brokers to produce a marine and cargo specie catastrophe model to help underwriters better understand, price for and manage their risk exposures. Chubb, Aon Benfield, AXIS, Liberty, MS Amlin, Munich Re and Sompo Canopius AG are helping develop the model by providing cargo specific vulnerability information, differentiating between types of cargo and providing industry exposure databases that quantify average and peak exposure in key global ports at high-resolution.
“The latest RMS marine model will enable clients to get a better handle on both their stockpoint and non-static cargo accumulations,” explains Aon Benfield’s Messer.
“Having said that, there is a long way to go in terms of cargo modeling and there is still a significant gap in knowledge compared to our property colleagues, who have been using sophisticated modeling techniques for over 20 years.”
“The standard market approach to port aggregation is to make assumptions based on cargo volume, average container dwell time and container value,” he continues. “This is too basic to accurately assess exposure, particularly post-loss as we found out after Tianjin.”
The Internet of Things could prove another critical source of data in tracking the movement of assets within global supply chains and logistics. “Every ship is tracked by GPS and cargo TEU containers are nearly all electronically tagged,” says Messer. “There’s a wealth of data out there, but it’s going to take a holistic industrywide approach in order to change the status quo that ‘modeling marine cargo business is impossible’.”