Vessel operating costs are expected to continue rising on a hardening marine insurance market, as conclusion of the P&I renewal season exposes the fallout from rising claims and the impact of Covid-19 on global merchant shipping.
The marine insurance market has been hardening since 2019 as poor returns reduced capacity and so forced up premiums. This upcycle is expected to continue with important implications for shipowners’ vessel operating costs which last year increased at their fastest pace in over a decade due to the impact of the Covid-19 pandemic. Insurance costs make up as much as 10% of total ship operating costs.
During this year’s protection and indemnity (P&I) renewals round the emerging concerns of Clubs over the past few years have finally come to a head. In effect, they have been underwriting at a loss for years and plugging the gap with investment returns. The erosion of their investment returns in 2020, combined with record large pool claims and the unprecedented impact of Covid-19 have all conspired to force Clubs into a position of hardening their rates.
And claims pressure is only expected to worsen with growing tonnage, rising complexity and cost of casualty settlement, as well as a rapid upsurge in activity with recovering trade. Meanwhile, the investment income outlook is increasingly uncertain after a challenging pandemic-ravaged year. These are demanding time for Clubs, some reporting loss ratios as high as 120%.
As Figure 1 illustrates, the market has been seeking average increases of between 5% and 10% in 2021, but in continuation of last year’s practice Club’s individual positions have varied, as has their approach with each member owner. The result is high single-figure percentage increases for most vessel operators.