The heyday of the cargo insurance market came in 2006. The global economy was expanding, as were trade volumes, and outside investors had plenty of other vehicles to look to for returns on their capital. Then came financial crisis and recession, which had two related ramifications for the cargo insurance market. Trade volumes fell and central banks, like the Federal Reserve in the United States, poured billions of dollars into global economies. Reduced trade volumes meant insurers were chasing fewer risks, leading to lower rates. The policies of central banks had the effect of suppressing interest rates, spurring investors to look for returns outside of money markets. One place that capital landed was in the cargo insurance market. That meant that more capital was chasing fewer risks, which caused insurance rates to plummet even further. “The cargo insurance market got soft then and it has been soft ever since,” said John Gambino, divisional vice president at the Great American Insurance Company.
This has been the case even though trade volumes have since rebounded. The only exception occurred in the aftermath of Superstorm Sandy. (See box on page 16)
The market may be soft but it is still thriving thanks to increasing trade, allowing insurers to increase their top lines, if not their bottom lines. Of course, a soft market is good news for shippers, who can cover their cargo cost effectively.
“Cargo insurance continues to be a very strong and lucrative product for insurance companies,” said Melissa Wirthlin, a vice president in the Global Marine Practice of Marsh LLC.
“There is plenty of capacity in the market,” added John Barnwell, Alianz’s Global Head of Marine Americas. “Investors are looking for greater returns and they see that in cargo insurance. There are also low regulatory barriers to entry in this market and it is not that complex. I don’t see a lessening of capacity in the future.”
Wirthlin agrees that the market is soft with lots of capacity. “We don’t see anyone jacking up rates,” she said. “Most of the policies I have seen this year have come in with no rate increase. In some cases there have even been rate reductions.”
After the Sandy uptick, insurer’s haven’t dealt with any catastrophic cargo losses and have reverted to business as usual. “After a year of making money again underwriters are offering renewal terms that are not onerous,” said Gambino. “Good pricing lets them grow their books of business and their top lines. They figure bottom line growth will come eventually.”
One trend that Wirthlin noticed in the aftermath of Superstorm Sandy was that some shippers switched their cargo coverage from property policies to stock throughput policies which over lower deductibles and broader coverage. “Straight cargo insurance provides coverage for cargo in transit globally,” she explained, “but limited coverage for inventory while it sits. The stock throughput policies cover inventory while it moves and while it waits to be sold.”
While the market puts downward pressure on prices, potential risks in the form of potential catastrophic losses and potentially larger losses brought about by increased vessel size could increase the over all risk that insurers have to deal with. Some insurers are coping with these situations by limiting the level of coverage they are willing to offer, according to Gambino. This in turn has led underwriters to band together in consortia for the purposes of insuring large risks.
“We call this subscription policy underwriting,” said Gambino. “Instead of one underwriter taking all the risk, brokers are going to more than one underwriter to share the risk and the exposure.”
“Not all capacity is created equal,” said Barnwell. “There is capacity that offers paper and capacity that offers services. The better insurance companies help clients minimize losses and costs. They have experts on board and can help clients mitigate risk. Others offer cheap pricing because they don’t have any services to offer.”
Supply chain and business interruption are issues that have been crossing Barnwell’s desk lately. “Bigger clients ship all over the world,” he said. “The better insurers provide one-stop shops to provide insurance and loss-control services anywhere in the world. Others don’t have the capacity to insure all over the world. If a company has a global supply chain it doesn’t make sense to insure with a local company.”
Barnwell sees trade volumes increasing, but not at a rate that will have much of an impact on the perennially soft cargo insurance market. “The increases have been slow and steady,” he said. “We anticipate that there will be continued pressure on rates until the overall investment climate improves and capital goes elsewhere.”
“Cargo will continue to remain an attractive class for all underwriters,” said Gambino. “Not every one of them work all the lines but almost every insurance company writes cargo insurance policies. As long as there are no severe catastrophic events, I believe the cargo market will remain as competitive as it is today.”
All of which, despite the robustness of the industry, puts pressure on insurer’s profit margins, according to Gambino. “Premiums are remaining flat or going down,” he said, “but costs keep on going up. Salaries, overhead, and the costs of adjusting claims are increasing.”
All of the choices present in the market represents advantages to shippers. “It is hard to believe that many shippers are shipping without insurance,” said Gambino. “Under current market conditions it is very cost effective to insure cargo.”