Applying lessons learnt from other classes to marine - Russell Group’s Basi

During the Tuesday morning session at the International Union of Marine Insurance (IUMI) Conference, held in Edinburgh this year, I delivered a presentation on applying the lessons learnt from other classes to marine hull.

The presentation drew on various conversations that I have been having with both our re/insurance clients and members of the Russell Working Group over various risks to their business, which range from geopolitical tensions to climate change and skill shortages.

The marine hull and cargo industry is no stranger to many of these issues and is actively wrestling with the best way to deal with these issues.

Given the time-constraint of my presentation, I wanted to delve more deeply into what I believe is the underlying issue that cuts across all the specialty classes, which is the complexity of events. Also, it is my belief that to unlock the complexity of these events requires forward-looking analysis.

Over the course of this article, I will explain why the complexity of events is changing decision-making, before outlining why forward-looking analysis can support insurers and corporates, before applying this to marine hull and cargo.

Cocktail of complexity

It is my belief that today’s events whether they be Covid-19 pandemic, or the Ukraine conflict have become extremely complex and difficult in nature. It is because this, that many organisations are becoming blindsided by unforeseen outcomes arising from these events. A clear example of this was in the car manufacturing industry, during Covid. Many leading manufacturers including Mercedes and BMW, cut down their production of cars, due to a fall in demand.

However, when they restarted production, they had to delay the arrival of new cars, as they required semiconductors. Yet, the semiconductors manufacturers had prioritised the booming smartphone and electronic device industry that had taken off during the pandemic, as businesses and individuals relied on them to work and communicate during the pandemic.

The frequency and severity of events has clearly increased over the last few years, and this has been driven by Connected Risk. Because of this, it has become difficult for an organisation to know their actual exposure from a single event.

Therefore, the key to any organisation’s resilience and sustainability, and indeed market viability is requiring more proactive decision-making and risk management. Going back to the car manufacturing example I alluded to earlier, an example of proactive decision-making, would be for the companies to diversify their supply of semiconductors from more than one supplier. In other words, what corporates and their re/insurers require is what we call “forward-looking” analysis.

Forward-looking analysis

So, what is forward-looking analysis? Forward-looking is typically used in many organisations to try and predict future business conditions and tends to be quantitative. For example, an organisation may predict their future earnings based on past earnings along with other metrics. Russell’s definition of forward-looking analysis is both quantitative and qualitative. It is placing that single organisation and its subsidiaries into a landscape along with its peers and trading partners, and using this as a basis with which to run a set of scenarios on. From this scenario-analysis, we can glean and understand the potential outcomes that could impact an organisation and their re/insurers.

This is in essence, the “outcome-based” solution, that corporates and indeed members of our working group have been calling for, who in their drive to attain this, are actively looking at alternative risk transfers such as captives.

For reinsurers, such an approach is highly beneficial, particularly in a time when the cost of reinsurance has risen. Having a better understanding of forward-looking exposure, along with peak accumulations and the effects of capital allocation will steer reinsurers to achieving a more stable net position.

Marine hull and cargo applications

In marine hull and cargo, the two key threats are trade disruption and cargo valuation, as the impacts of these events – whether it is a shipping incident or a closure at a port - can have significant impact on an insurers and their clients’ portfolios.

This forward-looking analysis can be highly beneficial for marine insurers, as these events are occurring more frequently. For example, the recent fire Fremantle Highway ship off the Dutch coast exposed Mercedes-Benz to at least $13m (£10m) in economic loss according to Russell’s ALPS Marine analysis.

Another example was the fire on the Felicity Ace last year that burnt many luxury cars, resulting in a $155m loss for VW, as modelled by ALPS Marine. There are not just economic events that marine insurers need to be aware of but also environmental events.

For example, there were storms in Southeast Asia, the size of the Taiwan Strait itself, which blocked shipping for several days in that part of the world. To be more sustainable, marine hull underwriters need a more proactive understanding of gross and net exposure. Brokers and Reinsurers will play a vital role here.

Ultimately, it is our belief that there is a desire among underwriters, including those underwriting marine hull and cargo, to leverage data analytics to deliver more sophisticated analysis of their portfolios. By doing this, they will be able to achieve forward-looking analysis, and in so doing take a step toward providing outcome-based covers in the future.