War risk and cyber restrictions weigh on cargo renewals – IUMI panel

A reinsurance panel debate at the International Union of Marine Insurance (IUMI) 2023 conference, held in Edinburgh this week, discussed issues facing marine and cargo re/insurers and clients amid a shifting reinsurance market seascape. 

Paul Friel, head of Marsh North America’s cargo practice, emphasised contract certainty gaps for cargo clients amid new restrictions in policy wordings. Recent examples have involved changes regarding cyber war risks related to a “five powers” exclusion.

Some restrictions have been in place for longer than others, providing brokers with precedents to determine whether claims are going to be accepted despite tighter wordings.

“Our goal is to open an early dialogue, if it’s possible to do it earlier…listen to each other’s challenges throughout the value chain, and helps us to understand them better,” he said.

Five powers clause

The so-called five powers clause excludes liability for losses arising from the outbreak of war between any of the following five countries: the UK, US, France, Russia and China.

“After the five powers war risk exclusion came out, a Russian fighter jet sprayed fuel on a US drone…which was an undeclared hostile act,” said Friel.

“Does that fall under the wording? Examples like that have become challenging for us to say whether [such a scenario] is going to be restricted or not,” he said.

The broker emphasised the need for “extreme transparency” in instances of “misalignment” between client expectations of coverage with what’s being offered by insurers, that can arise from changed wordings.

Friel emphasised the use of loss scenarios to discover what is being removed from coverage. However, this is far from an easy task, he suggested.

“Underwriters are restricted from putting anything in writing to say what is and what is not covered in a specific claim scenario,” he said.

“You have wordings like, ‘direct or indirect’, or ‘declared or undeclared war’. When you’re trying to relay those conversations to the client becomes really challenging,” said Friel.

“Our first reaction with insurers is to push back and try to either remove the restriction or refine the wording, so that it’s more clear around contract certainty,” Friel continued.

“Then around timing, if the restriction…comes upon anniversary, which a lot of restrictions have, typically we start with our renewal strategy discussions about four months out from anniversary,” he added.

Complexity and communications

James Fogarty, global head of marine, Aon Reinsurance Solutions, blamed “complexity and communications” for confusion around the previous 1/1 renewals at the start of this year. He emphasised “seeing both sides” as a reinsurance broker, but that the communication that was lacking at the last renewal had a knock-on effects of complexity and confusion.

“Downstream clients – insurance underwriters, insurance brokers and their insureds – are telling us: ‘you reinsurance brokers and reinsurance underwriters don’t understand the underlying coverage; you come with these clauses, you exclude things, and that’s not the way things work on the insurance side,’” Fogarty said.

“The inverse of that is our reinsurance trading partners tell us: ‘This is what I’m willing to sell, and I don’t have the balance sheet to provide the coverage you’re talking about…This is what my balance sheet sustains or what my board can take…You need to adapt as an insurance market to adapt to what the reinsurance market is willing to sell,’” he added.

Hamilton’s head of treaty reinsurance, Neil Lee-Amies, agreed with the brokers, but was keen to point to retrocession as a driving force in the hard market tightened conditions.

“That retro market is perhaps the tightest part of the whole the whole chain,” Lee-Amies said. 

“It’s important to remember, we’re talking about excess of loss here rather than quota share…The excess of loss product, because it’s losses occurring generally, more than risk attaching coverage, creates that immediacy that we saw on 1 January,” he added.

Systemic loss concerns

He pointed to communicable disease exclusions as one instance of the reinsurance market and primary market sharing similar concerns, driving tightened wordings throughout the risk transfer chain.

“You have communicable disease clauses in your original markets. The treaty market came out with this, but we’re willing to listen and revisit it,” he said.

“We came up with a separate clause and I think that started the market thinking about greater communication with our original insureds and brokers.

“Cyber has been worked on and worked on for years and years, but there is communication between all parties currently going on with the cyber clause…One pressure we have is thinking about systemic loss, and that’s about balance sheet protection. That comes from top down; it’s not certainly not the other way around,” Lee-Amies added.