Shipping’s Latest Problem: Rising Insurance Costs
Date: Friday, March 29, 2019
Source: The Wall Street Journal
Cargo vessels have been hit by an expensive string of fires. The beleaguered shipping industry will now have to contend with higher insurance premiums.
The sinking of a Grimaldi Lines-operated container carrier after it caught fire off the coast of France two weeks ago was the fourth big ship fire in the past four months. And 2018 was also a tragic year: In March, five crew members of the megaship Maersk Honam, owned by freight giant A.P. Moller-Maersk , AMKBY -0.08% died in a fire while the vessel sailed in the Arabian Sea.
Part of the problem dates back to the era, more than 10 years ago, when container-shipping companies engaged in an arms race by purchasing ever-larger vessels. This hasn’t just depressed industry profits as capacity has outpaced demand for cargo, it has also made it harder to suppress fires—which turn out to be more destructive aboard bigger vessels.
As a result, marine insurance costs rose in 2018 for the first time in six years, according to research firm Drewry, as companies providing so-called “hull and machinery” cover for shippers started reacting to widespread losses. Drewry expects this trend of higher premiums—plus tightening of terms and deductibles—to continue over the next five years.
This is bad news for shipowners, because insurance makes up roughly 10% of vessel-operating costs.
After 2015 in particular, fierce competition among insurance companies pushed premiums down by 22%. The long U.S. economic expansion and low interest rates led investors to pour money into all sorts of niche assets, of which marine insurance is yet another example.
Premiums eventually got too low to account for the probability of fires, yard losses and natural disasters such as hurricanes Florence and Michael. Reinsurers have already been badly hit. This week, Lloyd’s of London reported a second consecutive year of losses, resulting in insurers like Oslo-based Skuld quitting this market.
One hope was that better data on the contents of containers would allow insurers to measure risks more accurately, but it hasn’t really worked out. They don’t have access to much of the necessary information, says Sean Dalton, head of marine underwriting for North America for Munich Reinsurance America.
A global economic slowdown has already dampened sentiment toward the container-shipping industry, weighing on stocks such as Maersk, Cosco and Evergreen. The prospect of higher insurance costs gives investors another reason not to hold out for a swift recovery.