The market faces another loss-making year after three huge losses in the space of a month. Underwriters are looking to boost rates, but will this be enough? Emma Jones reports.
Recent events on the high seas have sent ripples rushing through the marine hull market. An explosion aboard container ship Hyundai Fortune off the coast of Yemen; a fire that engulfed 100 cabins on the Caribbean cruise liner Star Princess; and the sinking of late-night ferry Queen of the North in British Columbia, have left underwriters fearing the worst.
In the space of a week, the often fragile market has been turned on its head with many predicting that the latest incidents will create a wave of claims reaching $250m.
The fear is that, once again, the market will be pushed into the red.
Ken Alston, manager of the London marine practice for global broker Marsh, said the market anticipates that recent events willhave a significant impact on the 2005 policy year figures.
He said: "The three claims together, excluding cargo losses, could add up to $150m to $250m, which represents 7.5% to 12.5% of the total market premium.
"In less than a week the ship-owning community has crushed around 10% of the hull market's premium and 2005 has gone from looking like an average year to one of potential losses."
One Lloyd's underwriter has suggested that the sinking of Queen of the North, which struck a rock near Gil Island in British Columbia, will cost the market $70m.
Claims for cargo onboard the Hyundai Fortune could top $100m with $9m placed on containers and $70m on hull losses.
Cruise liner Star Princess, which was carrying 3,800 passengers and crew from Grand Cayman to Jamaica when a blaze broke out on its passenger decks, is also likely to generate losses of $75m.
The true cost of the three disasters will not be known for some considerable time, but Alston predicts that in the meantime the market's "knee jerk reaction" will make it a difficult market in the coming months as underwriters look to increase premiums by between 5% and 10%.
He said: "At the moment there are so many numbers being thrown around and from that point of view uncertainty is going to be the thing that causes the issue."
Brendan Flood, marine hull underwriter with Hiscox, said: "Obviously it is a serious chunk out of the market in a short space of time and how the market will respond is difficult to know. The 1 April renewal season is already done so it will not have an immediate effect because that business has been concluded. The effect, therefore, is going to be from now."
However, he added: "It is the sort of amount that we should be able to cover. If not, then we are clearly not charging enough."
Long before Hyundai Fortune, Star Princess and Queen of the North, the marine insurance market has had to battle through choppy waters.
Market statistics show that all lines of marine business - hull, cargo, liability and energy - have struggled for more than seven years with marine hull loss ratios in the Lloyd's market soaring to a record 150% in the late 1990s.
Today the class represents just 6.4% of Lloyd's business portfolio compared to 27% 10 years ago.
Rolf Tolle, Lloyd's franchise director, once described the market as a "barely viable field", warning marine underwriters that investment capital would be directed to more "attractive" insurance and reinsurance lines, if they did not start producing consistent profits.
He told Insurance Times: "The marine hull market has been under pressure for a long time. Lloyd's is no longer playing the role which it has played in the past. It has curtailed its writing, and in many cases we are not competitive and have left that to other markets. I think that it is the right decision."
But despite his heavy handed approach to the underperforming market, with profit being made in cargo and a large contract just renewed in marine liability, Tolle is confident the marine market as a whole has a future at Lloyd's. He said: "I think there is still profit to be made as long as you are selective enough and you are prepared, if necessary, to say no and let business go."
The latest incidents do, however, highlight the need for the marine hull market in particular to generate more premium.
Angus Wilson, class underwriter for Ascot, said: "Accidents do happen and this is very much what insurance is for. But what people have to understand is that you need to have a decent pot of premium and this should highlight the need to get rises on the international marine book."
Lloyd's chairman, Lord Levene, has said that although improvements have been seen in the marine sector it has not been nearly fast enough.
The big question now is how the market reacts to the latest losses on the high seas. IT
Speculation surrounds the cause of the explosion onboard the 64,000-tonne container ship Hyundai Fortune, which caught fire off the coast of Aden in the Persian Gulf.
The rear section of the Panamanian-registered ship was almost totally destroyed by the explosion and blaze, and significant damage to the hull and stern has led to suspicions of piracy or even terrorist attack.
While investigators look into the cause, insurers will be making their own investigations concerning policies which cover the ship, its containers and cargo.
Eamon Moloney, head of Admiralty Law and partner in the shipping and international trade group at law firm Eversheds, said the first thing insurers should look at is whether the ship's insured value is a reasonable one.
In the vast majority of cases in marine insurance the ship will be insured for an agreed value and not for the amount the vessel was worth on the day of loss.
He said: "It is a forensic investigation after a major casualty. In many cases the ship will be lost and it will be difficult to identify what that exact cause may have been."
While questioning cover, Moloney said insurers will often look to attribute cause to something that "is not insured" and, if minded, will investigate prior to the immediate incident to prove something "fundamentally wrong" before the insurance policy began.
In such a heightened period of uncertainty in the market, Moloney was also keen to reassure the market.
"Three incidents in a month can look very bad but on the whole the number of major marine casualties year on year is decreasing as a result of efforts in loss prevention, improved training and better standards of maintenance.
"I would advise insurers not to read too much into one bad month."