Beyond The horizon Marine MarkeT reviewapril 2012

Contents

MARINE MARKET REVIEW 2012

Foreword 1

Introduction 2 - 3

Hull and Machinery 4 - 5

Protection and Indemnity (P&I) 6 - 9

Special Risks 10 - 11

Average Adjusting 12 - 13

Cargo 14 - 17

Commodity Trading 18 - 19

Analytics 20 - 21

Super Yachts 22 - 23

View from U.S.A. 24 - 25

View from Asia 26 - 27

ForewordWelcome to the 2012 Willis Marine Market Review.

Over the course of the last year we have encountered many interesting challenges to our business and that of our clients. One of the great strengths of our marine business is its adaptability and with the support of our global associates we have continued to keep Willis at the forefront of the industry.

Our global marine philosophy continues to offer unrivalled solutions. The greater the problem, the better we are able to deploy and demonstrate our skills. The continued support of our long term customers and their continued recommendations to others is perhaps the greatest testament to our people and philosophy.

I hope you will find this years Review both interesting and thought provoking.

Alistair RiversChief Executive Officer - Willis Marine

MARINE MARKET REVIEW 2012

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For most Marine insurers 2012 has not got off to the finest start with the recent loss of the cruise liner Costa Concordia. While this may have stiffened the hull market, its long term effects remain questionable. What may prove more damaging are the P&I and Liability aspects which could be of far greater significance to insurers as matters evolve throughout the year.

eConoMIC UnCertAIntYIn Europe, perhaps more than in other areas, we find ourselves living in difficult times. Hardship and social uncertainty affect many people, especially those in the Mediterranean based countries. The effects in our now globalised world permeate much further than that of course. The maritime industry depends heavily upon consumer demand which drives not just the requirements for finished products but also the raw materials needed to produce them. Europe has been one of the largest markets for both, so any lasting economic downturn has significant consequences.

The fast growing economies in Asia - most notably China - together with the emerging economies of India and Brazil and signs of recovery in the U.S.A. will all go some way to counter balancing these European woes. However, the maritime industry also depends greatly upon the financial services provided by banking, insurance and reinsurance institutions in Europe, who are themselves increasingly affected by growing concern over their investments in European sovereign debt. Another year of uncertainty therefore appears to be signalled for the maritime industry.

MArKet seCUrItYNot only is the financial stability of the banking sector under surveillance but also the vitally important Insurance and Reinsurance organisations that dominate so much of the global underwriting capacity. Quite where this will end remains uncertain at the time of writing but the rating agencies are increasingly focused upon all (re)insurers investment portfolios and as a result some notable companies have suffered significant rating downgrades. Insurance plays an essential role in protecting a businesss assets and balance sheets. Stability is essential for everyone and brokers will be considering these aspects carefully when selecting insurance carriers, not allowing pricing to be the only driver.

IntrodUCtIon

INTRODUCTION

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0

20

40

60

80

100

120

140

160

2008 2009 2010 2011

45%

$31m

24%

$78m

27%

$82m

19%

$145m

Success rate (%)

Total ransom (US$m)

Source: Control Risks 2012

PIrACYThe issue of piracy continues to blight our industry without any concerted resolution in sight. Some suggest that we now have a second generation of pirates who are less skilled than their predecessors, who have in turn retired to enjoy their ill gotten bounty. This seems a little far fetched but it is true that security measures being taken by many shipping companies have been increasingly effective. While the number of successful attacks may have diminished this has only served to increase the demands and expectations of those that do occur, which is demonstrated in the chart below.

INTRODUCTION

sAnCtIonsSanctions continue to be ramped up against those regimes who threaten stability and they continue to require the upmost vigilance on the part of clients, insurers and ourselves. The ongoing challenges in the Gulf region and knock on effects to insurance contracts for shipowners will remain an issue to be debated over the months ahead.

If this paints a rather bleak picture, it should be remembered that the maritime industry is perhaps the purest of all global businesses, it has seen and overcome many similar challenges in the past and there can be little doubt that the entrepreneurial spirit that drives so much of this industry remains intact.

HUll And MACHInerYReaders of our last review of the hull market may recall that among the topical issues was the fresh underwriting capacity which had recently entered the market, particularly in Lloyds.

While we as brokers always welcome any increase in the choice of underwriters available to our clients, we were rather bemused as to how the new capacity providers had been able to construct their business plans.

Since then, of course, events have moved on and during the last year we have seen a number of notable issues impacting on the hull market.

Firstly, the Newcastle based Marine Shipping Mutual (MSMI), an off-shoot of North of England went into run off after 40 years of operation. Although extensively supported by both European and London reinsurers, the potential for profitability when underwriting 100% of Hull values was exposed by the inadequacy of persistent market rating levels. It was indicative of the soft hull market in mid 2011 that there was no shortage of alternative underwriters offering to replace this capacity.

The next issue was the extent to which the financial crises within the Eurozone would impact on underwriters security and of course this is far from finished. Within the hull market the only casualty so far has been the French insurer Groupama, who were dramatically downgraded by the rating agencies as their parent companys exposure to the Greek economy became apparent.

At the time of writing in late March 2012 there has been no further contraction in capacity. Quite suddenly the hull market has entered what we would describe as a mixed state of flux.

The trigger was of course the well publicised Costa Concordia disaster. While this hull loss of around USD 500m will be painful for the 25 underwriters who share in Carnivals fleet insurances, it is unlikely to result in a contraction in capacity. Rather, we have seen a new determination by those underwriters that they will extract a pay back from the rest of the worlds shipowners.

For the losses of the few to be paid by the many is a fundamental principal of how insurance works, or should do, except that there are plenty of other underwriters who did not have any share of the loss.

So we currently have a diverse hull market, with the majority of underwriters in the London market adamant that premium reductions are history and even renewals as before are unacceptable. While in other markets, particularly in the Far East and in Scandinavia, underwriters are less adamant and more inclined to be independent of the latest fashion in the London hull market.

What our clients want to know is will this firmer market stick?

Our crystal ball, which relies heavily on past experience, would suggest that underwriters need more than good intentions to turn a market. While we are the first to recognise that the quality of marine hull insurance policies can vary considerably (a claim is always a good test!), there is no escaping the fact that the price of hull insurance, like the price of guns and the price of butter, is a function of the relationship between supply and demand.

With world shipping in recession there is no immediate prospect of an increase in demand and the loss of MSMI can hardly be described as a meaningful contraction on the supply side.

So for now we would describe the firmer market as largely aspirational and patchy. As long as capital providers are prepared to tolerate marginal returns from their pure hull and machinery book, a truly hard market will probably turn out to be a mirage.

HUll AND MACHINERy

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HUll AND MACHINERy

ProteCtIon And IndeMnItY (P&I)renewAl At FebrUArY 20, 2012Firm, confrontational, variable, late, but pretty much as expected As anticipated in the Willis P&I Review, despite the relatively modest announced general increases, the renewal at February 20, 2012 was disproportionately confrontational, protracted and on average concluded far later than normal.

Clubs entered the renewal in a perceived climate of increasing claims costs and volatile investment income. Shipowners, operating in one of the worst economic environments for a generation, approached the same renewal seeking any way to save costs. It was little surprise therefore that even