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U.S. marine insurers stand tough and deliver.

As the U.S. marine insurance industry faces growing challenges in the global marketplace, soft rates in the commercial insurance market are creating new, and possibly dangerous, competition for marine underwriters. A concerted effort by U.S. brokers and underwriters must be made to promote the American market as a pre-eminent coverage provider. The perception of the U.S. market must be changed to effectively take part in the tremendous business opportunities emerging in the Soviet Union and Eastern Europe. To counter declining revenues, commercial lines underwriters are breaking tradition by offering clients marine and non-marine coverages through integrated, comprehensive insurance portfolios. Likewise, many marine underwriters are following a similar course in an effort to bolster premium income. These package policies may seem innocuous, but they could be hazardous for buyers and issuers. The trend toward packaged policies is driven mainly by London underwriters, who view entry into unfamiliar product lines as a way to enhance revenues. London brokers are also endorsing the concept, because the packages let them provide clients with a wide array of coverages. However wellintentioned, the deal may backfire.

Traditionally, Lloyd's underwriting syndicates have been divided into marine, non-marine, aviation and motor categories, and members of each group were limited from venturing outside their area of expertise. To attract large corporate and multinational risks to the London market, Lloyd's recently announced plans to eliminate these barriers, thus enabling its syndicates to underwrite any risk. This was the spark, and the soft property/casualty market provided fuel for the fire. It should be noted that the established underwriting community at Lloyd's did not push for this change, and many members have spoken publicly against it.

Rating Standards Differ

Unwrapping one of these package policies often yields little more than a portfolio of individual policies with marine and non-marine exposures rated separately. The problem is that the new players lack the specialized expertise essential to sound underwriting. In essence, comparing the experience needed to successfully price and underwrite commercial and marine coverages is like comparing a supertanker to a lobster boat. Inevitably, applying commercial lines standards to marine risks-or vice versa-leads to unrealistic rates. The expansion into unfamiliar product lines and excessive underpricing of these lines is a formula for disaster.

Marine risks are rated on an individual basis, and rates may appear to be perpetually soft. With experience rating, if a piece of business displays a consistently favorable loss record, marine underwriters will not arbitrarily raise the premium even if the market has hardened. Only when substantial losses occur do underwriters take action.

By nature, marine insurance is catastrophic protection. Although the market is relatively small, the potential for loss is high. Insured losses for a single occurrence can easily surpass those of a major natural disaster. For example, the 1988 Piper Alpha oil rig explosion, the largest marine loss on record, generated more than $1.4 billion in claims. In addition, as the market hardens and underwriters recapture premiums in their traditional lines, their incentive for writing marine business will disappear. Meanwhile, overcapacity in the marine market will have increased competition, thus keeping rates artificially and inadequately low. In the final analysis. no one comes out ahead.

Intangibles Beyond Pricing Buyers have long been mystified by how marine rates are determined. Because the outcome of a voyage cannot be preordained, assessing marine risks is highly subjective. In setting a rate, the underwriter must look beyond the value of the cargo to such details as damageability of goods and how they are prepared for shipping; the type of transportation; the cargo's origin and destination; previous losses sustained by the shipper and the shipping line; whether the shipment will be containerized; and the shipper's practices once cargo arrives in port. Ultimately, rates are based on the underwriter's knowledge of how similar shipments played out. Achieving this level of expertise takes years of constant exposure to all types of marine risks.

Underwriting individual risks and the price of insurance is only half the story. Marine insurance is a service business. Responsive, knowledgeable underwriting, along with maintaining accurate loss statistics, is critical. Analysis of this data provides insurers with a tool to assist clients in managing their risks.

Some marine insurers provide reports to insureds detailing the specifics of each loss. These loss exhibits provide detailed information on the insured's business by profit center, commodity shipped, geography and type of loss. Losses are then divided into specific categories.

The goal is to help sophisticated exporters and importers solve their loss problems and lower their insurance costs by identifying difficulties they have encountered in transit. In the case of one marine insurer, their insureds have access to a loss history for each year insured with the carrier until a five-year loss history is compiled. Then it is maintained for the most recent five-year period. The longer the relationship, the more relevant the statistics for enhanced loss prevention analysis.

Because marine insurance is international in scope and U.S. underwriters compete for business with foreign insurers, this line of business is the least regulated. The result has been an efficient, competitive market. Greater oversight of rates and forms, which has been called for by some regulators, would only impede the U.S. market's ability to compete on a worldwide basis..

Emerging Opportunities

Despite its historical dominance, the London marine market faces several setbacks that will give U.S. underwriters an edge in expanding their business. Among them is the impact of catastrophic losses, including the Piper Alpha disaster and the storms that ravaged Western Europe early this year. Paradoxically, many London underwriters reacted not by tightening rates, but by engaging in the unsound practice of cash-flow underwriting to boost their premium income to pay for prior losses.

In the United States the current state of trade holds promise for marine insurers. While imports increased by 8 percent in the first half of 1989, exports rose 15 percent and the long-term prospects are optimistic. Furthermore, federal government efforts to open foreign markets will result in more trading opportunities for underwriters in the United States.

In addition, political developments around the globe may mark a turning point for U.S. marine insurers. As international trade barriers continue to crumble, a host of business opportunities will emerge, particularly from the Soviet Union and Eastern Europe. These areas represent significant new markets for U.S. goods and the consequent need for marine insurance.

U.S. underwriters should be prepared to fight to bring this business to American soil. The battle will be fierce, especially because Lloyd's already has a leg up with the Soviets. Specifically, last December it wrote the first direct business on Soviet merchant ships ever placed outside the Soviet Union by insuring 75 vessels.

A Competitive Challenge

Until a few years ago most London marine brokers placed business through underwriting syndicates they owned and controlled. Although the Lloyd's charter now bars this practice, years of operating under the old system enhanced London's image as a centralized, cohesive marketplace. As a result, although the U.S. market provides a major share of the world's marine insurance capacity, it is not considered equal to Lloyd's. This misconception stems from the close ties that remain between the broking and underwriting communities in the United Kingdom. Clearly, foreign brokers and underwriters have a vested interest in minimizing American expertise and commitment to service because the U.S. market represents a real and substantial threat to their hold on the market.

It will take a concentrated effort to convince buyers that the U.S. market is equal and often superior to other markets. No single broker or underwriter is up to the task, but an effort to change the perception of the U.S. market and promote its strengths is being led by the American Institute of Marine Underwriters. The institute represents the leading underwriters in the United States and counts most major marine insurance brokers among its associate members.

This effort is aimed at promoting stable, long-term coverage and the financial strength of the U.S. market. Compared to London, where brokers place risks in piecemeal fashion, U.S. companies will accept 100 percent of a client's risk, which enables them to provide a level of service that is not available anywhere else. The more deliberate U.S. approach to underwriting also provides a safety net that ensures the long-term availability of coverage and the stability of the insurance programs.

Ultimately, this encompassing approach to underwriting allows the U.S. market to provide clients with efficient, responsive service and greater flexibility in structuring a sound risk management program. Perhaps most important, the system allows faster claims payment when losses occur.

Automation technology is also becoming crucial to the marine insurance business. Insurance carriers will be challenged to meet shipper's increasing demand for Electronic Data Interchange (EDI). This standardized system allows importers, exporters and freight forwarders to electronically transmit shipping orders, vessel data and other information. The idea of providing coverage electronically through EDI is promising, and work is being done to fit marine insurance into the EDI system.

U.S. marine underwriters continue to emphasize high-quality service and personalized attention that has distinguished them from foreign competition for nearly 200 years. American underwriters must also resist any temptation, even in today's soft market, to write marine business on anything less than a prudent basis at realistically competitive rates.

As non-marine insurers continue to operate in the marine market, it is even more important to sell the strengths of U.S. commitment to client service. To do less would be to lose the United States' competitive franchise in the global insurance marketplace.
COPYRIGHT 1990 Risk Management Society Publishing, Inc.
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Article Details
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Author:DeSimone, Richard D.
Publication:Risk Management
Article Type:column
Date:Jul 1, 1990
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