Almost all industries have experienced the effects of rising inflation over the last two years and are bracing themselves for further cost increases. The marine insurance market is not alone in this regard; however, due to its reliance on fuel, raw materials, international accessibility, and more, it could be fair to say that marine insurance is at the sharp end of changing costs.
Any one of the many factors that are currently impacting inflation would likely cause a stark rise in costs on its own, but the effects are compounded by several factors happening simultaneously.
Soaring costs of raw materials
The direct correlation between the price of raw materials and the cost of hull repairs is a major contributor to the rise in claim costs. Covid was a predominant factor in the sudden and steep increase in steel prices, which had a knock-on effect on the cost of shell plates and structural repairs.
Correlation with oil prices
The price of oil impacts the amount of offshore movement. More movement means that vessels are often in close proximity to each other, and so contact damage can be sustained. It is therefore reasonable to deduce that the recent spikes in oil prices have contributed, at least to some degree, to the frequency of hull claims.
Global Insecurity
Any report on the reasons for rising claims cost would not be complete without mentioning the rise in global shipping insecurity. Not only has the conflicts in Ukraine and the tensions in Red Sea impacted fuel prices and accessibility of routes, but a great deal of damage has also been sustained on vessels. The uncertainty surrounding the future and ultimate outcome of these ongoing conflicts makes the issue one of the most dominating factors affecting our industry.
LNG repair costs
Another issue, while not geopolitical, is the growth of the world’s LNG fleet over the past few years. The costs associated with repairing these tanks is considerable. Only the manufacturers of the tanks can make the repairs, further inflating the costs. The more LNG vessels that come into the market, the more the average cost of claims will be pushed up, due to the cost of the repairs.
Controllable costs — manning
In financial constraints, ship owners are looking to areas where they can reduce costs, primarily focusing on reducing manpower. This sometimes leads to operating vessels with on skeleton crews, just meeting safe manning certificate regulations.
Inevitably, a reduction in skilled human resource can, and often does, result in more accidents, and more severe damage to a vessel when an accident does happen. The outcome is a marked increase in claims and presents a very real problem for the marine insurance industry who inevitably inherit the issue.
Reduction in total losses
ABL reported seeing a drop in total losses. A change for the better, for sure, but one which could be contributing to the average cost of repair claims. Advancements in vessel design and technology mean that incidents, which may previously have resulted in a total loss, are now survivable but with costly repairs.
The advent of new technologies
When new technologies emerge, seafarers are trained on their usage. When the vessel is sold to new owners, knowledge of that technology is sometimes diluted or lost all together. Training is expensive and in times of austerity, it can unfortunately lead to casualties. If training is not maintained, accidents will happen, and claims will increase.
The future outlook
There are so many unknowns and uncertainties which make it impossible to accurately predict when the rise in the cost of marine insurance claims will stop. The sheer number of factors pushing up the inflation rates will not go away — at least, not immediately and certainly not all at once. One thing that is certain: when these issues do eventually ease, the prices will not go down at the rate at which they went up. Cost efficiencies that were present since the turn of the twenty-first century are unlikely to be seen again over the next few decades, if at all.
The marine insurance industry is starting to build inflation into their pricing models, as flat renewals now pose too great a risk. What was once perceived as flat, is no longer.
