Like the sea itself, the ocean marine insurance market has been turbulent of late, characterized by thin pricing, broad terms and conditions, high losses, and attrition from the market. Yet, there are opportunities for those agents and brokers who stay apprised of emerging risks and changes within their clients' industries and manage to ride the waves. "Thus far, 2019 has proven to be an interesting time in the marine insurance market," acknowledges Keith Blair, executive vice president, Sentinel Marine Underwriters. "Quite frankly, it has been a 'perfect storm' from a market conditions standpoint that has brought the marine insurance sector to where it is today." Although results tend to vary by region, and there are exceptions, in general, marine insurers on a worldwide basis have not made money over the past few years. "However, we've seen a general firming of the market with a supreme focus on 'righting the ship' to profitability," Blair says.

Underlying factors

For several years the marine market has had a surplus of capacity, with insurers setting extravagant goals and struggling for market share. "Marine brokers routinely found themselves with too many mouths to feed, and the result was a market consisting of extremely thinly priced programs coupled with very broad terms and conditions," Blair says. As losses piled up, the situation finally proved to be unsustainable for many carriers. "Some carriers have withdrawn completely from the marine market while others have completely revamped their appetite, approach, and willingness to deploy capacity," he notes. "Consequently, over the past 12 to 18 months or so, we've seen a rather drastic paradigm shift, with the London Marine market leading the charge." The carriers who have remained in the marine market are taking corrective actions on renewal business such as implementing rate increases, increasing deductibles, and decreasing capacity outlay on supporting lines. Some domestic insurers in the U.S. market have demonstrated an increased willingness to manage line size and capacity, resulting in more quota shared deals on larger and more complex risks. "This paradigm shift is long overdue for underwriters who are now in a position to more appropriately underwrite accounts and structure program pricing, terms, and conditions more commensurately with the inherent exposures involved," Blair says.

Rough seas

"While we are seeing these changes on profit-challenged business and tougher risk classes such as perishable cargoes and automotive risks, it's important to highlight that the marine market is still a competitive landscape, so quality in-appetite accounts are still aggressively sought after by marine carriers," Blair points out. Overall, he believes that the marine market is going in the right direction, as carriers appear to be doing their best to maintain their underwriting acumen and integrity and getting back to putting together fair, sustainable marine insurance programs for their insureds. "The marine insurance market seems to be emerging from a long period of soft rating, with some segments of the market more robust than others, but there is still plenty of capacity and expertise to handle the most complex of risks," says William Luce, director, hull and liability, International Marine Underwriters. "The blue water shipping industry is overcapitalized, which can lead to reduced margins for ship owners, which in turn can put pressure on underwriters in rate-setting." Andrew D'Alessio, head of ocean cargo, Americas, AXA XL, sees opportunities for insurers in the ocean marine market but cautions that there is still much turbulence in the market. "In the global marine insurance market, 2019 has been turbulent with vessel casualties, losses, reserve strengthening, and rippling effects of major corrective actions in Lloyd's of London," he says. "Some carriers or syndicates have stopped writing marine insurance altogether or have dropped certain marine product lines." Lloyd's marine business is being re-underwritten or canceled, and much of their North American business is repatriating to the U.S., D'Alessio notes. Although this is creating opportunities, some business is not adequately priced or terms and conditions are not aligned with the local market, he cautions.

Icebergs ahead: emerging risks

In addition to keeping a focus on market conditions and opportunities in the turbulent ocean marine market, brokers and agents need to peer through their figurative spyglass and focus on emerging risks. The primary risks to keep an eye on are presented by technology. "The world today revolves around technology, and the marine insurance market is no different," says Blair. Enhanced technology has led to improved vessel design, more accurate and more comprehensive data collection, as well as more precise CAT modeling (the use of computer-assisted calculations to estimate potential losses due to large-scale destructive events such as natural disasters). "These technological advancements are all critical to progress within the maritime sector," Blair adds. However, with the advantages also come new risks and challenges from cyber threats, politics, climate change, and piracy. Cyber threats are one of the largest emerging technology-related risk areas for the ocean marine industry. "Ships' systems are exposed to malware and ransomware attacks," says Luce. "The U.S. Coast Guard documented its concern to the maritime community several times this year." In addition, Luce notes that "the vulnerabilities in the maritime sector to cyber-related losses have become very real. Every ship operator, like every business, should have a plan for dealing with cyber risks by using proven prevention and best practices techniques, and insurance when it makes sense." The dangers posed by cyberattacks are potentially so significant that the International Maritime Organization (IMO) has made cyber risk management onboard ships mandatory by 2021. According to "Cyber Risk for Maritime," a 2019 report by KPMG, lack of compliance with these requirements could lead to the detention of ships, meaning huge financial losses for their owners, because even the best-designed cyber risk-management systems can be breached.

Major cyber threats

In the U.S. Coast Guard's publication "Proceedings," USCG Lt. Kevin Kuhn notes that shipboard systems such as communications, engineering, safety, environmental control, and other systems are all potentially vulnerable to cyberattacks. Some of the biggest specific cyber threats to the ocean marine industry, noted by Kuhn and other sources, include:

• Hacking and manipulating data. One form of hacking involves manipulating data captured by a ship's voyage data recorder (which is similar to an aircraft's black box). This compromises a ship's cargo management system by introducing malware that allows the remote alteration of the cargo manifest (potentially facilitating the smuggling of drugs and other contraband). In addition, there have been incidents of cyber implementing ransomware — introducing a virus into a shipboard network via email or other means and locking out the ship's computers until a ransom is paid.
• GPS spoofing. Another type of cyberattack cited often in discussions of cyber threats to the ocean marine industry is "GPS spoofing," whereby the cyber criminal sends out a radio signal that is strong enough to interfere with, or replace, a ship's legitimate Global Navigation Satellite System (GNSS) signal. The false transmissions can cause collisions at sea or facilitate hijacking, particularly of an autonomous vessel.
• Malware attacks on autonomous ships. Much of the autopilot technology in use today — even though it has been around for some time — has led to recent experimentation with autonomous ships and their possible vulnerabilities to malware attacks. "There are no truly autonomous ships operating yet, but there are serious investments contemplated in this area," says Luce. "The marine underwriting community will be looking at this development closely and with some concern," he cautions.

As the maritime industry relies more on technology such as autonomous vessels, digital navigation and the like, the industry becomes susceptible to malware attacks and theft of critical and proprietary data. "The marine sector must work together to come up with solutions on how to protect against these additional modern-day perils," says Pat Hickey, executive vice president, head of U.S. marine, Aspen Insurance. Andrew Lee, a partner at the law firm of Jones Walker LLP, likens hackers to "modern-day pirates who have the ability to sink maritime industry sectors that are unprepared for what's coming at them." Indeed, Hickey and other industry experts see cyber threats as an ongoing issue that will continue to affect seafaring companies of all sizes, as well as individuals. Lee strongly suggests that clients invest the time needed to fully understand their cyber risks and work with technology and cyber insurance specialists to mitigate the long-term risks and exposures that could rapidly bankrupt even the most successful company. "Cyber threats are perhaps the most significant risks we face today," he says. "This has been a key topic on the radars of global risk managers for several years, and many larger organizations have invested heavily in systems, people and insurance to mitigate the risks." According to the Jones Walker LLP "2018 Maritime Cybersecurity Survey" of 126 senior executives, chief information and technology officers, non-executive security and compliance leaders, and key managers from U.S. maritime companies across all size categories, the U.S. maritime industry is largely unprepared for the coming wave of cybersecurity risks. The survey found that nearly 80% of large U.S. maritime industry companies (more than 400 employees), and 38% of all industry respondents reported that cyber attackers targeted their companies within the past year. In 10% of cases, the data breach was successful. Furthermore, while 69% of respondents were confident in the maritime industry's cybersecurity readiness, nearly as many (64%) admitted that their own companies were not prepared to handle the myriad negative impacts a data breach could cause. Although 97% of respondents from large companies did report having cyber coverage, a whopping 92% of respondents from small companies, and 69% of those from mid-sized companies acknowledged having no cyber insurance.

Bigger ships mean bigger risks

Technological advancements have led to the construction of new "mega ships" that introduce a whole host of risks. The phrase "The bigger they are, the harder they fall" comes to mind. "While the improved design of these more sophisticated vessels is a good thing for the maritime industry, it also creates additional hazards," notes Blair. "With larger ships come larger accumulations of interests, so when something does happen on the ship there is naturally a greater chance the loss will be a big one." In addition to vessel size, vessel age can also be a risk factor, affecting the costs of hull insurance. Larger commercial vessels are made with steel exclusively, while smaller commercial vessels can be made of steel, aluminum, fiberglass and wood. Regardless of the material used to construct the vessel, the age of the hull, in general, has more of an effect on the cost of hull insurance, as a function of the value, than the material. Aging vessels can lead to increased claims and higher premiums.

Global unrest and piracy

In addition to the risks that accompany ever-more-sophisticated shipboard technology, other concerns, such as political unrest and piracy, are emerging that agents and brokers need to recognize and understand. Recent politically motivated incidents occurred this year when oil tankers were attacked in the Gulf of Oman. The United States accused Iran (which is under stringent U.S. sanctions) of the attacks, but Tehran denied any involvement. Bloomberg reports that as a result of the risk and the escalating tensions in the region, the cost of insuring tankers to ship Middle East crude oil likely will increase. "Trade disputes and sanctions obviously have a direct impact on the global trade and shipping industry, and this will affect the marine insurance world," says Blair. "If trade disputes stymie imports and exports, it results in a capacity shift requiring higher static limits at ports or warehouses due to cargo accumulations because products are not being sold or shipped out." In addition to political issues, piracy continues to be on the rise on the West African coast, where Somali pirates have been very active. Piracy is also a significant risk in the Horn of Africa and the Straits of Malacca. According to the 2018 annual report of the IMO, acts of maritime piracy increased from 180 in 2017 to 201 in 2018. The report reveals that "attacks in waters between the Ivory Coast and the Democratic Republic of Congo more than doubled in 2018, accounting for all six hijackings worldwide, 13 of the 18 ships fired upon, 130 of the 141 hostages taken globally, and 78 of 83 seafarers kidnapped for ransom." IMO also reveals that in Nigeria alone, vessels have been boarded by pirates well outside territorial waters, with crew kidnapped and taken into Nigeria where they are held for ransom. The pirates are also targeting a wider variety of ships: bulk carriers, container vessels and general cargo vessels in addition to local attacks on tankers, oil industry support vessels and fishing vessels. In terms of other loss trends, the ocean marine insurance industry has been hit severely by a steady flow of natural catastrophe events, particularly hurricanes, over the past few years. "Specifically, 2017 and 2018 generated devastating losses to marine insurers, and 2019 is shaping up to be a bad year as well," says Blair. "Weather-related catastrophes are becoming more intense, and the effects of climate change cannot be ignored," adds Luce. "Hurricanes, wildfires and floods are generating sizable marine insurance losses in places where we would not have expected to see them 20 or 30 years ago." See also:

• New players eager to enter inland marine insurance market
• Inland & Ocean Marine: Everything You Need to Know
• Ocean Marine: How Rough is the Water?