COVID-19 is driving the marine market's overdue turnaround
The challenges created by the coronavirus pandemic underline the importance of ongoing initiatives to reform and steer the market to recovery.
Although coronavirus has not sparked a wave of cargo claims, the global trade slump could have far-reaching consequences for the market, which is trying to chart a route to sustainability after some tough years.
The World Trade Organisation’s bleak forecast is that the global pandemic could cause a collapse in international trade not seen since World War Two. The impact that is likely to have on the cargo trade was spelled out by Maersk, the world’s largest container shipping line, which warned global container volume could shrink as much as 25% in the second quarter of 2020.
Lockdowns imposed by governments to tackle the pandemic have stretched supply chains to breaking point and frequently beyond. Manufacturers of goods ranging from jeans to cars have halted or scaled back production because of raw material shortages and a slump in demand; goods in transit are being delayed, redirected or offloaded short of their final destinations because of travel restrictions.
The World Trade Organisation’s bleak forecast is that the global pandemic could cause a collapse in international trade not seen since World War Two.
While delay coverage is typically not given under cargo policies, when global shipping came to a halt it created stockpiles of goods that were clogged up in the logistics system, giving cargo underwriters accumulated exposures in ports and distribution warehouses around the world that are inherently difficult to track and therefore exposures that were unlikely to have been anticipated.
Although restrictions are being eased in many countries, severe backlogs remain. Knotted supply chains take a long time to untangle, as illustrated by shipping giant Hanjin’s collapse in 2016, which left cargo stranded at ports and on ships around the world for months afterwards.
Even when trade starts to rebound, a shortage of available containers and ships to transport goods will cause further headaches – and so too may insurance-related issues the pandemic has caused. The shipment of oversize and high-value cargoes, such as wind turbines or generators, for example, could be held up further because of quarantines preventing specialist marine surveyors from going to their outbound ports, as required by cargo insurers, to oversee their handling and stowage aboard vessels.
Storms ahead
Although the volume of cargo losses are likely to have fallen in line with the dip in maritime trade, the COVID-19 crisis may throw up some unexpected claims. The ripples created by the global unrest triggered during the pandemic from Portland, Oregon to the Serbian capital Belgrade, may be felt in the cargo insurance market, where strikes, riots and civil commotion is typically covered under an all risks policy.
Meanwhile, Hurricane Hanna’s landfall on July 25 near Corpus Christi, one of the largest ports in the US, is a stark reminder the Atlantic hurricane season is now in full swing. This season is forecast to be an unusually active one, meaning the cargo business could be hit by a natural as well as a public health disaster.
Several of the states most vulnerable to storms, such as Texas and Florida, are already battling record numbers of COVID-19 cases, which could hamper their response to a natural disaster. Many of our clients have emergency response plans, but the pandemic might prevent them from deploying the same resources as normal to protect their goods. Worse, if powerful storms do cause devastation, response teams and claims adjusters, who are vital in helping to prevent those losses from escalating, might have trouble in getting to disaster sites.
Whereas in the past, a slump in customers’ turnover would have prompted a reduction in premiums owning to overcapacity and excessive competition between insurers, the global pandemic is now likely to give added impetus to the market’s nascent turnaround.
Track and trace apps are a hot topic right now. Cargo underwriters and their clients have been crying out for technology to enable them to know where their shipments are at any time and the port chaos created by the pandemic has highlighted just how necessary its development is.
But the pandemic has already prompted some innovation. Virtual surveys are now starting to be conducted where it is impossible to get physical access. If this works well, the practice could take off, meaning surveys may in future be carried out in real time rather than the current standard market practice of within 30 days.
Whereas in the past, a slump in customers’ turnover would have prompted a reduction in premiums owning to overcapacity and excessive competition between insurers, the global pandemic is now likely to give added impetus to the market’s nascent turnaround.
The COVID-19 outbreak has highlighted the extreme challenge facing cargo underwriters in controlling their exposures in a time of unprecedented challenges. That realisation is likely to stiffen their resolve that coverage offered in the cargo market is generally extremely broad and this has been a factor in its undoing in managing exposures and maintaining profitability.
Market hardening
Years of lacklustre results in marine cargo prompted Lloyd’s to institute a performance review, as part of its Decile 10 initiative to tackle underperforming lines of business. Some have exited the class of business as a result, causing capacity to shrink, while the remaining players tightened their terms and pushed up rates. The significant market hardening that ensued was painful - in some extreme cases, premiums doubled - but those increases must be set against the backdrop of years of rate cuts before that. The medicine was necessary to push the market back towards health.
Ultimately, that will benefit everyone in the long term. Once this sector is back on an even keel then brokers will find it easier again to place business and manage their customers’ expectations. This is a difficult period for purchasers of cargo coverage, who have seen in some cases dramatic premium increases and changes in coverage as the cargo market looks to realign itself to a place of sustainability. The additional impacts imposed from COVID-19 are many cases having a significant impact on their sales and costs of doing business. It is at these times that long term relationships between underwriters, brokers and clients may prove their worth in helping all parties chart a path through these choppy waters
If the pandemic has taught us anything, it is how difficult it is to predict what is just over the horizon.
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This article was first published by the Insurance Day on 11th August 2020:
