Cargo insurers shifting more attritional loss to clients: IQUW’s Heeley
‘It’s hard to spot trends in such a volatile global economic environment,’ Heeley says
Specialty re/insurer’s lead marine cargo underwriter, Scott Heeley, outlines how marine claims have evolved and the increasingly prominent role of contract logistics
Marine cargo insureds are bearing more attritional loss than before, which is sharpening their focus on risk management, according to IQUW’s lead underwriter for marine cargo, Scott Heeley.
In an interview with Insurance Day, Heeley says this is the main discernible trend for cargo in an otherwise increasingly unpredictable world for marine re/insurers.
Heeley is predominantly a cargo and cargo liability underwriter but sits within the wider marine team at the specialty re/insurer. IQUW’s cover is underwritten by Lloyd’s syndicate 1856 and Heeley’s work spans international marine markets.
“It’s an interesting time to talk about claims because it’s becoming harder to tell whether something is a trend or a trigger,” Heeley says.
The most obvious recent trigger has been the Covid pandemic, which not only reduced global maritime trade but also the rate of shipbuilding and container construction, he says. As the world emerged from the pandemic, freight rates increased but new types of triggers for claims emerged owing to increased leakage in older containers and an ageing fleet.
Maritime losses in the past few years have not been as significant as the likes of the MOL Comfort disaster of 2013, certainly not for cargo insurers, Heeley stresses, but they have been “regular”. These include onboard fires, particularly involving car carriers, and damaged imports from rough handling, owing to pressure on ports to get trade moving again.
“Fast-forward 12 months to now and freight rates have dipped, we know there’s been some blank sailings and there’s been a build-up of empty containers,” Heeley says, “but something that’s hard for cargo insurers to understand is which vessel a container is placed on.”
Insurers can give their clients best practice advice on checking containers before they load them, but the task of checking and loading is increasingly being done by third-party logistics providers, Heeley adds.
Although many customers have “significant” warehousing, there is also a trend towards outsourcing logistics, meaning they will have less control over the shipping and storage elements until the cargo ends up at their warehouse or factory, although they could still have responsibility for it, he says.
“The world is changing rapidly from the many years of ’samey’ types of goods, like oil and gas, to cargo with specific needs, such as temperature-controlled pharmaceuticals,” Heeley says.
“Supply chain disruption causes delays that can lead to the deterioration of such goods in ports because the more something is handled or if the required conditions are not maintained, the more opportunity there is for human error and therefore damage or contamination,” he adds.
Cargo insurers also have concerns about wider changes to shipping, including environmental exposure from increased demand for emissions reduction, alongside changes to fuel, machinery and equipment needed to propel vessels in a more climate-friendly way.
Insurers are themselves “on a journey” with the safe transit and storage of electric vehicles and lithium-ion batteries, Heeley stresses.
The Fremantle Highway incident in July this year highlighted how car carriers pose one of the biggest challenges for marine cargo insurers because of the risk of onboard fires. They also face the challenge of the compound storage of cars, Heeley continues, which brings with it a lot of natural catastrophe exposure as well, especially to hail and flood.
The future of shipping from a net-zero perspective is also top of mind.
“We want to be innovative and understand how we can provide ongoing coverage to our customers in this changing environment, which will have long-term impact on the world’s fleet,” Heeley says.
Highlighting Maersk’s use of green methanol for the maiden voyage of the world’s first methanol-enabled container vessel, he stresses wider use of these new developments is “untested in the insurance market, but we will be watching closely in the coming months and years”.
Cargo’s exposure to natural catastrophe risk is especially “prolific” in North America. “Climate is huge for us, for road transport and goods at sea, but also from a static inventory perspective,” Heeley says. “The increase in wildfires in California, Canada, Oregon and parts of Washington is something we now expect every year effectively.”
He continues: “We try to understand what our customers need to do to minimise the impacts, such as husbandry around their properties and contracts with fire departments to provide specialist services.”
Although there is “relatively well-established” modelling for earthquake, windstorm and flood, tornadoes are showing a strong propensity for loss.
Heeley says: “From among the secondary perils, tornadoes are much more arbitrary. I was in the Midwest in April and I visited some sites where there had been tornado damage. What spoke to me was how indiscriminate that was, with one warehouse still standing but three others over the road not.
“Getting our arms around that from a loss perspective is quite challenging, but we’re doing our best to iterate our models as often as we can and engage with companies that aggregate that data.”
In relation to an estimate by international transport and logistics insurer TT Club in 2019 that a major containership fire incident at sea occurs on average every 60 days, Heeley stresses this does not automatically result in a significant claim for cargo insurers.
“If a general average is declared, then that’s obviously going to filter through to the cargo industry,” he says, adding the average value per box is going up considerably.
“Where there has been a loss, even in the attritional space, the same loss three years ago might have cost $200,000 but that has risen to $300,000,” he says.
Amid continued global inflationary pressures, cargo insurers need to be mindful of the potential for more significant and possibly frequent general average contributions with new and emerging risks within the shipping industry.
The rise in inflation has been a counterweight to the drop in demand during the Covid pandemic.
“Volumes weren’t increasing massively, but values were as a result of inflation, so limit requirements for customers definitely went up,” Heeley says. “The volatility and severity risk we started seeing as a market led to the requirement for additional limit, but that wasn’t automatically driven by volume, rather by inflation pushing up value. Some of that normalised but was then impacted again by the start of the war in Ukraine.”
Concerns about natural gas supply in the winter of last year led to requirements for excess capacity within the marketplace. There has been price volatility and not only in crude oil and natural gas markets.
Heeley says: “We also saw some huge price rises in lithium coming out of Argentina and Chile as demand started to ramp back up for consumer electronics and electric vehicle batteries. Before the pandemic, there hadn’t been enough stockpiling but then customers did stockpile and bought a lot of additional capacity. That has since normalised.”
From a war perspective, cargo re/insurers do not face much loss, Heeley says.
He says: “We do write it, but we don’t tend to write it standalone from a cargo perspective. IQUW has a war and political violence team, led by Dan Callow, who are experts in that class and have significant experience in both land and marine war risks. For example, from an IQUW cargo perspective, the Russia-Ukraine war has not given rise to a significant amount of waterborne war loss.”
The fact sanctions against Russia started to be imposed soon after its invasion of Ukraine in February 2022 has meant international markets are not insuring cargo on Russian-flagged vessels.
“The market reacted quickly in response to the sanctions, which has meant we haven’t seen a significant uptick in loss,” Heeley says.
However, Heeley refers to the piracy attack on two tanker vessels off the coast of Iran in the summer of 2019, which caused a spike in insurance rates for vessels in the Gulf of Oman.
“Subsequent to that attack, that whole area west of longitude 58°E was subject to enhanced war restrictions and/or additional premiums. But since that incident, we have seen improved risk management and I don’t believe there’ve been any further significant incidents,” he says.
As well as the Russia-Ukraine war, marine re/insurers are also now watching the conflict in Gaza.
“It has been terrible to see the devastation of war unfold in Ukraine and we’re now following the terrible events in the Israel-Hamas conflict. Similarly to the outbreak of war in Ukraine, it’s too early to predict the impact of events. However, up until now we haven’t seen any actual waterborne loss,” Heeley says.
He continues: “The thing to remember is as soon as cargo has made it to shore, generally speaking coverage wouldn’t be available in the marine market and would have to be provided by the war and land market. Some cargo insurers do provide that coverage but it’s not provided as standard.”
Piracy has become much less of an issue in recent years.
“I was underwriting cargo in the late 2000s, when piracy in the Gulf of Aden was at its peak, but we haven’t seen anything anywhere near those levels for quite a long time. It’s something we’re always mindful of, but it’s definitely normalised,” Heeley says.
From an IQUW perspective, Heeley says it recognises that for a long time, the marine market has not been as strong as it is now. “Marine rates are probably moving towards their apex, and coverage is much more in line with what we see as sustainable,” he says.
Next year will be IQUW’s third full year of trading, meaning it now has sufficient data “to start optimising where necessary”.
Heeley continues “We want to be a sustainable partner for brokers and clients through the cycle while maintaining a portfolio that makes sense and trying to risk select appropriately, with as much information as we possibly can.”
Being sustainable throughout a market cycle requires an understanding of risk at the outset, he says, having the best possible access to natural catastrophe modelling, client information regarding loss control and risk management and upskilling in line with new and emerging risks.
Heeley says those risks include changes to vessels, the transport of electric vehicles and lithium-ion batteries and high-value pharmaceuticals.
IQUW’s marine business is covered by marine cargo and marine and energy liability, while its political violence and terrorism line “has a dedicated experienced underwriting team within our specialty division”.
“Going into 2024, we believe there’s more market opportunity, but we expect the rate of growth will slow slightly,” he says. “We felt 2022 and 2023 was the time to really push on and we’re grateful for the amazing support from brokers and have established ourselves as a core part of Lloyd’s and the London market, which was, and remains, a key aim.
“I expect 2024 will be a year of modest growth for the IQUW cargo team. We expect to continue with our portfolio consolidation and will continue to upskill our team, so we can be a key market for brokers – a market that really understands the risk we’re writing and able to offer insight and guidance. We don’t want to just be a capacity provider.”
Regarding the trend towards increased retainable risk, Heeley says rates rose as claims came through Decile 10 and conversations with clients about attritional loss ensued.
“A lot of what was considered historically as attritional loss is being borne by customers now. That obviously means they need to focus on their risk management because the more they can reduce their attritional loss, the better it will be for their balance sheet,” Heeley says.
Clients are also moving that risk on to their third-party carriers.
“We are seeing a lot of customers negotiating relatively strong contracts with their logistics providers, less obviously on the deep-sea risks, but certainly with regards to warehousing and truck cargo around the US and Canada,” Heeley says.
“It’s harder to spot trends in marine cargo because a lot of the small impact damage from rough handling is now being dealt with within the customer’s own deductibles. From the market’s perspective, then, the biggest trend is attrition is forming a smaller part of our portfolio.”
Has this made attritional loss more opaque to re/insurers? “That’s a really good point because, if you’re basically saying to a customer ‘we’re not going to provide the first $50,000 of insurance, so that’s for you’, then there is no requirement for them to tell us. But it’s always good practice to say to customers ‘in the event you think you have a loss that could breach your deductible, let us know about it’.”
He concludes: “The marine cargo market is in a positive position at the moment because we’ve got our arms around modelling better than we ever had before, both in terms of natcat and pricing, which means we can understand adequacy of premiums relative to risk.”