Cargo rates softening on back of new capacity

Cargo insurance rates are softening under the impact of new capacity, while avoiding a return to the soft market conditions that characterised the end of the last decade, according to marine insurance sources.

Issues facing cargo underwriters right now include disruption in the Red Sea, which has seen an increase in heavy weather losses as a result of rerouting round the Cape of Good Hope, extreme climate events and the spate of strikes at US ports.

In addition, a number of London portfolios are thought to have taken a hit after a decision from Switzerland-based commodities trader Glencore to place its cargo premiums, worth $50m annually, with a captive.

Cargo is by far the biggest class of marine insurance, with premiums up 6.2% to reach $22.1bn last year, according to statistics revealed at the International Union of Marine Insurance conference in Berlin in September.

That makes the niche twice as large by volume as marine hull, where premiums totalled $9.2bn in the same period, the figures showed.

Like hull and machinery, cargo insurance was something of a Cinderella in the opening years of this century. But rates firmed up after the Lloyd’s Decile 10 purge on underperformers, transforming it into a profitable line in recent years.

Additionally, London cargo underwriters have not faced the same level of competition from the Nordic market as hull underwriters have experienced of late and nor have they had to make major payouts on war risk.

Tide turning

The apparent reversal in its fortunes therefore comes as something as a surprise to cargo insurers, which had been looking forward to continuing growth this year. But with hindsight, it now looks as if the tide turned in the first quarter.

Instead, they are having to concede discounts in the 5% to 10% range to better-performing accounts, with marked softening in London and the US reportedly more competitive still.

This all represents something of a turnaround from 2023, when premiums jumped significantly on the back of high commodity prices, rocketing inflation and a positive rate environment for underwriters.

But despite the crop of challenges, appetite for cargo business remains substantial, feedback suggests.

A report from Alec Russell, executive director at broker Gallagher, points to four London cargo managing general agent markets either opening or waiting to open. New Lloyd’s entries are planned in both this quarter and in early 2025.

In June, K2 Group Holdings launched Rubicon Specialty, with ex-Ascot underwriters Gavin Wall and Chris McGill, while the same month saw Amphitrite Underwriting expand its cargo entry.

In October, Probitas 1492 established a special-purpose arrangement cargo book underwritten by Anthony O’Dwyer, while Cincinnati Global hired James Hyett to build a cargo book targeting £10m of premium income next year.

In many cases, we are seeing the return of insurers that had exited the class in recent years but now view conditions as suitably attractive.

In addition, existing players have been ready to increase the capacity they will commit.

“Most market participants aim for price adequacy and are generally satisfied with their pricing,” Russell says. “However, there’s a concern about the potential for the emergence of a two-tier market, where new business is priced lower than existing business.”

Essentially, things come down to a fight for market share, with insurers valuing underwriting control and risk management over pricing discipline, indicating a desire to maintain a given slice of the pie.

Claims concerns

Claims continue to be a concern, he went on. While the Baltimore bridge collapse is the obvious biggie, the level of attritional claims remains a worry.

There have been a handful of larger claims, most notably from Dollar Tree, a US discount retailer that has a substantial damages and recovery claim after a tornado wrecked its distribution centre in Oklahoma earlier this year.

There is also concern about exposure and accumulation risks as a result of congestion at Asian ports.

Gallagher estimates in the first half of the year, the trade cost at risk flowing from congestion at Singapore, Port Klang and Tanjung Pelepas at $131bn.

While the peaks of the Asian cyclone season and north Atlantic hurricane season have now passed, above-average activity is predicted and we have seen the arrival of the earliest category five hurricanes since records began.

Losses from Hurricane Helene and Hurricane Milton, which thankfully gave Tampa a swerve, have not been on the scale initially feared, although some losses are starting to creep into the market.

While shipping has come to terms with the Houthi onslaught on merchant tonnage in the Red Sea, Russell highlighted a warning from Maersk chief executive, Vincent Clerc, that the global maritime supply chain is at breaking point due to a lack of vessels.

Another potential flashpoint is the ongoing political tensions between China and Taiwan and the claims that could arise should vessels be denied access to Taiwan for any significant period.

“Absent a significant major loss event, the remainder of the year will likely be defined by further market softening and carriers’ efforts to access new business,” Russell concluded.

This article first appeared in Lloyd’s List, a sister publication of Insurance Day