The South African marine insurance market, which essentially may be described as a cargo market, including goods in transit, has proved a profitable area of operation for insurers over many years, with the possible exception of 2007 where the loss of the vessel MSC Napoli resulted in the largest marine loss ever.
Uninsured KZN tanker highlights financial implications for marine industry players
Andre Brooks, Marine Customer Relationship Manager of Lion of Africa Insurance
The announcement in July this year that the cost for salvaging the uninsured stranded oil tanker, MT Phoenix, in Durban is estimated at over R30m highlights the potential devastating financial impact for players in South Africa’s growing marine sector.
Although the maritime industry has always played a huge role in the South Africa’s economy, a worrying trend has emerged whereby industry players are, as a result of market conditions, taking on dangerous amounts of risk by cutting expenses such as insurance.
If you are an importer or exporter who is reliant upon goods being transported by sea, without adequate insurance cover you are exposed to potentially myriad risks during a voyage. Your cargo could be exposed to loss and/or damage arising from, among others, piracy, fire, and the vessel sinking or running aground.
This was especially evident in the recent MSC Napoli casualty. The container vessel had suffered structural damage in January 2008, resulting in a number of containers being lost overboard. It is estimated that 40% of the cargo on board the vessel was uninsured, with the insured cargo costing the South African Insurance market in excess R120m.
Uninsured losses of this nature could have a crippling effect on smaller to medium businesses with very few companies being able to absorb these types of catastrophe losses to their bottom line. A factor often over-looked by international traders is that of the commercial terms of sale between the parties. These commercial terms usually govern the transfer of the financial risk and responsibility between the traders and they need to be carefully scrutinised and negotiated to ensure cargo is adequately covered throughout.
Also of utmost importance is that the international trader pays close attention to the classification of a vessel on which their cargo is being transported, with specific reference to vessel age and seaworthiness.
Most marine insurance is split between hull and cargo, covering loss of and/or damage thereto. The concern is that marine insurers don’t always fully comprehend the risks faced by companies transporting cargo. It is therefore important that insurers do an extensive risk analysis to enable them to underwrite the risk effectively. This, more than often, involves consideration of all aspects of the risk and accordingly determining things that could possibly result in a loss.
In the past five years, South Africa has experienced an increase in ships running aground, which includes, among others, the Seli 1, which ran aground in Blouberg, Cape Town in 2009 and the Safmarine Agulhas which was stranded in East London in 2006.
Climate change is steadily having more and more of a profound effect on the shipping industry globally and the potential for greater storm conditions increases the chance that cargo vessels will get into difficulties, run aground or sink.
It is paramount that the players in the marine sector look to minimise risks by taking adequate financial precautions.
Over-traded and under-priced?
Steven Forcey FCII, FIISA, Chartered Insurer
This time last year I wrote that we will get the market we deserve. Since then, there have been further new entrants, yet the skill base from which the expansion is sourced has not grown. In other words, a limited resource is being stretched, expect something to snap.
The driving force behind expansion is usually profitability; in some instances, it’s a desire to grow premiums, even at the expense of profitability, in the hope that profits will eventually accrue, a “tough-it-out” strategy. The former I can understand the latter is questionable at best.
There are over 20 insurers in a marine market which has an estimated premium income of R1 billion (accurate market statistics are not available). I’m therefore of the view that the market is over-traded and as a consequence under-priced. An additional concern is how insured’s can best be serviced by operations which have less than a handful of staff. Mediocrity seems to be the current order of the day.
In my opinion, the market would be better served in terms of skills and professionalism if there were less than 10 marine players that are properly staffed rather than the current scenario. Competition may even be more intense, but at least based on a well thought out strategy.
General insurers do play in the market together with UMAs. One has to question whether general insurers have the desire and will to invest in a marine department when marine represents only a small proportion of total short-term premium. The UMA model is ideally suited to niche products such as marine.
Whilst personal lines and commercial business insurance is being targeted by direct insurers, I do not believe the client’s best interests are served if marine were to go this route.This being the case, the broker has an important role to play and for those that have the correct skills in place, opportunities will present themselves.
There is room for both specialist brokers and large brokerages: the trick is to have skilled, knowledgeable staff in place.
With regards to new developments in this sector, I wouldn’t say there are new innovations, but rather fashions that come and go. These can range from conventional policies to those with meaningful levels of self insurance, burning cost formulas, stock-throughputs, profit incentives and the like.
Over the years, the established Institute Clauses are reviewed and re-issued to make them pertinent to modern trade. We can expect some new Clauses during 2012. The most recent development concerns Sanctions and ensuring that marine policies are not in breach of international laws. Regulation and consumer protection will result in further changes to our industry.
Ship and cargo owners urged to safeguard against piracy
Jeffry Butt, Business Unit Head of Marine at Aon South Africa
The two attempted piracy attacks along the Gulf of Aden that occurred recently have once again highlighted the need for ship and cargo owners to safeguard both their assets and people through an effective risk management strategy.
The first in-depth global piracy report released by Aon Risk Solutions has confirmed an increase in overall piracy activity in the East African region. The report revealed a 17% year-on-year increase in attacks from 231 to 278 between 2009/10 and 2010/11. According to the report, cargo vessels are the most attacked type of vessel in this area. The most notable shift was in the Gulf of Aden, historically, a piracy hotspot, to the Arabian Sea, which experienced a 267% increase in attacks.
Statistics released by the International Chamber of Commerce Commercial Crime Services substantiate these figures, revealing that the total number of piracy attacks worldwide totalled 326 this year with a total of 33 hijackings. Currently, pirates in Somalia alone are holding 16 vessels with 301 hostages.
The report highlights the need for those operating in the marine industry to manage the risk of piracy by ensuring robust preparation and preventative measures are in place to reduce the potential exposure to liability. Should a vessel be pirated, costs are incurred almost immediately. Prior to finalisation of ransom settlement, investigators, legal counsel, average adjusters are brought in to assist with ransom negotiations, determining the value of the vessel and the cargo she carries as well as potential consequential risk to lives and the environment.
When piracy occurs, it can take up to three months before the pirates start with initial communications. Once it has been confirmed that a piracy has indeed occurred, the general practice thus far has been for the ship owner to declare a “General Average”. The average adjuster(s) will provide each cargo owner with an average guarantee / bond to be signed and returned. This confirms the commitment from each cargo owner that they accept responsibility to pay their proportionate share of the collective cost of the ransom being negotiated.
There have been instances of General Average where the proportionate share each cargo owner had to pay was equal to 60% of the value of their cargo on board the affected vessel; for example, if a particular cargo owner had cargo to the value of R 10 million rand on board the affected vessel, his contribution would be R 6 million.
In some ransom cases the average guarantee/bond that is submitted to each cargo owner for signature and return is open-ended, which does not stipulate the proportionate amount to be guaranteed. The cargo owner’s liability at the time of signing is therefore an unknown.
For any small business without adequate marine insurance cover in place, this kind of exposure is potentially devastating.
Further costs may also include the cost of all third parties involved such as negotiators, average adjusters, and so on. Although there are commodities that pose a environmental threat, especially in the case of bulk oil, piracy in general is not commodity-driven as the cargo on board often has a limited monetary value; however the ransom value can be almost limitless due to the lives that are taken hostage.
Consequential losses and trade disruptions are also a huge risk factor. Negotiations can sometimes take up to seven months to finalise, leaving companies without their cargo and no sales activity. This leaves business massively exposed to profit loss risks if they are not insured; however, there are solutions available in South Africa to reduce exposure to such risks. Some companies, such as Aon South Africa, offer crisis management in situations where lives are involved, manning vessels to deter piracy through passive means and tracking movement of a vessel and its cargo.
It is essential for all ship and cargo owners to make sure that they have spoken to a specialist advisor who understands the full set of risks facing a marine business in order to provide a comprehensive risk assessment. This will assist, not only in identifying what type of cover is best suited for the business, but will also save the company from suffering significant potential losses in the event of falling victim to a piracy attack.
More than Watercraft insurance
The leisure industry is under pressure as a result of the world economic crisis, which has necessitated that consumers spend their hard-earned cash on day-to-day living expenses rather than toys. The specialist retailers, manufacturers and importers who built their business when the consumer had excess cash or when banks loaned money freely, have had to restructure their businesses and supply a superior product to attract the ever-decreasing new boat buyers and or those upgrading current boats.
The second-hand market is also depressed, with the result that the boater has no market for his vessel and is still in need of watercraft insurance. It is essential that the insured buys the best possible cover at a reasonable price.
Traditionally, watercraft covers have been included within the wordings of personal lines products providing limited and standardised covers. This is, in the main, owing to personal lines practitioners having limited experience around boating in general, and a lack of knowledge of the client’s needs and of expertise.
The three key areas of risk – that is, in storage, in transit and on the water – require covers and limits to deal with the risks associated with theft, liability, transit and own damage particular to the type and use of the craft. It is incorrect to assume that insurance is only required during the months that the craft is used.
- Legislation now has a major impact on the individual who wants to ‘play on the water’ with family and friends. The watercraft has to be inspected annually and passed with a COF (Certificate of Fitness) which determines the craft’s ‘sea-worthiness’ and that the craft carries the requisite safety equipment.
- At the manufacturing stage, the craft needs to be fitted with sufficient floatation to pass the SAMSA (South Africa Maritime Safety Authority) buoyancy requirements – if a craft is holed or flooded, the craft’s internal buoyancy should not allow the craft to sink.
- The skipper/owner of the craft needs to be licensed, that is, as in a motor car licence to take/drive/skipper the craft onto the water. Only licensed individuals may skipper/drive the craft.
The role of the specialist UMA is to provide all brokers with the best covers available and, more importantly, provide the broker with the expertise and support better to understand, service and advise the client on their insurance needs and requirements for pursuance of their special or favourite pastime.
Vanguard Marine & Leisure is an underwriting manager specialising in the insurance of watercraft, its trailer and associated all risks items.The business is underwritten by Infiniti Insurance and sold via the insurance broker market.