Since inflation first disrupted the global economy in 2021, some shipowners have seen their insurance premiums climb by percentages in the double digits in 2022. Looking ahead, Lloyd's anticipates a further surge, with projections of written premiums rising from GBP48.9 billion in 2022 to GBP56 billion in 2023, representing another 14.5% rise.
A critical factor behind is the rise in Hull and Machinery (H&M) insurance claims, which presents a large costs for ship owners but providing the primary protection against damages incurred during normal operations.
With freight markets in a downturn, owners are now eyeing savings across all business spheres, including insurance premiums. Coping with the surge in H&M insurance claims, shipowners face a tough dilemma. Should they bear the burden of increased premiums or accept a reduced coverage that could expose them to considerable financial risk?
In-Depth Analysis of the Situation
The ripple effects of global inflation have intensified H&M insurance claims, complicating marine financial operations. Understanding the nuances of this inflation-led situation requires a deeper look into H&M insurance claims. Such claims are directly correlated with the changes in vessel repair prices.
When repair costs rise, it means that the parts and labor necessary to fix a ship have become more expensive. Allianz's 2023 Safety and Shipping Review reveals that vessel repair prices have surged nearly 20% over three years, leading to a substantial increase in insurance claims costs, with some now twice as expensive as before inflation. These dynamics place a significant burden on H&M insurers, forcing a reevaluation of premium structures to maintain financial viability while serving policyholders in a volatile market.
Root causes of H&M claims
The interplay of inflation, rising repair costs, supply chain disruption, and higher H&M insurance claims paints a complex picture for shipowners. Particularly affected are those shipowners with longer incident records, who now face higher premiums from insurers seeking to reduce financial risk. Understanding the root causes of H&M claims is crucial to developing effective strategies to reduce them.
Diving deep into the 200,000 claims recorded by Allianz between 2017 and 2021, we can see that only 9% were due to natural catastrophes. A significant 59% were attributed were caused by incidents such as fires and explosions, collisions and sinkings, damaged goods, and machinery breakdown.
These incidents frequently stem from operational issues, equipment malfunctions, and inadequate maintenance procedures onboard. Therefore, more effective operational practices and preventative measures such as inspections, can potentially lead to a reduction in claims.
An Effective Strategy for Mitigation
Despite the annual value of marine claims exceeding €1 bn, a substantial proportion of this hefty sum could potentially be mitigated with robust risk management and refined operational strategies. The key lies in proactively addressing the root causes of the most common non-natural incidents which lead to insurance claims.
1. Improved Safety Measures: The most effective way to reduce claims is to prevent incidents from happening in the first place. This includes investing in enhanced safety protocols, regular safety drills, better on-board equipment, and continuous safety training for the crew. Such initiatives not only decrease the incidence of accidents but also instill a culture of safety onboard, reducing the likelihood of non-natural incidents.
2. Regular Maintenance and Inspection: Regular and thorough maintenance of all machinery and equipment is a must. This preventative measure can detect potential issues early, preventing machinery breakdowns that contribute to a significant percentage of H&M claims.
3. Enhanced Communication: Effective communication between all parties involved, including ship crew, maintenance teams, and the insurance company, is vital. Sharing important information promptly can help in swift decision-making, reducing downtime, and mitigating losses.
4. Claim Analysis: Regular analysis of past claims can help identify patterns and recurring issues, allowing shipowners to address specific problem areas and prevent future claims.
5. Use of Technology: Many companies already have the above measures in place. However, the intrinsic problems of paper-based system make it hard for the above measures to be effective. For instance, it's hard to know if the inspection tours are plausible, and the inspection data is unstructured, making it challenging to extract actionable insights to prevent incidents. Embracing technology, like Kaiko Systems, can help mitigate multiple systematic issues concurrently. By ensuring all collected data is reliable and structured, Kaiko Systems provides immediate vessel health analyses and highlights critical findings and risky areas. Communication between ship and shore is also streamlined and effective as it is based on specific findings and trends. Therefore, companies can expected better maintenance of the vessels and less surprises.
By adopting such strategies, shipowners not only reduce their own financial obligations but also contribute to an overall reduction in H&M insurance claims. This, in turn, can help stabilize insurance premiums, making settlements less challenging for insurers, and even reduce the overall shortage of materials in the market.
Conclusion
In conclusion, although inflation has presented challenges, strategies exist that can significantly improve insurance conditions. By reducing non-natural marine incidents, H&M claims can decrease, contributing to a healthier market. Solutions like those provided by Kaiko Systems allow shipowners to enhance vessel safety, efficiency, and financial security in the face of these challenging economic times.
