Louisiana Marine Insurance Facing Rough Seas

Premium price wars have reduced income as much as 50 percent.

With one in five Louisiana jobs tied to the maritime industry, managing risk on the ships, boats, barges and ports, shipyards and offshore oil rigs that serve our region has a major impact on the state’s economy.

The potential for catastrophic losses is high, and combined with reduced oil prices, the implementation of tariffs and the increased potential for trade wars, has left many in the maritime industry doing what they can to survive. That is especially true in the marine insurance industry, which has seen an influx of new, unseasoned competition enter the market in the last decade. The result has been pricing wars that have caused premiums to drop as much as 50 percent in the last three years, said Dieter Max Hugel, president and chairman of Gulf Coast Marine, a Metairie-based marine underwriter.

“In 2014, Gulf Coast Marine was transacting $50 million in premiums a year. Now we’re doing $25 million,” Hugel said. “That’s a significant reduction.”

A wakeup call came last year when hurricanes Harvey, Irma, Nate and Maria, paired with wildfires in California and additional major international weather events led to the worst natural catastrophe losses in history for the property and casualty insurance sector. As a result, the International Union of Marine Insurance (IUMI) has warned marine insurers to be cautious. That has led some local underwriters to question the overall health of the marine insurance industry.

“It’s a market in flux,” said Elder Brown Jr., chairman of Covington-based Continental Underwriters Ltd. “Last year was a brutal year for most insurers who are involved in property and any kind of marine business. I think that’s going to take a heavy toll on some of the players in the market. It already has on the yacht side, and we’re going to see it on the commercial side eventually.”

There’s also the issue that too many underwriters without extensive experience in marine insurance have entered the market with underpriced premiums that expose them to too much risk. Just insuring one cargo ship may leave a company with tens to hundreds of millions of dollars in risk not covered by the premiums they charge.

“They see big money coming in, but when claims come in and they have to pay out large amounts, they can’t,” he said. “The margins between profit and loss are very slim – a few percentage points. If you get it wrong, your losses are going to be huge.”

Outlook: Caution

At the IUMI’s spring conference in March in Hamburg, Germany, the organization urged the global marine insurance sector to remain cautious. Hull protection insurance was a major concern for the IUMI due to the rate of serious accidents, including sinkings and groundings. While the organization acknowledged improvements in marine safety, regulation, and naval architecture and marine engineering, it expressed concern that ship crews are not being adequately trained on managing newer technology incorporated in modern vessels.

“All hull markets acknowledge the severe volatility inherent in a typical international hull portfolio,” said IUMI Ocean Hull Committee chair Mark Edmondson. “The rate of serious casualties such as sinkings and groundings has grown since 2014, but was found to be stable in 2016-2017.

Although the financial impact of major casualties was modest recently, increasing values of single risks bear the potential risk of new record losses, and attritional losses are a growing concern.”

While the stabilization of vessel damage claims was good news, the cargo insurance market suffered due to numerous weather-related events that caused physical damage and shipping delays at major ports, including Houston and Tampa. There is concern that the highly competitive market for this type of insurance could lead some businesses to overlook proper coverage in exchange for the lowest-priced premiums, which may leave them underwater should tragedy strike.

In potential good news for the local economy, the union believes that continued increases in oil prices will lead to more offshore exploration, which will increase insurance demand.

Local Impact

With several deep-water ports that connect the Mississippi River and its tributaries to the world, south Louisiana is intrinsically affected by global factors that impact the economy. This means that when the price of oil goes down and exploration ceases in the Gulf of Mexico, it causes a profound domino effect on commercial and personal income and spending habits. That was evident when the price of a barrel of crude dropped from $65 to $25 in 2014. Since then, there has been a downturn in oilfield activity and related jobs.

“On average, only about 40 percent of oil vessels are working,” Hugel said. “Some small operators may not have any work. They’re just sitting there.”

Hugel said that Gulf Coast Marine has been able to ride the storm by holding onto its core clients. “We may not be making as much money as we did 10 years ago, but we’re still turning a small profit.”

Continental Underwriters has diversified its offerings by opening locations in New York, Chicago and Houston, and offering new product lines related to the maritime industry. Brown said it’s a necessary step to survive.

“If you’re going to underwrite in the Gulf of Mexico you might as well go find another line of business because it’s pretty dead,” he said. “Quite frankly, in the United States, we’re in a depression within the maritime industry. The near term, I think, is pretty bleak. I don’t see a lot of opportunity offshore. The strong will survive, so we’re holding on for better days.”

Hugel believes those better days may be at hand. “We think the soft market ended at the end of 2017,” he said. “We don’t think more (premium) reductions will happen. We’ve seen a hardening of the market since the beginning of the year.”

He also noted that oil prices have been increasing since the beginning of the year. If they continue to climb, he said, oilfield activity in the Gulf should increase, as well.

“That’s good for everyone,” Hugel said. “If people have money, they’ll spend it.”

 BREAKING IT DOWN

Who needs marine insurance?

If an organization does business on the water, it needs marine insurance. In general, this includes port authorities and dockside terminal operators, shipyards, vessel owners and operators, vessel brokers and dealers, and cargo owners. In Louisiana, that impacts several lines of business, including ports, terminals and marinas; boat builders, brokers and dealers; offshore oil and gas crew and supply boats; construction and maintenance vessels; coastal and inland barges, tugs and dredges; pilot boats, ferries, commercial fishing vessels, dive boats and yachts.

Marine insurance coverage comes in several forms to cover different risks. The major lines of coverage include protections for workers, vessels and the environment, including:

Marine general liability: the most common and provides legal protection for most sectors of marine businesses.

Hull and machinery: covers damage to or the loss of a vessel and its machinery and onboard equipment.

Protection and indemnity liability: protects owners and operators against employee injury and third-party damage.

Maritime employer’s liability: defends employee accidents on vessels and docks not owned by the holder’s company.

Marine builder’s risk: covers any damage to a vessel under construction, repair, remodel, or retrofitting.

Pollution coverage: protects the company from any environmental-related damage.

If you, or one of your businesses, is in need of Maritime Insurance Contact Thimmisch Kastner today!