As in many sectors of the world economy, the global marine insurance industry is significantly impacted by inflation. Since May 2020, the inflation rate has increased to record levels in many countries. The result has been a steady increase in the cost of goods and services. The increases are likely caused by a combination of factors, including sustained low-interest rates, an increase in money supply, governmental policies, and supply chain delays. When considering international trade and purchasing power, currency exchange rates are also a factor. The world is also facing a downturn in international trade. There has been a significant recent reduction in demand, resulting in slower vessel turnarounds in ports due to low cargo volumes. This, together with declining freight rates due to shrinking demands and the easing of congestion, shows that the market is decreasing. In turn, it impacts marine insurance as there is far less value to insure. The various marine lines of business, including Ocean Cargo, Hull & Machinery, Protection & Indemnity, Marine Liabilities, Marine Builders Risk and Yacht Insurance, are all impacted by inflation. In simplest terms, inflation increases the cost of loss.
The latter, especially in the last 18 months, is perhaps the element that scares insurers the most; in fact, there has been a simultaneous ” dangerous” situation in which on the one hand inflation is causing a rise in expense items (think of labor and mainly raw materials) and on the other hand the high freight rates of 2021-2022 have led to an increase in the value of ships, thus causing a greater exposure to risk (only recently we have been experiencing a reduction in the value of ships, especially bulkers and containers, a reduction however mitigated by an increase in the value of tankers and LNG).
Underwriters, therefore, are called upon to keep constantly updated with these rapid changes and to ensure fair terms and conditions for both the shipownersand the insurance companies.
However, this is probably the most complicated element: shipowners, strong in a market that is still soft (due mainly to the London market), do not want to be subjected to upward adjustments in either premiums or especially deductibles at all, much less do they want to have more restrictive terms and conditions in their policies.
Therefore, Underwriters are faced with having to counter both the willingness of the shipowners and the high level of competition arising from the market, resulting in a “war” based solely on offering better terms; the coming months will therefore be extremely important in order to see if a new market balance can be found.