IRDA Seminar on proposed De-tariffing programme in Non-Life Insurance

1
IRDA Seminar on proposed De-tariffing programme
in Non-Life Insurance

• 13th to 14th March, 2006
• Hotel Taj Krishna
• Hyderabad

2
Rating in Marine (Hull and Cargo) Insurance
Portfolio

• Past
• Present
• Future

3
History of Marine Insurance

• Ancient
• Richness
• Variety
• Interest

4
Role of Marine Insurance

• Overseas and internal trade
• Linked with banking and shipping
• Ship-owners / merchants not legally bound to
  insure
• Hardly any choice, due to modern methods of
  financing

5
Categories of Marine Insurance

• Cargo
• Hull

6
Peculiarities of Marine Underwriting

• Insure any commodity that can be moved from one
  place to another

7
Knowledge required by Marine Underwriter

• All types of cargo
• Susceptibility of cargo
• Conditions at various places
• Packing

8
Ability of Marine Underwriter

• Decide and tell at a glance
• Terms of cover
• Rate of premium

9
Importance of information

• Unlikely to complete Proposal Forms
• Elicit as much relevant information
• Correct assessment of risk
• Decide upon rates
• Decide upon terms of cover

10
Pooling of knowledge

• Marine Cargo Underwriters are individualists
• Little desire to pool their knowledge
• In fact, active resistance against such objective

11
Reason for resistance

• Varied nature of cargo
• Varying terms of cover
• Varied individual experience
• International nature of transaction

12
Challenges of Cargo Underwriting

• Very competitive
• Compelled to accept risks at very thin rates
• Yet ensure profitability

13
Rating factors

• Basis of valuation
• Physical properties / sensitivities
• Condition and packaging
• Residual value
• Normal and expected losses
• Recoveries from carriers

14
Rating factors (continued)

• Modes of transportation pre and post ocean
• Duration of cover
• Length
• Route
• Transshipment
• Port conditions / facilities
• Inland transits

15
Rating factors (continued)

• Physical environment enroute / destination
• Seasons
• Storage conditions
• Socio-economic environment
• Past claims experience
• Conditions of insurance / deductibles

16
Hulls

• As per English practice
• Air-borne crafts
• Water-borne crafts

17
Subject matter of Hull Insurance

• Air-borne crafts with their machinery Aviation
  Hull Insurance
• Water-borne crafts with their machinery Marine
  Hull Insurance

18
Reasons for separation

• Different trading environment
• Ever-increasing sophistication

19
Basis of Marine Hull Policy

• Time
• Voyage

20
Marine Hull categories for rating / underwriting

• Major ocean-going fleets
• Inland vessels
• Fishing vessels
• Ocean-going sailing vessels
• Fixed jetties and pontoons

21
Marine Hull categories for rating / underwriting
(continued)

• Builders risk
• Ship-repairers liability
• Port crafts
• Offshore properties / activities

22
Factors for rating Hull risks

• Physical features
• Type of construction
• Age / repair cost
• Size
• Class

23
Factors for rating Hull risks (continued)

• Physical features (continued)
• Value
• Overall
• Per ton
• Country of registration
• Flag of convenience
• Nature of cargo carried

24
Factors for rating Hull risks (continued)

• Physical features (continued)
• Engine power / Navigational equipment
• Area of operation (Trading zone)
• Climatic conditions (Lay-up periods)
• Purpose for which the vessel is engaged

25
Factors for rating Hull risks (continued)

• Ownership / management quality
• Experience
• Loss / claims record
• Financial stability
• Size of fleet
• Moral hazard
• Type of crew engaged
• Unduly high insured value

26
Factors for rating Hull risks (continued)

• Conditions of insurance, including quantum of
  deductible

27
To make profitable Hull Insurance portfolio

• Specialised class of business
• Demands extreme underwriting caution
• To be handled by technical experts
• Judicious selection of risks

28
Risk information

• Completed Proposal Form necessary in all cases

29
Terms of Insurance for vessel / fleet

• Varying from TLO / CTLO to ALL RISKS
• As per Standard Hull Clause

30
Extent of cover

• Ocean-going vessels
• Full conditions
• Coastal / inland crafts
• Limited cover

31
Hull premium

• Rate per cent of Sum Insured
• Components
• Total loss
• Other than total loss

32
Payment of Hull premium

• Hull Insurance effected for 12 months
• 4 quarterly installments
• Full annual premium payable if Total Loss

33
Total Losses 1989 2002
By NumberVessels gt 500Grt
34
Total Losses 1989 2002
By TonnageVessels gt 500Grt
35
Total Losses 1989 2002
As Percentage of World FleetVessels gt 500Grt
36
Age / Type ProfileVessels gt 500Grt
Total Losses 1989 2002
Source LMIU for Joint Hull Committee
37
By Cause, All Vessel TypesVessels gt 500Grt
Total Losses 1994 2002
38
Total Loss Trends
Conclusion

• By number, by tonnage, as age of world fleet-
• Downward trend
• Despite the losses of 2002, overall improvement
  in recent years.
• Trend arrested in 2002
• The most influential factors-
• Age weather

39
Partial Loss Casualties 1994 2002
Serious Losses and Total Losses by Age
CategoryVessels gt500 Grt.
40
Partial Loss Casualties 1994 2002
Serious Losses and Total Losses by Number
41
Partial Loss Casualties 1999 2003
Frequency Magnitude, All Vessel TypesEstimated
Cost of Repairs gt US250,000
Source BMT Salvage Ltd
42
By Cause, All Vessel TypesEstimated Cost of
Repairs gt US250,000
Partial Loss Casualties 1999 2003
43
Principal Cause and Vessel TypeEstimated Cost
of Repairs gt US250,000
Partial Loss Casualties 1999 2003
44
Partial Loss Casualties 1999 2003
Machinery / Engine Room, Frequency
MagnitudeEstimated Cost of Repairs gt US250,000
45
Partial Loss Casualties 1999 2003
Machinery Losses by Vessel AgeEstimated Cost of
Repairs gt US250,000
46
Partial Loss Trends
Conclusion

• Machinery / Engine Room Damage
• Highest frequency
• Highest overall cost to Underwriters book
• All age and vessel types
• Underwrite Loss Prevention Risk Assessment
• Do we consider engine types enough?
• Are we happy with class surveys of engines?
• Should we be covering machinery at all?
• Should there be a (25) coinsurance for
  machinery?
• An allowance for betterment in respect of older
  tonnage?

47
Repair Costs
Global Sample 1995 - 2003
48
Market Results
Conclusion

• Worldwide Acute Results
• 6 8 years of appalling losses
• Implications
• Capital withdrawal
• Collapse of hull insurance market
• Dramatically reduced choice for shipowners
• Remedy
• Increase rates urgently

49
Underwriting Statistics
Relative Rating 1995 - 2003
(Sample 1)
Source Broker Portfolio (1) for Joint Hull
Committee
50
Casualty, Shipping Underwriting Statistics
Conclusion

• Marine Hull Insurance Market still losing money
  internationally
• Shipping world is relatively unchanged
• Greater exposure
• Rating wholly inadequate
• Capital withdrawal imminent
• Brave underwriting required
• Shipowners can afford to pay for healthy market
• Urgent action required now for Market survival

51
Underwriting Pattern Of Marine Risks
52
International Scenario

• Largely Non-Tariff Throughout The World
  Basically Governed By Demand And Supply.

53
Hull

• The Flat Hull Market Has Seen Little Improvement
  In Terms Of Profitability For Hull Insurers
  Thus Few New Entrants.
• Claims Front Cost Impact Is Affecting Those
  Insurers Writing Large Lines.
• High Risk Construction Risks Being Tackled By
  Good Risk Management.

54
Cargo

• Fierce Competition Has Led To A Debilitating
  Slump In Cargo Premiums.

55
Indian Scenario
56
Past

• In India, Marine Cargo Business Used To Be Fully
  Tariffed Till A Few Years Ago.
• But, In Course Of Time, All The Tariffs For
  Different Cargo Risks / Commodities Have Been
  Gradually Dismantled Completely Including War
  Risks And Strikes, Riot And Civil Commotion
  Risks.
• Hull Tariff Has Also Been Withdrawn Recently.

57
Present

• Market Is Extremely Soft, Driven By Intense
  Competition.
• Even Adverse Claims Experience Is Not Reflected
  In The Renewal Terms Fear Of Loss Of Fire And
  Engineering Businesses, Which Are Still
  Profitable Portfolio.
• This Practice Needs To Be Deprecated.

58
Future

• The Two Profitable Portfolio Fire And
  Engineering - To Be Detariffed In January, 2007
  Likely To Result In Lower Premium Incomes.
• Thus, The Subsidy Lent To The Marine Business By
  Such Profitable Portfolio Should Reduce.

59

• Marine Insurance Underwriting Being Truly
  Experience-Based, Each Insurer Will Need To
  Define Its Underwriting Philosophy And Develop
  Its Own Database.

60

• Hopefully,Adventurous Acceptances Will End And
  The Volatile Marine Market Will Attain Balance.
• Ultimately, The Sense, Intuition And Imagination
  Of The Marine Underwriter Will Prevail.

61

• IRDA, In Its Developmental Role For The
  Betterment Of The Industry Should Guide The
  Insurers, Providing Meaningful Statistics
  (Internal And International) On The Behaviour Of
  Various Risks And Underwriting Results Of
  Individual Portfolio.

62

• The Key To Successful Underwriting Is To Ask
  When You Have Doubts.
• The Worst Thing You Can Do When You Smell A Fish
  Is To Use Deodorant.
• Use Your Nose Instead, And Search Until You Have
  Found And Eliminated The Bad Smell From Your
  Book.

63
Thank you