Stiff competition within the marine sector has left many insurance companies in the Middle East complaining about what they see as unfair play, say industry sources who warn that the issue could destroy the market.
Insurers say that while trade volumes and ship capacity continue to increase, premium rates in the market have remained flat due to the ongoing competition – and there is no sign that rates will go up soon.
"Due to increases in volumes the number of claims has naturally increased," said Mohammad Hussein, Manager for Marine Insurance at Al Buhaira National Insurance Company in Dubai.
"Even where we want to raise our premium to match market trends we cannot do so because our competitors are not cooperating. The competition is unbelievable as each company wants to increase their portfolio, but unfortunately this is softening the regional marine insurance market."
Insurance claims in the region have increased by about 20 per cent since the beginning of the year on the back of the boom in seaborne trade and a rise in the number of ships.
The growth of the regional fleet is a reflection of the current global trend. Worlwide there are 42, 872 vessels above 300 gross tonnes and the total is expected to grow by 40 per cent in the next five years. While ship numbers have increased dramatically, tonnage has grown at an even faster rate – by 48.1 per cent to 685,738 million gross tonnes between 2001 and 2007, reflecting the increased size of new vessels.
World seaborne trade has increased by 45 per cent to more than 2.9 billion gross tonnes between 1996 and 2007, while regional cargo capacity is expected to increase 35 per cent over the next five years from the current one billion TEUs.
Captain Ashuman Singh, Regional Adviser for Protection and Indemnity and Senior Claims Manager for the Gulf Agency Company, said: "The number of claims is poised to keep on rising in the coming years due to a greater risk aggregation per vessel. This should have been a good opportunity for companies in the marine insurance market but hull and cargo premiums have not risen at the same rate as the trade. There has been widespread rate cutting in cargo due to overcapacity and underwriters growing their top line. We now see outright reductions as underwriters underprice business and chase revenue."
While this trend continues to narrow the profit margins for insurers, shippers and shipping companies consider it a blessing for their businesses. Shippers now have a wider selection of marine insurance companies to choose from at lower premium rates, thus increasing their profit margins.
The rise in the number of claims has been compounded by a sharp increase in claims costs - a double blow for insurance companies.
The average cost of a hull claim has risen by 86 per cent over the last five years and, with claims costs likely to continue growing in the future, analysts say the industry must manage costs without compromising safety.
Experts believe that the high claims costs recorded in 2006 and 2007 were caused by random fluctuations in claim severity or frequency but rather resulted from a number of factors.
Harry Rogers, Senior Claims Manager at Goltens Insurance in Kuwait, said: "Strong market conditions and the rising costs of raw materials have resulted in price hikes for virtually all claims cost factors, ranging from higher rates for towage and salvage craft, cargo values, pollution combat equipment, replacement parts, and lack of capacity in repair yards. Costs have also been impacted by a negative currency effect due to the relatively low US dollar, while repairs are often priced in other currencies. Increased environmental sensitivity has created more complex and costly salvage and wreck removal situations."
Buoyant market conditions have also resulted in a shortage of skilled and experienced crews to operate a growing world fleet.
With the cost of accidents due to human error on the rise, the scarcity of skilled seafarers to operate increasingly sophisticated vessels remains a major concern for insurers. Industry analysts suggest that to manage rising costs, marine insurers must work more closely with shipowners, class societies and regulators to develop systems to ensure safer industry and more effective tools to manage risk.
"Today ship operators are responsible for ensuring that vessels under their control comply with current safety regulations, while the responsibility for the enforcement of maritime safety rules lies squarely upon the flag states and the classification societies to which they delegate," added Rogers.