Lloyd’s Execs Comment on ‘Mixed Outlook’ for Marine Sector

September 17, 2008

Rolf Tolle, Lloyd’s Franchise Performance Director, speaking at the International Union of Marine Insurers’ Conference in Vancouver, noted that low inflation, huge rises in commodity prices and the growth of import-export activity of emerging economies have boosted the marine and energy sectors over recent years. But he warned that the outlook is now mixed.

While Tolle expressed some optimism that the sector will continue to perform well, as long as insurers maintain underwriting discipline and write for profit rather than market share, he also called for caution.

In an article on its web site (www.lloyds.com) Lloyd’s noted that “while the good times are not yet over – the number of vessels is expected to increase by as much as 40 percent in the next five years, freight rates are rocketing and average day hire rates have risen by 170 percent – there are significant challenges ahead for insurers, led predominantly by the global economic slowdown.”

Tolle explained: “The thirst for raw materials from emerging countries has abated and the once healthy Asia-to-Europe route, buoyed by the fast-growing Eastern Europe economies and strong Euro, has suffered a decline in confidence, problems of over-capacity and a deceleration of Chinese exports.”

He also indicated that financial difficulties were likely to cause the potentially massive fleet growth to be curtailed by new building cancellations or delays. Citing the “current liquidity problems in the financial markets and the reluctance of banks to lend money,” Tolle warned that it would “have a major impact on the affordability and feasibility of the new build program.” Ship owners are also dealing with the dual difficulty of not being able to pay for the ships they have ordered and rising steel costs.

Speaking directly to the concerns of marine insurers, Tolle told conference attendees: “The performance of the shipping sector is closely linked to the health of the global economy and we all know that it is in the sick bay at the moment. The erratic rise of oil and the threat of a global recession may lead to a slow down in consumer spending, a general economic slowdown and a reduction in demand for tonnage.”

“The insurance cycle is not working in our favor and we are seeing significant softening across all lines of business. Almost without exception, terms and conditions are under increasing pressure and rates are either falling or are already at very soft levels.”

But, he added: “At Lloyd’s our mantra has been the same for the last few years: focus on underwriting discipline and write for profit not market share. My simple message is stop, look, listen and change. There is still money to be made for marine insurers as long as they are prudent and calculate risks effectively.”

In a prior bulletin Neil Roberts, Senior Technical Executive at the Lloyd’s Market Association, noted that the conference is being held at an important time, as the market faces greater threats, as pirates, competition and capacity continue to put pressure on premium levels.

“There are a number of challenges that the conference participants will discuss,” he explained. Ship construction standards – some recently constructed vessels have been rejected as not meeting specifications – are being stressed by the demand for capacity. Costs are rising as well due to the increase in the price of steel and the demand for repair facilities.

Roberts added that the delegates will also discuss the increase in pilot errors and the associated claims, which are “driving some pilots away from the industry and that’s contributing to negative effects.”

There’s also grave concern about the continued rise in piracy and attacks on shipping in the waters off Somalia. Roberts noted that “there’s an international task force in the area, but if it gets to the point where owners are unwilling to send their vessels there because of the threat of attack, it may mean far longer voyages to avoid Somalia. If so, it will have a profound effect on journey times and cost given the additional fuel that will be needed.”

Source: Lloyd’s

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