Marine insurance began in London in the 17th century and the UK’s leading position in the sector continues to this day. Indeed, recent research commissioned by the City of London Corporation found that London marine insurers receive 35% of worldwide marine insurance premium income. The UK ranked in the top 10 of global ship owning countries as of last year and accounted for just over 48 million deadweight tons. Key global maritime institutions such as the International Maritime Organization (IMO) and Baltic Exchange are headquartered in London. The maritime sector as a whole contributes an estimated £10 billion to the UK economy, and employs 240,000 people. Alongside marine insurance, the maritime sector is supported in the UK through high quality offerings in related areas such as shipping finance and shipbroking.

Yet despite these encouraging statistics, the UK marine insurance sector faces a variety of challenges that must be overcome for it to maintain this leading position:

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  • The growing number of marine insurance carriers has made the marketplace very competitive. Marine insurance premiums continue to show evidence of downward pressure. Speculation that the August 2015 Tianjin disaster would result in increased premium rates has apparently proven unfounded. Although the explosion caused the death of 173 people and losses of around US$3.3 billion, the excess of market capacity helped to absorb these losses with minimal effect on premium rates. Indeed, a recent report by Willis predicted that premiums are actually set to fall by up to 10% in 2016.
  • ‘Brexit’ could severely harm the UK marine insurance sector, given that 40% of shipping traffic passing through terminals in the UK is with EU countries. A vote for ‘Brexit’ could mean many years of disruption as new trade agreements are negotiated and prepared. Moreover, currency volatility could lead to much higher costs, just at a time when the marine insurance industry is fighting against a global downturn exacerbated by an excess of vessels for charter and the Chinese economic slowdown. John Nelson, Chairman of Lloyd’s of London, has said that it would be “fantasy” to expect the trade negotiations to be simple, and predicted they would take “many, many years”. There are also concerns that ‘Brexit’ would discourage foreign companies from investing in the UK. Niels Smedegaard, President and Chief Executive Officer of Danish shipping company DFDS commented “We are concerned that Brexit will bring about a prolonged period of uncertainty which could in itself be negative for investments, trade and growth”. Finally, there are also implications for (re)insurers who have passported into or out of the UK.
  • The UK must remain outward-looking and be ready to seize global opportunities when they arise. Between 80% and 85% of the revenues earned by UK companies in the shipping sector originate from outside the UK. Two countries with particularly large potential for the marine insurance sector are Brazil and Iran. Many global insurers are currently expanding to Brazil as local demand for insurance continues to grow. UN sanctions against Iran, which included restrictions on insurance and shipping, were lifted on 16 January 2016, and Iran will therefore have an increasing need to obtain international insurance cover.
  • The legal environment for insurers in England and Wales is challenging and uncertain with the introduction of the Third Parties (Rights Against Insurers) Act 2010 on 1 August 2016 and the Insurance Act 2015 on 12 August 2016. The Insurance Act 2015 represents the biggest reform to insurance contract law in more than a century. It is generally accepted that overall, the changes will benefit insureds more than insurers. This Act makes important changes such as varying the insured’s duty of utmost good faith to a general duty of fair presentation, treating warranties as suspensive conditions and introducing proportionate remedies to insurers. The Third Parties (Rights Against Insurers) Act 2010 will finally come into force on 1 August 2016. This Act will help claimants pursue insurers directly when a defendant insured has become insolvent.
  • Losses, although relatively infrequent at the moment, could potentially become larger, more complex and more expensive when they do occur. Deepwater Horizon (2010), Costa Concordia (2012) and Tianjin (2015) are examples. As the volume of international trade continues to increase, vessels carry more cargo, presenting the potential for a large, catastrophic loss. Shipping operators are starting to look more closely at the Arctic for new trade and tourist routes. A total loss in this region could be particularly disastrous, considering the lack of infrastructure or services there.
  • Cyber threats are a repeatedly discussed topic in the insurance sector. Marine operators and insurers must brace themselves for ever more sophisticated cyber attacks, including contingency planning for attacks where hackers take control of systems that control navigation, handle cargo and track containers at ports. Vessels are constantly becoming larger and more technologically equipped, increasing the potential for a cyber disaster.

One notable response from the insurance sector to these challenging conditions has been large-scale mergers and acquisitions, which can benefit insurers by offering advantages such as increased global reach, economies of scale and more leverage when purchasing reinsurance. Global marine insurer XL Group acquired Catlin Group which was renamed XL Catlin in 2015. Then, earlier this year, ACE Group acquired Chubb, and is now operating under the name Chubb. Japanese insurers were involved in two notable transactions in 2015: Mitsui Sumitomo’s purchase of UK insurer Amlin for £3.47 billion, and Tokio Marine Holdings’ takeover of US based HCC for US$7.5 billion. Challenges created by these consolidations include merging two potentially different corporate cultures and retaining the best marine underwriters and claims specialists, who are in very high demand.

The UK is not resting on its laurels and is actively considering how best to maintain its position as the leading global maritime hub. The UK Government launched its ‘Maritime Growth Study’ last year which, together with industry representatives, considered the opportunities and challenges that the UK faces in maintaining its preeminent position. The Study focuses on areas where action could be taken to generate growth, and it has led to the publication of a report which identified that for the UK to stay in its current prominent position, it needs to engage more closely with emerging industry issues such as cyber security, international piracy and new trade routes.

The UK Government’s full ‘Maritime Growth Study’ report, Keeping the UK competitive in a global market,contains 18 recommendations and is available here1. For more information on the Insurance Act 2015, please see HFW’s previous briefings here2 and here3. For more information on the Third Parties (Rights Against Insurers) Act 2010, please see HFW’s previous briefings here4 and here5.