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Drewry: Shipowner opex remains hostage to rising marine insurance costs

Vessel operating costs are expected to continue rising on a hardening marine insurance market, as conclusion of the P&I renewal season exposes the fallout from rising claims and the impact of Covid-19 on global merchant shipping.

The marine insurance market has been hardening since 2019 as poor returns reduced capacity and so forced up premiums. This upcycle is expected to continue with important implications for shipowners’ vessel operating costs which last year increased at their fastest pace in over a decade due to the impact of the Covid-19 pandemic. Insurance costs make up as much as 10% of total ship operating costs.
During this year’s protection and indemnity (P&I) renewals round the emerging concerns of Clubs over the past few years have finally come to a head. In effect, they have been underwriting at a loss for years and plugging the gap with investment returns. The erosion of their investment returns in 2020, combined with record large pool claims and the unprecedented impact of Covid-19 have all conspired to force Clubs into a position of hardening their rates.
And claims pressure is only expected to worsen with growing tonnage, rising complexity and cost of casualty settlement, as well as a rapid upsurge in activity with recovering trade. Meanwhile, the investment income outlook is increasingly uncertain after a challenging pandemic-ravaged year. These are demanding time for Clubs, some reporting loss ratios as high as 120%.
As Figure 1 illustrates, the market has been seeking average increases of between 5% and 10% in 2021, but in continuation of last year’s practice Club’s individual positions have varied, as has their approach with each member owner. The result is high single-figure percentage increases for most vessel operators.
In the hull and machinery (H&M) market, firmer pricing looks sets to continue and perhaps, for some owners, result in significant broad insurance cost increases.
In mid-2019, there were signs that the bottom had been reached as the H&M market began to reposition and address the capacity issues that had plagued it for so long. Inevitably, consolidation of capacity meant some price increases in 2020 and Drewry estimates that average H&M premiums rose around 2%, but cover costs are expected to accelerate this year.
Underwriting losses continued in the first half of 2020 and it would be a surprise if this was converted into a surplus when the Lloyds Market reports its full year results at the end of this month. In the latter half of 2020 more players either announced that they were leaving hull and machinery or scaling back their activities in that market. This all points to a market that has some way to go towards recovery, and reports of double-digit renewal increases are not uncommon.
In addition to rising cover costs, negotiation on terms and deductibles will go on for at least two more years. The events of 2020 have done nothing to assist providers in rebalancing their market and price risks while at the same time retaining capital coverage.
In 2020 we offered the advice that the inflationary pressures resulting from capital turbulence in the insurance market would force both H&M underwriters and P&I Clubs to raise fees for cover in subsequent years, by as much as double digit percentage increases in some instances. We don’t expect that to wind out this year, and although the measures taken by Clubs in this renewal round may help stabilise their positions, we see this as the continuance of a hardening cycle that may take several years to play out.
Beyond 2021, Drewry expects to see some consolidation in the P&I mutual market as a part of that cycle.

Our view
Despite the unwinding of some Covid-19 related costs, vessel operating costs are expected to continue rising in 2021 on higher marine insurance premiums, particularly for those owners with poor claims records.