Marine insurance premiums on the brink?

Current aggressive behaviour between insurance companies in the industry has driven insurance rates to an all time low, thus companies are struggling to break even

Sea freight volumes have heavily increased in the region, primarily due to containerisation, a tremendous improvement in logistics and transport and now the great demand for fuel and project cargo to facilitate Dubai’s construction boom. In the first quarter of 2007 alone, 8,431 vessels called into Dubai ports and a total of 34,052 by the end of the year, with a value of AED679 million (US$185 million) worth of cargo movement in foreign trade including free zone and custom warehouse trade.

Vessels are now operating at full capacity, whereas only a decade ago, shipowners were happy with 50 to 60 per cent occupancy. With the cost of steel at its peak and the current global shortage of tonnage, it makes economical sense to keep operating older vessels. For this reason insurance companies are less willing to offer hull and machinery insurance.

More owners are now operating vessels that are long over due for scrapping and insurers are reluctant to offer cover for vessels over a particular age. More insurance companies are also concentrating heavily on the volumes of cargo that are entering the country. The number of exports and re-exports are similarly soaring creating abundant opportunities but with a negative effect on insurers.

“Cover on textiles was offered at a rate of 0.5 per cent of the commercial value of the goods, where rates now have drastically dropped to an alarming 0.05 per cent,” says Balaram Kumar, Technical Manager, Millennium Insurance Brokers.

However, Albert Rodrigues, Managing Director, Millennium Insurance Brokers, reassures that despite the instability on insurance premiums, there is no imminent threat to the market itself, nor is there any indication of a disruption in the market. In fact, the current state of the insurance market commands a better rate on marine cargo. Enough profit can be gained in cargo insurance, but unless stringent guidelines are enforced to control and regulate the marine market, stability among rates will never be retained.

Banks have also made it next to impossible to open a letter of credit. Ten to 15 years ago, opening a letter of credit was an effortless process, but since conditions have toughened commanding heavy deposits, many traders have doubled up their relationship with suppliers and trade without a letter of credit in place and goods are shipped on cash-in-hand basis once the vessel arrives, while others do not insure their goods altogether.

This results in a shrink in premiums. Critically, the Middle East has no laws regulating the marine market and when damage occurs no one in the industry can be held accountable for the lack of diligence and malpractice. Dubai is a regional and international hub for the maritime industry, witnessing a fast-phase development in its infrastructure and maritime related sectors thus companies already operating in the industry should be expected to comply with certain requirements if the region aims to attract more international business into the country.

At the moment, approximately 340 to 400 freight forwarders operate in Dubai alone and less than 10 per cent operate without any professional indemnity, creating an enormous gap in the industry.

Comparatively, endless regulations govern the construction industry, inflicting heavy penalties on those who do not comply with the law. Therefore something similar needs to be structured for the marine and logistics industry to maintain healthy levels of competition.

Konstadina Kottoros is a legal consultant in the shipping department at Fichte & Co Legal Consultancy in Dubai, UAE