Data and digitalisation, the key to calmer waters for marine insurance
In a year of drastic change, how can we use real-time data to move away from static insurance policies to policies that adapt in line with changing risk and exposures. Take a look at some of the changes we've seen within the marine sector in 2020.
2020, a lesson in the importance of real-time data.
The unprecedented events of this year highlighted better than most, the importance of real-time information when it comes to effectively mitigating risk. Traditionally, insurance policies have been set annually, based on demographic data, and claims history. But, what happens when a global pandemic forces us to drastically change how we operate? The truth is that most marine insurance products are not flexible enough to adapt to changes in vessel operations such as those we have witnessed in 2020. Covid-19, countrywide lockdown measures and fluctuations in consumer demand have driven numerous changes to vessel utilisation in the last nine months.
Click on our infographic below for instant access to data highlights from the marine market. And read on to find out how you can turn this data into actionable insights for use in risk mitigation.
Highlights of the changes are below.
Cruise ship mileage and port visits plummet.
There was a seismic reduction in cruise ship utilisation due to the increased health risk to crew and passengers posed by Covid-19 and the lack of space on board. In what should have been peak season for the cruise industry this year, data shows that vessel activity hit a low of 78.3% and ships accumulated in ports across the globe. A drastic change to operations of this nature has implications to the risk profile associated with individual vessels, and existing insurance policies may not be adequate to cover the risk.
Crude tanker vessels redeployed on short term storage contracts.
Following unprecedented global lockdown measures and reductions in demand, the price of oil plummeted to depths unseen for 25 years. Storage facilities became overwhelmed during the oil contango, and crude tanker vessels provided floating storage between May and August 2020. The increased demand sent the value of these vessels soaring. However, a significant change in asset value could have resulted in claims escalating too. The nature of the potential risks also changes depending on the location of the ship. For example, vessels anchored at busy ports have a greater chance of being involved in a collision, or vessels located in war zones can become a target for piracy which can affect the type of cover required by an operator. Using real-time data, Concirrus has proven that behaviour is a better indicator of risk than demographics. Port visits is one of our key measures of behaviour in marine risk and the graph below shows the drastic changes over the course of 2020 compared to 2019.
Figure 1: Global tanker fleet – total number of port visits
Some containership operators implement longer, cheaper routes.
Containership operations have varied by region throughout 2020. Earlier in the year, we saw port visits down on previous years as consumer demand reduced throughout periods of regional lockdown. Demand reductions combined with falling oil prices saw some operators start to traverse old routes, avoiding the costly Suez Canal in favour of a longer route around the Cape of Good Hope. Changes to shipping routes can affect the types of risks the crew and vessel face during their voyage, and operators need to ensure they plan accordingly. More recently operators have suggested that the lower fuel prices will help the sector to recover as the industry starts to return to normal.
What do these changes mean for the marine insurance market?
Catastrophe accumulation risk.
As large numbers of vessels anchor in a port or out at sea, the level of catastrophe accumulation increases for the insurance market. The potential losses surrounding natural disasters such as hurricanes can be significant for (re)insurers. Historical trends show that most cruise ships would be out at sea during hurricane season and whilst rerouting and changing itineraries can be challenging, this is the safest place to be. Covid-19 and the CDC No Sail Order saw accumulations of vessels moored close to each other at some of the busiest cruise ship ports increasing accumulation risk worldwide. We’ve seen a record number of named storms in 2020, with Tropical Storm Iota making landfall as recently as last week. Real-time weather data is essential for keeping track of changing exposures and providing risk mitigation consultation services to fleet operators.
Frequency and severity of losses.
Another key measure of behavioural data at Concirrus is mileage, and as mileage reduces, we also expect the frequency of losses to reduce. Reduced mileage is something that affected both cruise ships and crude tankers during the height of the global pandemic earlier this year. However, the accumulations of cruise ships in busy ports and crude tankers out at sea at the start of an above-average hurricane season could have adversely impacted the severity of claims in the event of a natural disaster.
Reduced premiums to write.
Reduced demand for cruise ships has also led to more cruise ships being demolished in 2020 compared to annual averages for the last five years. With fewer cruise ships in operation, there will be fewer policies to write throughout the remainder of the year.
Risk profile changes.
Turning our attention back to containerships, as well as the increase in mileage for operators travelling via the Cape of Good Hope, they also faced much harsher weather conditions. Vessels are exposed to much bigger wave heights and increased wavelengths along this route compared to the journey via the Suez Canal. Navigating tricky weather conditions increases the risk of container losses as the vessel experiences more frequent and excessive roll motions. These conditions can also impact the vessel itself, causing premature wear and tear and maintenance issues. Tackling more challenging weather conditions is a risk when the crew are operating at peak performance, but one of the other factors affecting risk during 2020 has been crew welfare. Many seafarers have been trapped onboard vessels for months, and teams have not had the rest they need to make informed decisions. Human error accounts for 70% of claims, so poor decision making has a significant impact on risk profiles.
Salvage operations have slowed due to complex travel restrictions and social distancing measures. Availability of salvage and rescue services can also impact on the level of risk associated with the variety of shipping routes available to operators. Response times can affect the scale of insurance losses.
Maersk predicted a return to pre-Covid-19 container demand in 2021, and we have seen activity levels returning to normal in recent months. There were reports as far back as August of ports witnessing their busiest month to date in 2020 as retailers began to restock inventories and prepare for the end of year sales. In October, VesselsValue reported growth on 2019 figures for container journeys between China and the US despite faltering trade in the first half of the year. LA even reported a backlog of cargo waiting to unload at the port. Earlier this week there were reports of increasing volumes of cargo being shipped, a surge in consumer demand that could surpass 2019 levels. This is something we’re seeing reflected in the volume of port visits for the global containership fleet.
Figure 2: Global containership fleet – total number of port visits
So why is this information important to marine insurance?
2020 has been unlike any other the marine insurance industry and our community have witnessed before. We cannot rely on historical claims in years of unprecedented change like this. And, we’ve proven that rating risk on demographics alone leaves the marine insurance market open to inaccurate premium prices and unnecessary losses in our ‘tale of two ships’ blog.
Real-time data on changing behaviours, operational activities, weather and other factors that impact risk allow the marine insurance market to offer market-leading solutions. 2020 is the year of change for marine insurance as the market moves towards algorithmic led pricing that is truly reflective of individual risk profiles of fleet operators. Transparent breakdown of the factors influencing premium prices provides fleet operators with an action plan to help them improve their risk profile. Savvy industry leaders will use this information as an opportunity to offer new and innovative services to fleet operators resulting in new revenue streams. Products and services could include consultancy services or flexible, data-driven connected policies that provide optimal coverage for operators based on real-time activity and best practice risk management processes. This advanced level of service will increase the gap between those organisations holding on to traditional insurance models and those embracing digital transformation to reinvent themselves.
To read more about the data available to the market and to access the Beyond Covid: Marine Insurance Business Resilience Blueprint from Concirrus click the link below.