Similar to many sectors of the global economy, the global marine insurance industry is significantly impacted by inflation. Since May 2020, the inflation rate has increased to record levels in many countries.
The result has been a steady increase in the cost of goods and services. The increases are likely caused by a combination of factors, including sustained low-interest rates, an increase in money supply, governmental policies, and supply chain delays. When considering international trade and purchasing power, currency exchange rates are also a factor.
The world is also facing a downturn in international trade.
There has been a significant recent reduction in demand, resulting in slower vessel turnarounds in ports due to low cargo volumes. This, together with declining freight rates due to shrinking demands and the easing of congestion, shows that the market is decreasing. In turn, it impacts marine insurance as there is far less value to insure.
The various marine lines of business, including Ocean Cargo, Hull & Machinery, Protection & Indemnity, Marine Liabilities, Marine Builders Risk and Yacht Insurance, are all impacted by inflation. In simplest terms, inflation increases the cost of loss. Other factors unique to marine insurance products that are affected by inflation, such as increased values at risk, greater accumulation, adequacy of limits/deductibles, and policy valuation, make this more complex. Record freight rates and supply chain challenges resulting from the global pandemic are major factors impacting cost.
Some examples of specific cost drivers include higher material and labour costs for repair, as well as the availability of parts/materials and labour shortages. Third-party liability lines are also challenged with the increased cost of litigation and, in the USA, the ongoing ramifications of social inflation driving increased jury awards and settlements.
Marine insurance professionals are challenged to keep pace with these rapid changes and ensure sustainable offerings. One of the ways this is addressed is by making sure that technical premiums/rates keep pace with inflation. However, as the inflationary pressures were not easy to predict, the marine insurance market is reacting and either trying to “keep up” with rising costs or, more likely, playing “catch up” as rate change lag claims inflation. All this comes after four or more years of a much-needed market correction that is still ongoing and continued challenges ranging from war, the global pandemic, record cargo vessel fires, unprecedented container overboard losses, large wreck removal claims, and increasingly complex General Average claims.
Even with signs that inflation has peaked and is projected to ease throughout 2023, there are concerns about a global recession and its impact on marine lines. It will likely be 18 or more months until marine insurers have a decent view of the actual financial impact of inflation on their underwriting year results.
For more detailed information, kindly refer to the webinar on inflation and its impact on marine insurance by clicking the LINK.