It has long been a fundamental principle of insurance that the losses of the few are paid for by the premiums of the many. This spreads the cost of risk amongst Insureds and allows insurance companies to cover their operating costs and to make a profit.
One of the down sides of this equation, however, is where an exceptional loss occurs or a risk has been under priced by insurers they will look to recoup their losses by charging an increase to all of their policyholders.
Insurers have a long history of not explaining how their business works to their customers and so when such an event occurs there is much consternation amongst Insureds. A recent example of this was the terrorist attacks of September 2001 which led to worldwide increases in the cost of insurance across all sectors.
I was working in Asia at that time and explaining to an Indonesian tug and barge operator why he was paying an increase for his insurance because of an event, unrelated in his mind, that occurred many thousands of miles away when he had had no losses was a considerable challenge!
If we put ourselves in the position of an individual policyholder following one of these events (although I am sure many readers have actually been there) the logical thing to do would be do look for an alternative supplier. The problem with this approach at that time was that the events were so extreme that there was a reduction in the supply of insurance.
The capital providers who guarantee the financial stability of Insurers either became more cautious and risked less capital or invested their capital elsewhere. This change in the supply side of the equation in the face of consistent demand meant that the increases in pricing were sustained.
This is all a very interesting history lesson but how is it relevant today? Where is this supply / demand dynamic currently and what effect is it having on the day to day pricing of insurance? As many readers who are also insurance buyers will have noticed it has moved considerably in favour of insurance buyers.
A combination more available capital and an increase in the liquidity of that capital has greatly increased the supply of insurance capacity. This effect has been further magnified post 2007 by the fall in available returns from the equity and bond markets leaving the insurance industry awash with capital and with that capacity.
Major recent events such as the Japan earthquake have had little effect on the pricing of insurance of sectors other than those directly affected, the fundamental principle mentioned in the first paragraph of the premiums of the many paying for the losses of the few seems to have been bent if not broken.
So if this is the case, why has the 'Costa Concordia' loss (the largest marine loss in history by some margin) had little or no effect on the pricing of marine insurance and, in particular, the tug, offshore and supply industry ('Brown Water' business in Insurance terminology)? Well, there are two main reasons for this.
Firstly, premiums insurance companies collect in respect of marine risks are seen in a favourable light by the regulators who measure how solvent insurance companies are. This is true to such an extent that an insurance company with a large portfolio of marine business is able to write more non-related business for the same solvency level than they would otherwise.
This is somewhat of an accounting trick but regardless of that does make the sector very attractive to insurance companies. Secondly the 'Costa Concordia' was deemed a 'Blue Water' loss so does not fall into the 'Brown Water' sector that readers here are involved in. Blue Water business has historically performed poorly and such a major event event occurring on top of this has had some effect on its pricing but of more relevance to readers here is that this has meant that capacity has been redeployed from Blue to Brown water business increasing capacity further.
So, for a variety of reasons, as we sit here today, lots of insurance companies want to write Hull and Machinery insurance for Tug, Supply and Offshore vessels.
This supply side shift has far outstripped any increase in demand and pricing in the sector is more competitive than it has ever been. Great news for owners, isn't it? Well yes and no. As many readers will attest to being in a very competitive market space makes selling a value proposition much harder and this doubly so for insurance companies who are essentially selling a promise.
The value of an insurance policy is only delivered when a loss occurs which may happen rarely if at all so ensuring you are getting value as a buyer is very difficult to judge.
So how to navigate this process and take advantage of the market whilst extracting the maximum amount of value? The first thing to do is define where insurance sits in your procurement process. As an item it sits across finance and risk management but it is important that it doesn't fall between the cracks and is given due consideration internally.
It is increasingly common for companies to run through various loss scenarios on paper as part of this process such that real numbers can be applied to what can be a somewhat abstract process.
Another key element to look at closely is the insurance broker that you use. A good broker is one that you know and trust and not the one that says they can get you the cheapest price. At some time in the future you may be calling them up at three o'clock in the morning when something has gone wrong and you need to be sure that it is somebody that will be responsive all year round at not just in the run up to renewal.
Brokers are legally bound to act in your best interest so don't be afraid to work them hard and ask whatever questions you want. Once you have a broker that you are happy with stick with them, the longer term your relationship the better they will understand your business and so deliver better solutions for your needs. An Insured who demonstrates loyalty to their broker is a much more attractive proposition for Insurers than one that is perpetually tendering their business and the pricing you achieve will reflect that.
The broker will also be able to offer advice on the various insurance carriers. Many insurance buyers lean heavily on rating agencies to decide who appears on their insurance panel and whilst this does have some validity it only measures ability to pay rather than willingness which is a much more important measure.
Brokers will have had experience of most insurance carriers through the claims process and will be able to offer advice as to which are flexible, responsive and keen to assist and which are not so. If you can it is always a good idea to meet your insurers and a good broker will have no objection to this.
It is very important that your broker has experience in the tug, supply and offshore space as this sector is much more 'hands on' and requires a greater depth of knowledge of the contracts unique to the sector and how they effect insurance. There is no harm in talking to your competitors about who they use!
As for the insurance carrier themselves you need to be guided by more than price and your broker will assist you here. Most insurance placements are syndicated and will have one or two lead insurers who will manage the policy on a day to day basis. It is important that you have a good relationship with your lead insurance carrier and a long term relationship is ideal.
The more this carrier understands your business then the more likely they are to be comfortable with any mid-term changes to your policy you require. These maybe required to allow you to enter into certain charter agreements and so having a knowledgeable, flexible carrier maybe the difference between being able to tender for a contract or not so is a major consideration. As with the brokers, lead carriers with experience of the sector are a must. Many carriers have recently moved into the sector and may not have the experience to deliver what is required to make the policy truly effective.
As well as making them more responsive day to day having a long term relationship with your lead carrier will also assist when it comes to claims payment. The more a carrier feels part of your business the more they want to help and the best way of achieving this is by working with them over a long period of time.
In summary, it is a great time to be an insurance buyer in the tug, supply and offshore sector but when you are buying promises beware the 'too good to be true' deal.