A sea of change as marine assets plummet:
By Insurance blogger Kris Oldland
The International Union of Marine Insurance (IUMI) has added its weight to a radical compromise proposal put forward by the influential Lloyd’s market underwriter Simon Stonehouse that marine insurance underwriters should have the option of being able to purchase vessels at the current rock bottom values in replacement of lost vessels that have been insured at the previous peak market rates that were prevalent before the global economic crash.
This recommendation was delivered to a panel of IUMI members against a backdrop of plummeting asset values which has impacted hugely upon ship owners, many of whom are now facing loan defaults. Mr. Stonehouse – a senior underwriter for Brit Insurance, commented that “If a vessel is worth $60m yet an underwriter can go out and purchase an exact same type of vessel for just $30m, surely the underwriter should have that choice?”
With Moral Hazard proving to be another boat insurance issue never far from debate in the current climate Stonehouse added he felt that although this unusual approach may draw criticism from some area of the industry “The intention, by pushing for value reductions, is to improve risk by eliminating moral hazard,” he argued. “But increased financial pressure can also increase moral hazard.”
Indeed Moral Hazard has emerged as one of the key topics of debate within the marine insurance and ship insurance sector. With the shipping slump deepening at an alarming rate, the worrying situation of ship owner’s insured value being the worth more than the actual value of the ship they own has become more and more prevalent. In particular this has been evident since the market in secondhand vessels has now all but collapsed.
Chairman of the London Market’s Joint Hull Committee Peter McIntosh entered into the debate bringing managing director of Bankserve, Peter Mellett with him by publicly asking the finance expert to provide an overview in the role that he believes underwriters can play in saving ship owners from dreaded covenant defaults or even complete business failure.
In response Mr. Mellett told the IUMI it was his belief that the underwriting fraternity could become the catalyst which triggers an overhaul in lending policies and defaults if they were to continue to drive insured values to levels below those required by ship financiers. Mellett added “The issue is values. It is a debate beyond banks about how to address indemnity on hull and machinery policies. It is a great idea [purchasing replacement vessels], although I am not endorsing it.”
Adding further fuel to the debate Mr. McIntosh was noted to have tersely responded that if underwriters were “nervous about moral hazard” he strongly recommended that they “examine their relationship with their insured” and re-appraise their valuations.
Whether these strongly voiced opinions are borne out of necessity or frustration is yet to be seen. As is whether Mr Stonehouse’s honest yet somewhat unusual suggestions will actually take seed. If they do so it could mean a period of revolution within the sector. If they don’t then things will still be uncertain for some time as the economy slowly picks itself up from the series of sucker punches delivered across the last year.
Either way one thing is for certain – there are troubled waters ahead…..