COVID-19: Uncertainty and an Opportunity for Change

For the first time in its history, the International Union of Marine Insurers conference is being staged remotely – with great success. This is a very clear example, as we have also seen in many other segments of international and domestic insurance and reinsurance, of how the marine insurance industry is having to adapt to the brave new world that is a product of COVID-19.

Beyond the conference, against a backdrop of market practice long steeped in tradition, shifting to a new way of working at such short notice has been a major challenge for the London international market. But, the so-called “new Normal” has also created an opportunity to evolve.

The London Market has needed to react quickly, adapting and accelerating many of the changes that have either been predicted or attempted for more than two decades.  Lloyd’s itself has recognised that business processes developed over its 325-year history need to change quickly to retain the strong position the franchise has developed in the international wholesale market.

So, after almost six months operating remotely, it poses a delicate but pertinent question – could the franchise, its infrastructure, capacity and trading ability be maintained without the Room itself? The expense ratio of Lloyd’s syndicates - a combination of acquisition costs, fixed costs and management expense - would almost certainly benefit from trading outside 1 Lime Street, but at what cost from a commercial and distribution point of view?

What is indisputable is that the pandemic experience has demonstrated that both carriers and brokers with technical capability and clear planning have continued to trade very effectively in an environment that seems set to shape the landscape of the London wholesale market for the future.

During lockdown, Chubb Global Markets’ (CGM) Marine business transitioned rapidly from established EC3-based practices to trading in a work from home environment with negligible impact on our ability to deliver for our clients and brokers. That the volume of inquiries we saw since lockdown started in mid-March was higher than an average year to date is indicative of how our trading landscape has changed, perhaps in some areas for the better, during the transition.

We are now back to office-based working wherever possible and with Lloyd’s also opening its doors once more, our main priority is to ensure the safety and well-being of our clients, brokers and staff by observing all Government guidelines regarding social distancing and hygiene regulations. Our Marine underwriting and claims teams are also aiming to provide an effective and flexible service to those clients and brokers, whether face to face on our Box in the Room, in our office or remotely. We remain a service industry and now need to ensure that some of the successful initiatives we have deployed as a result of COVID-19 act as a catalyst for positive change that modernises business within the London subscription market.

Trading electronically has without doubt received a shot in the arm. The widespread use of e:trading platforms that have potential to address traditional high frictional expense costs may in a post COVID-19 world see that change manifest itself more materially.

The CGM Marine portfolio has been built on consistent underwriting process, rigorous risk selection emanating from a detailed understanding of risk and of the qualified and quantified risk factors that face our clients in the completion of their day-to-day operations.

As marine insurers, we are used to adapting to changes in risk profile, normally successfully, despite the performance of the global marine insurance market in more recent years. However, the risk landscape in the short and medium term is without doubt uncertain.

A shrinking insurable portfolio is never a good trend for any underwriter. With the world’s cruise and passenger vessel fleet facing a state of paralysis and some operators looking to downsize in response to the crisis, a prolonged downturn in demand for most segments of commercial tonnage would result in a reduction in capacity on a more permanent basis, a severe slowdown in new build activity and increased demolition, by definition reducing the insurable risk for insurers of hull and machinery and associated interests.

The prevailing depressed oil price that has had a significant impact on CAPEX in the E&P industry has had a corresponding knock on effect in the specialist offshore support sector, something that the impact of COVID-19 has exacerbated, resulting in corporate failures and an increase in laid up tonnage, another example where premium shrinkage has occurred in a typical hull underwriter’s portfolio.

From a cargo perspective, the future risk profile, certainly in terms of volume, is also uncertain, particularly with obvious variables that surround any projection – such as a second wave of COVID‑19.

Following a sharp fall in world trade during H1 2020 (-3% Q1 YoY and -18.5% Q2 YoY according to World Trade Organisation figures) the outlook for the global economy in the medium term remains extremely uncertain - the WTO’s April forecast offered two scenarios for 2020 that ranged from a reduction in merchandise trade volume of -13% to -32%.  A range of GDP estimates have been issued by international organisations that include the OECD, the World Bank and the IMF, also suggesting significant slowdowns in global trade, largely consistent with the WTO's forecast for 2020.  However, many of these projections suggest a less significant impact on trade compared to the fall-out from the global financial crisis of 2008‑09.

Uncertainty is inherently part of an insurer’s raison d'être. Recent developments have illustrated in extremis that insurers in the London subscription market need to adapt to changes in their operating environment in terms of business process, distribution and risk profile.

At CGM we look forward to continuing to work through the uncertainties that COVID-19 has created and to continue to provide our broking partners and clients with sustainable and secure products and service excellence across all our chosen classes of marine business, whether remotely or face to face in person.

Mark Edmondson is Head of Marine for Chubb Global Markets