25 & 26 September 2000, Athens Greece
Ministry of
Transport, The Netherlands
Reinventing the Marine Insurance Industry: The Responsibility of Marine Insurers in Quality
Shipping
Today’s shipping market
Long ago shipping consisted of wooden ships and men of iron. Transport
over sea was considered a high-risk adventure: big money or bankruptcy. In
terms of legislation, liability, the role of other players in the maritime
market and similar aspects, our maritime framework is grafted on this
old-fashioned concept of the marine adventure.
The concept of the marine adventure led to the allocation of risks to the shipowner. This is, among other
things, reflected by an impressive legacy of international rules and
regulations that has been built up during the past few decades. Focusing on
vessel and crew, the main concern was to minimise maritime risks by prescribing detailed technical and
environmental safeguards. Though benefits can’t be denied - safer and cleaner
shipping over the years - the present regulatory system has fundamental
shortcomings. By putting the responsibility and the burden unilaterally on the
authorities it entices ship owners and the rest of the industry to do little
more than the barest essentials to comply with the rules. The present
prescriptive regulatory framework doesn’t contain economic incentives to comply
with the rules.
Ship owners started to explore means for a way out of this straitjacket.
The 1996 OECD study on the competitive advantages of substandard shipping has
demonstrated savings of up to 15% or up to 1 million US dollars per annum for a
large vessel. Ship owners dodging the rules found refuge largely in open
registries. Those flag states started to adopt a position as a market player,
thereby forsaking their primary role which is to guard social boundary
conditions.
Moreover, this imbalance made it possible - and indeed easy - for other
parties within the maritime industry to escape responsibility. As those other
parties influence market conditions, there is a whole chain of market players
who should bear at least some responsibility: classification societies, insurers
and P&I clubs, shippers, finance companies and merchant banks. Moreover,
let us not forget governments themselves. All these other parties have a lucky
escape, as they are never held accountable.
The approach based on the marine adventure has ultimately led to a
culture without a sense of collective responsibility and without proper checks
and balances. A market which is cost-driven instead of quality-driven. Under
these market conditions it is getting more and more difficult to effectively
enforce existing and new regulations. We must look for ways to make quality
shipping rewarding.
Tomorrow’s shipping market
The shipping market is an international and highly liberalised market
which requires more and more quality of services and sustainability. Shipping
is not only a matter of costs, it is also a matter of social conditions on
board, safety at sea and care for the maritime environment The aim of responsible governments should be
just that: a strong service-oriented high-quality market, not a cost-driven
market.
The only way to effectively revert the current situation is the creation
of a culture of self-regulation in regard of safety, commonly referred to as
“safety” or “quality” culture. To be effective this culture progresses beyond
the mere following of externally-imposed rules, and emphasises the need for every
company and individual within the maritime industry to be responsible for
taking action to improve safety. The starting point for this is professionalism
in management. It is of the utmost importance that ship-managers see the
economic benefits of a safety culture within their companies. However, it is
not only the ship-owner: quality depends on all players in the market and is
the responsibility of all players. Other market players should, to their own
benefit, give ship-owners the economic and financial incentives to help them in
adapting a real safety culture. The maritime industry in general has till now
shown a rather disappointing commitment towards an active quality approach.
However disappointing, not at least surprising. The present rules and
regulations do not contain economic incentives to bring about a safety culture.
On the contrary: the collision of common good and governmental policies versus
the interests of the maritime industry has led to evasion of the rules, by
ship-owners and other market-players. It has led to a culture without a
collective sense of responsibility, a culture where nobody is held accountable,
except for of course the ship-owner, a significant number of whom will dodge
the rules, etcetera, etcetera, a vicious circle. This evasive culture
transformed the shipping industry into an often untransparent industry in which
it can be difficult to identify the owner of the ship - unacceptable in case of
accidents.
It’s no two way street: besides the ever necessary regulation
prescribing technical and environmental safeguards and the much appreciated
efforts of bona fide quality driven maritime market-players, we need to develop
a third way. We need to create a symbiosis between those two and create an
environment in which it is more rewarding to play by the rules than dodge them
and, in doing so, to bring about quality shipping without distorting
competition. It is necessary to provide the maritime industry with an effective
legal framework. A framework in which a collective responsibility is felt by
all market-players and in which they are held responsible and liable, a
framework which contains economic incentives for quality. And only when
everybody feels and is held responsible and liable, it is possible to bring
about a safety and quality culture by self-regulation. This is the missing link
in maritime industry, today.
Unilateral action by governments will not bring about a change in
culture. Co-operation between governments and industry is essential: the
quality parts of governments and industry must work together. The joining of
forces interested in quality must make life more difficult for those who are
not interested in adequate safety standards. A prerequisite is a different
approach towards the phenomenon risk. The old ways of yesterday are not the
ways of the future. Maritime risk today shouldn’t be based on the perils of the
sea alone. Only when we realise that maritime risks are the result of quote
unquote misbehaviour of not only the calculating ship-owner but all calculating
market-players, we can hold market-players responsible and liable. And shared
responsibility is important to shift attention and focus on prevention of
accidents in stead of - as for example in the present liability regimes - the
handling of claims afterwards. A legal framework should reflect this changing
attitude towards maritime risks.
A legal framework which reflects this changing attitude towards risk
can’t be build overnight. We have to slowly rebuild the current system and
introduce economic incentives to all market-players to perform according to
modern quality standards and help bring about a safety culture within companies
and their management. The European Union should take up the gauntlet and could
play an important pioneering role. The European Union should define her point
of view and develop a strategy towards a regulatory system that facilitates
self-regulation.
Today’s marine insurance
market
The marine insurance market resembles today’s shipping market. The hull
and machinery insurance market has suffered from a structurally “soft” market
for almost a decade now, with rates being rock bottom because of over-capacity
and fierce competition. Profits are no longer
being made, and indeed the fall-off in claims has by all accounts now
been sharply reversed. And yet, for fear of losing business competition is
still based on price, instead of on proper risk assessment. And without proper
risk assessment underwriters are unable to tell good from bad risks, thus
running their business virtually blindfold. Increasingly, the underwriting
market has obtained all the characteristics of a pure commodity market. It is
not surprising that as the underwriter is left with the poorer part of the
portfolio, he makes an underwriting loss. Reinsurance or higher deductibles
will only conceal the problem. And underwriters who compete on price will also
lose business on price, so they lose business, period.
In a soft insurance market it is easy for substandard shipping to insure
their risks. Because the market is cost-driven, proper risk assessment is
neglected for fear of losing business. Without proper risk assessment, it is
not only difficult to differentiate between good and bad risks but also to
differentiate adequately in price.
There is a downside for marine insurers as well. After all, a soft
insurance market is bound to produce more claims because more business is
written by more underwriters on the basis of rates alone. Also, with the lower
deductibles that characterise such markets the losses suffered by negligent
ship owners reach the level where they are still insurable by underwriters.
This will inevitably come to a standstill at some point, and the later it
happens the worse the damage for the insurance market. In addition, purely
cost-driven underwriting is producing a generation of hull underwriters without
the necessary technical skills and know-how, leading to even more pressure on
marine underwriting to become a pure commodity.
Needless to say, this is not what anybody wants. In order to make the
marine insurance rewarding again the marine insurance industry on the one hand
needs to be professionalised whilst on the other hand should refrain from
becoming a gambling industry. For both, marine insurance has to reinvent their
business.
What do governments expect from the marine insurance market? What contribution can the maritime underwriting
market make?
Tomorrow’s marine insurance
industry
Risk assessment and price
differentiation
Let me start off with a question. What is the difference between marine
insurance and other insurance, for example a simple car or health insurance?
Should it not be the case that all good (technical) underwriting starts by a
proper assessment of good and bad risks? Should it not be the main concern of
all good (technical) underwriters to achieve a balanced portfolio consisting of
quality risks? Should this not be done, as already happens in most other parts
of the insurance industry, by raising minimum requirements and price
differentiation? Unlike marine insurance, in car insurance governmental safety
policy goes hand in hand with commercial policies of insurance companies.
Marine underwriters, like any other part of the insurance industry, should do
their homework better and set insurance conditions in response to risk
parameters. A soft market cannot be an excuse.
Risk assessment means a systematic approach to evaluating and measuring
each client against defined quality standards. Without proper risk assessment
and price differentiation, marine insurance is then consciously providing
incentives to substandard shipping instead of scaring off rogue elements in the
shipping industry. In doing so this makes the marine insurance industry
accessory to substandard shipping! And, like I said, all market-players should
feel responsible and, if not, be held responsible and liable.
As stated before, in order to achieve high-quality underwriting complete
transparency of information is a prerequisite.
Equasis database
I’m not here to tell you how to conduct a proper risk analysis. I do
want to tell you that there already is a lot of information available in the
public domain. More will come. At the Mare Forum conference in 1999, we
discussed at length the disadvantages of a lack of transparency. One should
have a global information system and data base on at least safety and
environmental aspects of shipping. Lack of information will cease to be an
excuse. The European Commission has taken up the initiative with the design of
the Equasis database which is to contain information from Port State Control,
as is later to be supplemented by data from class societies, flag state
inspections, private inspections such as SIRE and CDI, and lastly and,
hopefully, from insurers. The database will be reliable, easily accessible and
regularly updated. Underwriters not only can make use of the information in
their risk assessment, they should also feel obliged, as a market-player
carrying an individual as well as a collective responsibility, to add data to
the database.
The Equasis database should serve as a basis for conducting a proper
risk analysis and raise minimum requirements by using “quality” templates. All
kinds of information should be available, notably the information needed to
assess hull insurance risks:
· description of vessel and management;
· area of trade; nature of trade; period of trade;
· classification society and class status; flag state; P&I Club,
nationality of crew and officers;
· technical details of vessels, including age, build and engine
manufacturer;
· degree of compliance with international regulations, and specifically
with the ISM code.
By using “quality” templates to extract information from the Equasis
database, by sharpening minimum requirements or the introduction of “quality”
clauses like those dealing with ISM and STCW95, one cannot only differentiate
between good and bad risks, but also between good and bad underwriters, and in
doing so contribute to improving both business and image! Solid customer
relationships, based on recognisable quality, are essential for the business in
the long run. Even certification of some kind may come to the fore. A voluntary
Code of Conduct or Code of Best Practice for marine underwriters, not unlike
the recent Code of Conduct of the European Shippers’ Council or the Maritime
Industry Charter on Quality Shipping of the European Commission, should help
bring about this change towards an active quality approach.
Conclusion
Short term policies have never worked. In a cost-driven market a sudden
stop seems inevitable. In order to survive and strengthen market positions,
development of a long term strategy will prove to be essential. What we need is
a safety culture to bring about a service-oriented quality-driven market. Governments
as well as the maritime industry must take their responsibilities. Conditions
must be set by governments and industry together.
Besides the ever necessary technical and environmental safeguards
combined with strict supervision, governments must provide the maritime
industry with a regulatory framework which reflects a new approach towards
maritime risk and contains the economic incentives necessary to bring about
self-regulation of safety or safety culture.
The maritime insurance industry should evaluate their own performance: a
sense of collective responsibility and self-regulation must be internalised. A
safety culture progresses beyond mere following of externally imposed rules,
the maritime industry therefor must take their own responsibility in achieving
quality shipping. The marine insurance industry plays a key-role and should
realise this. Better than anyone else they are confronted with the consequences
of maritime risks. The maritime insurance industry can forward an important
message to substandard shipping by conducting proper risk-assessments: the
higher the risks, the higher the premium and the tougher the application of
restrictive conditions. In that way governmental policies go hand in hand with
commercial policies of the insurance industry.