Marine Insurance Market Report

Summary and Forecast (Q3’ 20) Market Trends as of Q3 2020

We have analyzed the global premium trends and capacity changes since Q3 2020 across the various marine products and provide our “Marine Market at a Glance” below:

Marine Market at-a-Glance

CAPACITY TREND

RATE CONTINENT RATE RANGE TREND % USA CANADA LONDON NORWAY EUROPE ASIA

Cargo  5% to 25% ê è ê ê ê ê

Stock throughput  20% to 75% ê è ê N/A ê ê

Blue Water Hull  7.5% to 15% ê è ê ê ê ê

Blue Water P&I  2.5% to 5.0% è è è è è è

Brown Water Hull  10% to 15% ê ê ê ê ê ê

Brown Water P&I,  10% to 15% ê ê ê ê ê ê Liability

Other marine  7.5% to 15% è è è è è è liability – Primary

Other marine  5% to 15% è è è è è è liability – Excess

Ports & Terminals –  10% to 20% è è è N/A è è Property

Ports & Terminals –  7.5% to 20% è è è N/A è è Liability

Logistics – Cargo  5% to 20% è é è N/A è è (Shippers Interest)

Logistics – Property  5% to 20% è é è N/A è è (Warehouse)

Logistics – Liability  5% to 20% ê é è N/A è è

Logistics – E&O  5% to 20% ê è ê N/A ê è

Legend

Increases 

Stable 

Decreases 

Commercial Risk Solutions Marine Insurance Market Report | Q3 ’2020 2 Hull Markets

U.S. /Canadian Markets: Both internationally everyday operations. To ensure there are strong run and domestic markets continue to push for insurers for when the inevitable major losses increases as this has not been a profitable class. Blue occur, premium levels will have to go through a water appetite in the U.S. continues to be limited period of major adjustment. to a handful of markets who are predominantly follow markets and as per London, are looking London continues to take the lead on the key issues, for double digit increases on clean accounts and drafting clauses, issuing guidance and working considerably more for loss sensitive accounts. This with maritime experts as appropriate. The Joint limited blue water capacity was reduced further Hull Committee (JHC) has most recently addressed with the withdrawal of Crum & Forster from the cyber, Covid-19 and reactivation issues and will be space. Greater underwriting discipline is being seen turning its attention to the problems around ship across the board including vessel types, terms and recycling. JHC members are, as ever, keen to make conditions, long term agreements, deductibles, progress on behalf of the market on the technical in addition to technical rather than commercial issues they are elected to look after. underwriting taking precedence. US markets can Hull rates in London are trending upward from 10% write additional lines to their overseas offices in to 15% on renewals for accounts with favourable loss certain circumstances, however, will largely cap their records all depending on size/type, renewal rating overall exposure on anyone account in conjunction history, and relationship with the insurer. Fleets with with their London team. indifferent or poor records, much greater uplifts London Market: Marine hull business has suffered in rating, with increased retentions being used to from world overcapacity and multiple loss years, so mitigate such rises. Increase in verticalization of risks it will not be a surprise that London has taken the to maximise benefit for clients of markets which are lead by pursuing the prudent path of remediation. hardening at a slower pace than London. This has resulted in some carriers withdrawing from Asian Markets: Asian Hull and Shipping markets the class and greater controls being imposed around continue down the road of their previous trends. levels of participation, but nonetheless the London Underwriters continue to push for double-digit market remains the biggest writer of hull business. increases as the starting point of negotiations for Clearly size is not everything, and an overdue clean renewals, coupled with a push for increased return to sustainable rating levels is underway. deductibles and a further tightening of coverage Premium levels in hull insurance had fallen to such conditions. For the right shipowners, single digit low levels that they barely covered the attritional increases are certainly achievable, although we losses that ship owners encounter during their are increasingly seeing markets following different

Commercial Risk Solutions Marine Insurance Market Report | Q3 ’2020 3 underwriting strategies. While some are looking to War Risks continues to follow the London market, return to a level of technical underwriting, there is even if there are pushes to deviate, however it seems no denying that others are simply applying the law that the narrative on this is controlled by a select of supply versus demand, requiring a (very high) few operating out of the Old Continent. With no premium for their capacity, regardless of the risk headline-grabbing negative news recently coming profile of the fleet. out of the Middle East (on the contrary – the recent establishment of diplomatic relations with Israel The withdrawal of capacity from Asia seems to have signalling a potential easing of tensions), we might see abated in the most part, although select smaller this sector as the first to ease off in terms of pricing. players continue to withdraw from international marine. On the flipside, the emergence of new The Covid exclusion clause is being considered markets in other parts of the world will no doubt on Hull placements. Although this is applied begin to slow the rise in rates. to Global Hull rather than just Asia: Joint Hull Committee just recently published the Turning to MGA’s and Line slips, underwriters Communicable Disease Exclusion clause for are increasingly reluctant to “give the pen away” use on Marine Hull risks. This is being driven to others, making small and/or local business by the Reinsurance Excess of Loss market and more difficult to place. Likewise, we are seeing the concern is that this will be adopted by underwriters avoid certain vessel types, even for the Hull market without underwriters really good operators of those types. This on one hand understanding what the potential impact is exacerbate the rise of rates, while at the same time in terms of how a Communicable Disease can presenting an opportunity to those underwriters cause physical damage to a vessel. looking to think outside of the box.

Protection & Indemnity (P&I)

Since our last quarterly update all the clubs however was extremely positive and collectively have released their financial results for the the clubs generated USD 762m in investment 2019/20 policy year. As expected underwriting income up to the Feb 2020 policy year cut off. performance has deteriorated somewhat and For the most part this impressive investment accordingly combined ratios have increased result more than offset underwriting losses to an average of 119% across the international and as a result total free reserves for the IG group compared to 112% in the prior year. The increased from $5.13bn to $5.35bn. best performer in the group was the Steamship Mutual, with a result very close to breakeven Of course, since February there has been significant at 99.8% and the worst being the American volatility in the investment markets due to the Club at 139%, excluding their unbudgeted pandemic and whilst we understand most clubs supplementary call. Investment performance have recovered initial investment losses, such

Commercial Risk Solutions Marine Insurance Market Report | Q3 ’2020 4 volatility and general economic uncertainty has is driven by large claims to the clubs including the demonstrated that clubs are unlikely to be able rely Stellar Banner and Wakashio incidents. on investment income to subsidise underwriting losses going forward. Currently there is no Covid 19 exclusions in mutual IG cover however it should be anticipated As for the current year it’s too early to accurately that for commercial placements such as offshore, anticipate what the club results might be charterers and fixed premium, we are likely to see however, we would anticipate that based on pandemic exclusions being brought in to some recent years performance being driven by erosion extent as accounts renew. of premium, most clubs will be running at an underwriting loss in the current year. It should Lastly, most clubs will have their board meetings also be noted that the current year is proving to in October/ November and we would anticipate be a particularly expensive year to the pool (those a round of general increases to be announced. claims between each clubs USD 10m retention Whilst there will be some disparity in the and the USD 100m reinsurance attachment approach taken between the stronger and point). At the half year point the pool is currently weaker clubs, we would anticipate GI’s to fall in reporting USD 294m in claims, the highest year the range of +5% to +10% with any adjustments on record after 6 months and somewhere in the for record. The P&I team will of course circulate region of 3 times higher than a normal year. This a full market review shortly as well as updates on club announcements as they are received.

Brown Water Hull and Marine Liability/ Ports & Terminal Operations

U.S./Canadian/London Markets: The US Brown which liability class (e.g. terminal vs. shipyard Water Hull/P&I market is pushing for increases vs. P&I with crew). across the board and rate reductions are becoming a thing of the past but not impossible if an account Excess Liability/Bumbershoot: The excess is marketed at renewal. Due to adverse results, market, particularly the first layer which has some insurers have scaled back their appetite and become a working layer, is certainly being rated will only consider writing brown water accounts with greater scrutiny with traditional rating if P&I is excluded (Axa XL) and/or some primary models being used less and less. The auto layers are being written on a subscription basis. liability attachment point has become a key discussion point with most markets not willing Marine Liability / Ports & Terminals: There to attach at $1M if there is anything more than is still plenty of keen capacity on Terminal/ a handful of autos; $2M is acceptable, however, Shipyard/Charterer’s business with this sector $5M would be the sweet spot for our marine of the market performing well overall. However, underwriters. Additionally, markets are putting incumbent markets are pushing for renewal out smaller limits and seeking ventilation increases of between 10% and +15% on clean between layers that they write resulting in accounts depending on existing pricing and smaller stretches of excess limit.

Commercial Risk Solutions Marine Insurance Market Report | Q3 ’2020 5 Cargo

U.S. and Canadian Markets: For the U.S. London Market: Renewable Cargo business marine cargo business, and non-retail stock with clean loss records receiving anywhere throughputs, we are experiencing increases from 15% to 30% in rate increases. Excess Stock from 5% to 25% for accounts with favorable loss Throughput business that is largely NAT CAT experience because of the hardening of other driven is likely to feel more rating pressures coverage lines. The U.S. cargo market remains than transit related accounts. The reduction committed to writing new business, however, in capacity from the US domestic market is they are closely reviewing and modelling increasing demand in London which will only each account. Further, markets continue to be allow underwriters to push rates further. inundated with submissions from accounts that in the past were placed into the London market. There is now very little appetite to write limit All signs are that underwriters will be closely stretches exceeding USD 80,000,000 due monitoring their books of business and if they to one or two large profile account losses. are not profitable then they will take corrective We are now being asked to structure things action. For existing U.S. accounts with poor very differently and there is a desire from loss experience, we are seeing increases from underwriters to write small tranches on large 20% to 75%, especially accounts that have stock vertical limits. associated within the placement. The market Asian Market: In Asia, rate adequacy continues for excess stock has rapidly diminished and to be the main emphasis driving the cargo the cost of capacity has risen sharply. We are market with substantial bottom-line pressure seeing increases of 25% - 75% over the expiring coming from Global management. As we premiums as this market was underpriced for enter the peak months of the typhoon season, many years. insurers are hyper aware of stock in catastrophe The market for retail stock throughputs is exposed areas, and therefore have a greater constricting and pushing for higher rates especially focus on modelling / technical analysis. In line where the loss experience has deteriorated. with this, data quality and risk management On retail stock throughput primary layers with information remain a key facet of pricing significant losses, we have seen significant increases control and it’s as important as ever that we in expiring premiums as well as increases in engage with our clients to highlight that CAT deductibles. As the cost for excess stock is information is king. becoming more expensive and capacity is greatly We are still experiencing a cautious risk appetite reduced we are beginning to see the property from most lead insurers with underwriters heavily markets sit excess STP programs at much lower relying on actuarial reviews. As a consequence of limits than in the past. this, we have witnessed incumbent markets turning

Commercial Risk Solutions Marine Insurance Market Report | Q3 ’2020 6 down clean business purely because of premiums our various Aon offices across the globe to work not fitting within their technical margins. To stay together in completing placements and providing ahead of any unforeseen outsized rate changes, solutions; echoing the Aon United spirit. we should continue to have adequate lead times and prepare the client for all eventualities, with Overall there is little change to premium trends, expectation management at the forefront. with positive rate changes being the norm. We are still very much in the midst of a hardening market Our Global connectivity and communication but with our ever-growing experience in handling capabilities are stronger than ever as we rely on this climate, we are well placed for the future.

Logistics

U.S./Canadian Markets: Logistics Liability to be a difficult risk to place with most marine capacity has decreased since the prior quarter insurers reducing capacity and increasing rates with one of the three U.S. Logistics Operator to offset the increasing severity of these claims liability package insurers not accepting new as well as their increased cost to reinsure the submissions for an undefined period as well as exposure. Standalone warehouse legal liability others beginning to reduce limits to align better coverage is getting more difficult to place with their strategy. The availability of standard as many marine markets will decline the risk logistics cargo liability markets is still on the without some transportation risk included in the lean side as they have been for some time, but program, so we usually wind up placing those it seems that there haven’t been any further risks with an inland marine market on the primary decreases in capacity which be somewhat of a and potentially using a willing property market positive sign. This segment of the market is less to act as the excess insurer. In the logistics competitive than the shipper’s interest market operator’s liability excess market there is now a and in general has been increasing rates at steady trend of 15% plus increases as insurers renewal at around 5-10% versus 2019 where grow more concerned about the potential for they already had achieved rate increases. They large contingent third-party liability claims that are also pushing for larger increases where the they may have to defend if tort reform is not loss performance has been less than desirable achieved and the current trend of increasing and further restricting their appetites for certain nuclear claims for road accidents continues. high-risk commodities. Rate reductions on transportation operator liability packages are London Market: Capacity for Cargo Legal rare but we have seen some recent renewals Liability coverage decreased over the course with outstanding loss history going down of 2019 and has remained flat during the first by 5% or less. The shipper’s interest market half of 2020. There is still only a handful of pricing is trending up 5-10% but there is still credible insurers for large multinational Logistics ample capacity for these types of programs. The accounts, particularly those requiring fully logistics Errors & Omissions exposure continues compliant placements with local policy issuance,

Commercial Risk Solutions Marine Insurance Market Report | Q3 ’2020 7 albeit insurer demand for following lines/ With this being the case, Underwriters are Reinsurances on such placements looks to be looking to impose higher rate increases and increasing. In respect of smaller multinational reduce their capacity on any storage risks where clients, there is a greater choice of insurers, clients are unable to provide adequate risk however those competing within this space information. are more inconsistent in their risk appetite and generally concentrate their interest towards Asian Market: Logistics insurance remains accounts lighter on contract logistics and with reasonably accessible in the Asia market, with less onerous customer contracts. Capacity a greater emphasis on providing solutions to remains plentiful for smaller single-territory or cater for increased demands in the industry due pan-regional accounts, albeit market appetite to current circumstances. The rate increases for more attritional Road Haulage accounts is are steady, and insurers continue to focus on seemingly diminishing, after intense competition profitability and are pricing systematically, in that segment in Europe. however the increases are slightly less significant than in the cargo market. In terms of pricing, Freight Liability insurers who write their business within a wider Cargo Overall Market Outlook portfolio are looking for +10% on average for As we move forward marine underwriters Primary renewals with profitable loss. Excess will need to continue to ensure their books renewals are currently seeing in the region of of business return to profitability. Marine 15% to 25% rate increases. Insurers are still underwriters are being advised by their willing to cover E&O exposures despite the management to carefully analyze their current general upward trend in frequency/severity over books of business and we expect that any new recent years, however there is little appetite risk they wish to underwrite will be carefully to cover this aspect in isolation, particularly in reviewed. Capacity is at premium as we enter respect of large logistics companies. Q3, however on a positive note Insurers as asking how they can grow again. Shippers’ Interest covers are generally placed with the same insurers as the Freight Liability All descriptions, summaries or highlights of coverage piece, so rate trends are similar, however any are for general informational purposes only and stand-alone placements in the Cargo market do not amend, alter or modify the actual terms are likely to be looking at 20-30% rate increases or conditions of any insurance policy. Coverage is at a minimum in line with market trends, with governed only by the terms and conditions of the claims affected accounts experiencing larger relevant policy. rises. Insurers are pushing increasingly for more meaningful exposure data at insured locations, wishing to better model their exposures worldwide to prevent potential accumulations/ aggregations and to ensure adequate pricing.

Commercial Risk Solutions Marine Insurance Market Report | Q3 ’2020 8 Contacts

Lee Meyrick Alexander Gibson CEO Global Marine – London Head of Marine – London +44 (0) 20 7086 3657 +44 (0) 20 7086 4204 [email protected] [email protected]

William Penn Patrick O’Neill Marine Practice Leader – U.S. Head of Hull & Liability – U.S. +1.313.244.6058 +1.212.479.3683 [email protected] [email protected]

Brent Chorney Jan Steven Kelder Marine Practice Leader – Canada Regional Managing Director, Marine – Asia +1.416.868.5795 +65.9622 5217 [email protected] [email protected]

Tom O’Donnell Logistics Practice Leader – N.A. +1.212.441.1763 [email protected]

About Aon Aon plc. (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our global Marine practice, one of our dozens of specialized product and industry groups, places more than USD 3 billion in premium to marine markets, giving Aon superior access to the top markets in the world. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance

The information contained herein and the statements expressed are of a general nature and may not apply to particular factual or legal circumstances. The materials do not constitute legal advice or opinions and should not be relied upon as such. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. All descriptions, summaries or highlights of coverage are for general informational purposes only and do not amend, alter or modify the actual terms or conditions of any insurance policy. Coverage is governed only by the terms and conditions of the relevant policy.

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