16 Jan 2017
High Value-added Maritime Services: Marine Insurance Opportunity
- Chart: Marine Insurance Premium by Region
- Chart: Delivery of New Vessel by Builder Country in 2015
- Table: China’s Non-life Insurance Premium, 2004-2014
- Chart: Top Cargo Insurers in China by Market Share, 2014
- Chart: Top Hull Insurers in China by Market Share, 2014
- Chart: Real GDP Growth of Selected Asian Countries
In common with nearly every other sector of the maritime service industry, the marine insurance sector is currently going through a very challenging time, largely as a consequence of an overabundance of ships and falling freight rates. While vessels of all kinds have declined in value, the world’s major shipbuilders have not moderated their pace of production in line with this drop-off in demand. This, in turn, has put continued pressure on insurance premiums.
In 2015, the global maritime insurance market shrank to US$29.9 billion, 10.5% lower than the previous year. In retrospect, this was likely caused by the rising marine insurance risks associated with the tightening of various maritime regulations, coupled with lower return rates. It is notable that, according to statistics from the International Union of Marine Insurance (IUMI), all four lines of insurance business - hull, cargo, offshore energy and protection & indemnity (P&I) - experienced a decline in their premium income.
In view of these financial rough seas, many marine insurers are now aiming to diversify their business away from the sluggish markets in Europe. Instead, they are turning their attention to those emerging markets where growth is still reported, particularly those in Asia. Despite difficult global conditions, Asia is one of the very few regions where the maritime industry is managing to report an increased demand for professional maritime insurance services.
Asia - A Rising Star in Marine Insurance
In terms of geographical markets, Europe remains the largest marine insurance area, due to the clear dominance of the UK and Germany. However, based on IUMI data, Europe’s market share dropped to 50.4% in 2015, down from 52.6% in 2013. By contrast, Asia Pacific, the second largest region by market share, grew from 25.5% in 2013 to 27.1% in 2015, picking up a fair amount of the slack left by Europe.
As the world’s largest trading and shipbuilding country, China plays a key role in Asia’s marine insurance sector. In 2015, China was the world’s second largest marine insurance market, trailing only behind the UK and accounting for 8% (around US$2.3 billion) of the global marine premium.
China emerged as the largest cargo insurance market (with a value of US$1.4 billion) and the second largest in the hull insurance market (with a value of US$0.9 billion) after the UK. However, it was estimated that cargo and hull insurance accounted only for roughly 1% each of China’s total property/casualty gross premium. Over the short-to-medium term, then, there should still be plenty of potential for the Chinese insurance market to expand as the industry develops further. The growing recognition of maritime risks and the resulting need to remedy an under-insured market should ameliorate the ongoing effect of the diminished value of vessels, cargoes and freight rates.
In China, the marine insurance market is mostly dominated by local insurance players, many of whom are also leaders in the property and casualty market. In 2014, the top five insurers accounted for, respectively, 76% and 88% of the cargo and hull markets in terms of gross premium. Almost all of these major players, including PICC, China Pacific Insurance and Ping An, have already set up subsidiaries in Hong Kong, serving not only the city’s shipping community, but also the regional market.
Belt and Road Opportunities Expected to Generate New Premium Incomes
As it stands, given the sluggish trade performance, the global market for insurance products may not have the capacity for significant organic growth. Nevertheless, marine insurance professionals may find new opportunities in Asia as a result of new initiatives for insurance businesses within the region. In particular, China’s insurance industry may find that new premium incomes are created by the Belt and Road Initiative (BRI), the country’s latest economic development strategy, announced back in 2013.
The BRI promotes China's economic cooperation with more than 60 countries from Asia to Africa and is mostly focused on building infrastructure and broadening trade. Many economies along the Belt and Road routes are expanding fast, in particular those in South and Southeast Asia, but insurance penetration has not kept apace. According to US based rating agency A.M. Best, the general insurance penetration rate for most of the economies along the Belt and Road routes currently stands at less than 1%. Over the medium-term, these under-insured markets have great potential for generating new premium incomes, covering a wide range of marine-related products.
New Opportunities for Hong Kong
China is now emerging as a major maritime country and one keen to implement the BRI and forge regional co-operation. As a result there are plenty of business opportunities on which Hong Kong businesses could capitalise, leveraging on its institutional advantage to complement the growing marine insurance market on the Chinese mainland. At the same time, Hong Kong could also enhance its position as a regional marine hub within Asia.
In November 2016, IUMI, a key professional organisation representing the global marine insurance industry, elected to set up its Asian Hub in Hong Kong. As the organisation’s first permanent presence outside its German headquarters, the IUMI Hong Kong office is expected to champion insurance market development. It should also become an important forum for the Asian marine insurance industry to exchange ideas and views. This move by IUMI recognises the increasing importance of Asia in the marine insurance industry, while also highlighting Hong Kong’s position as one of the most prominent players in the region’s marine insurance sector.
Hong Kong as a Regional Centre for Marine Insurance
Compared with traditional industry players from Europe, China’s marine insurance sector is still in the early stages of development. Increasingly, though, the Asian market is realising the value of local expertise and there is a desire to have sufficient local capability on the ground to serve the growing regional client network, rather than going via the traditional London platform.
According to industrial sources, although competent marine insurance underwriters and brokers enjoy salaries higher than the industry average, it is still difficult to recruit experienced professionals to the industry. This is especially true in new markets, given the sheer time and effort it requires to learn the complex and sophisticated skills and knowledge needed to enter the business.
Hong Kong is one of the few locations in Asia with a flourishing marine insurance market, offering a full range of insurance services. As of June 2016, there were 84 authorised ship insurers in Hong Kong, of which 32 were foreign insurers. In addition, Hong Kong is a hub for P&I insurance. 12 out of the 13 principal P&I Clubs have established offices in Hong Kong, making it the largest cluster of representatives outside London. Moreover, Hong Kong is currently the world’s fourth-largest shipping register after Panama, Liberia and the Marshall Islands. More than 2,500 vessels were on the Hong Kong Shipping Register (HKSR) as of September 2016, totalling 106 million gross tonnes (GT). Undoubtedly, commercial principals of marine insurance companies will find it beneficial to develop their presence in Hong Kong.
Hong Kong as a Test Bed for New Insurance Products
There is a growing need for Chinese insurance companies to provide comprehensive insurance solutions and innovative marine insurance products in order to better serve Chinese interests in overseas markets. In this respect, any insurance company in Hong Kong with experience of insuring infrastructure projects, such as ports and related infrastructure development, should find a wealth of opportunities in offering tailor-made and advanced insurance products suitable for serving the needs of the Chinese shipping community.
In spite of the rapid growth of China’s maritime sector, existing marine insurance products available in the country are primarily simple in structure and may not suit the needs of the fast-changing global market. In this respect, Hong Kong could serve as the preferred testing ground for marine insurance companies when offering innovative products, allowing them to try out market receptiveness before entering the Chinese mainland.
For instance, with most of the focus on cargo and hull insurance, other products such as wharf property insurance are relatively undeveloped in China. With seven out of the top 10 busiest container ports in the world located in China as of 2015, there is huge potential for insurers to tap into this sector.
In addition, China’s reinsurance industry is highly dependent on the offshore reinsurance market. In 2014, foreign-funded reinsurance companies accounted for RMB 98.35 billion or 64.8% of the total reinsurance premium in China, according to China Insurance Regulatory Commission. With increasing demand from local insurers for reinsurance protection, there is also plenty of room for growth in the reinsurance market. Chinese insurers are becoming interested in establishing captive insurance companies in Hong Kong to self-insure their business risks.
A New Era of Hong Kong’s Insurance Regulation
The development of a marine insurance sector relies on the support of a comprehensive law system. While the marine insurance laws and regulations in the traditional market in Europe are well developed, Asia has much catching up to do in terms of both legal policies and judicial environment.
The Insurance Companies (Amendment) Ordinance 2015 was enacted by the Legislative Council in July 2015. This was designed to enhance the current regulations and bring Hong Kong closer to the regulatory environment of the other major marine insurance centres, most notably London. In doing so it paves the way for the establishment of an Independent Insurance Authority, as well as a statutory licensing regime as a replacement for the existing self-regulatory system for insurance intermediaries.