New capacity ramps up concerns of steeper softening in cargo
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New capacity ramps up concerns of steeper softening in cargo

The loss of premium income from Glencore is expected to add to competitive pressures running up to 1 January.

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cargo ship hull A cargo ship moored to the mooring bollard of the seaport.jpg

With a series of new entrants launching into the space and ongoing bullish appetite from incumbents, market sources have warned that the marine cargo market may be set for significant price softening next year.

Sources explained that claims activity so far this year has been modest and cargo portfolios continue to post healthy returns, which is set to ramp up competition for market share.

“It is going to be brutal next year,” an underwriting source said.

Meanwhile, it was warned that the pricing pressure may begin to emerge in the final months of 2024, after numerous portfolios in London suffered a significant top-line hit following Glencore’s decision to place its cargo coverage within a captive.

The Swiss commodities trader previously bought $800mn of cargo coverage with a premium spend of approximately $50mn, but Insurance Insider reported last month that the company had decided to self-insure.

“It’s terrible timing for the market,” an underwriter warned, suggesting it would prompt growing competition for existing business as underwriters who have suffered a major loss of income seek to muscle on to other programmes.

Quizzed on how dramatic the downwards pricing spiral would prove, sources gave a mixed response.

Some identified the telltale signs of a market about to enter freefall, given pricing is already softening and new entrants are continuing to come in.

Currently single-digit rate rises are commonplace in the market, with the year having begun with pricing broadly flat.

“Until now discipline has generally held, but I fear the worst for the next year,” one underwriter warned.

But others were more optimistic that because the memory of the soft market and the brutal Decile 10 process was still fresh, pricing erosion would be gradual, and rating adequacy would be maintained.

“There is more discipline in underwriting than in previous cycles,” a broking source said.

“It is not falling off a cliff yet,” they added.

Strong performance attracts capacity

Insurance Insider first reported in April that the cargo market had passed its rating peak, with underwriters flagging concern that ostensibly healthy results were benefiting from an unusually benign loss environment.

At the time, sources predicted that new capacity would continue to flow into the space, which has proved correct.

Recent months have brought the news of numerous new entrants to the cargo space, and sources have suggested there may be more to come.

In June, K2 Group Holdings launched Rubicon Specialty, with ex-Ascot underwriters Gavin Wall and Chris McGill set to begin building a book from next year.

Also in June, Marine MGA Amphitrite Underwriting expanded its cargo entry under the leadership of Scott Sykes.

Then at the beginning of October, Probitas AdA SPA 2024 launched a cargo book underwritten by Anthony O’Dwyer, while Cincinnati Global has hired James Hyett to build a cargo book next year, targeting £10mn ($13mn) of premium income.

All new entrants will be seeking to build a book at a time when cargo pricing is already reducing and incumbents are looking to defend their participation on business.

This will inevitably add further downward pressure on rates.

“The underwriters are trying to talk a good game and not talk the market down,” a broking source said. “[Pricing] is only going one way.”

A profitable market

Although some participants are concerned about the trajectory the market may take, cargo underwriters are set to enter 2025 from a position of strength and rating adequacy.

Cargo was one of the classes of business subject to the Lloyd’s Decile 10 process, and it has enjoyed a multi-year period of improving pricing and a return to profitability after a torrid period of loss-making.

cargo premium trends IUMI ID 5 november 2024.png

Cargo is commonly perceived to be the best performing of the marine classes, with hull still pressured from the competition of Scandinavian markets, and the war book exposed to high claims activity.

Data from the International Union of Marine Insurance (Iumi) shows a steady increase in global cargo premium income – driven by increased global trade volumes and improved pricing.

For 2023, the most recent year for which data is available, global cargo premium income increased by 6.2% to $22.1bn.

There has also been a corresponding improvement in loss ratios, with the loss ratio for Europe coming in at 40% in 2023, having exceeded 70% in 2015 – the year of the Tianjin port explosion.

However, while pricing and terms have improved, some underwriters argue that the scale of profitability has been aided by an unusually benign loss environment.

ultimate cargo loss IUMI ID 5 november 2024.png

Over the last couple of years, the market has not had to absorb high value claims on the level of the likes of the 2020 Dell warehouse claim, which cost underwriters around $300mn.

So far, 2024 has remained healthy from a loss perspective, although some carriers’ results will be impacted by the Dollar Tree loss, after one of the retailer’s warehouses in Oklahoma was destroyed by a tornado in April.

The reinsurance factor

One factor that concerns underwriters is changes to reinsurance coverage during the difficult 1 January 2023 renewal.

Following strained negotiations, most primary markets were forced to take on substantially increased retentions, meaning more loss activity is borne by the primary market.

Underwriters have warned that these new structures have yet to be tested by an active loss year, and that should claim activity rebound, the profitability picture may not be as rosy as it seems.

The watchword now is discipline.

Cargo has achieved an impressive turnaround in performance and managed to absorb numerous new entrants since 2020 without sacrificing performance.

As competition continues to increase, sources cautioned that now is not the time to squander what the market has achieved.

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