Perils of the sea, and other captive tails


Andrew Cater

Perils of the sea, and other captive tails

With experience of a number of recent high profile maritime disasters, Andrew Cater of the United Insurance Company discusses the relevance of a captive solution to cover complex maritime risks.

The marine insurance market has, since its inception more than 400 years ago, used some very strange terminology to describe certain risks and perils.

But is that language so strange? If one accepts that marine insurance was truly the first real insurance business to be conducted, then maybe all the language that has evolved since is strange, compared to the marine standard?

The reality, of course, is that property and casualty premiums globally, since Cuthbert Heath’s pioneering policies at the turn of the 1900s, now dwarf global marine premium, even though the latter is still extremely substantial, at around $25 billion of premium with the direct writers in 2011. So it is logical that property and casualty market buzzwords are the norm, rather than the salty seadog language of the marine insurer. In the captive world—with some very notable exceptions—the emphasis of the majority of captive and risk managers is on looking after the big spenders—specifically, the property and casualty risks. The marine element of risk in a captive is sometimes therefore lumped together with property (inland marine), or not included at all. This could be for many reasons, from a pure lack of comprehension of risk to the failure of the captive management company to advise its clients correctly, because they find words such as ‘general average’, and ‘flag of convenience’ incomprehensible.

I now find myself in an unusual position, being a mariner in a captive and reinsurance underwriting environment, working with clients and potential clients to establish the value of putting marine business into a captive, and providing explanations (where needed), programme structures and reinsurance to support those clients.

Marine direct writers—2012

The end of 2011 and beginning of 2012 were not particularly auspicious for marine insurers, with MV Rena parking herself on a New Zealand reef, and of course the tragedy of the Costa Concordia. Both of these—apart from the human tragedy—will cost, and are costing, the marine markets dearly. The hull claim on Costa Concordia is around $500 million. The protection and indemnity claim (P&I) is likely to be extremely large, larger possibly than the hull claim. Those are big numbers in anyone’s book.

Marine markets are also affected by economic conditions, with the 2008 crisis resulting in fewer cargoes and voyages, with shipping lines facing increased fuel costs and expenses, and insurers’ investment income dropping away to zero in the face of an almost ‘perfect storm’.

Protection and indemnity markets

Costa Concordia happened right in the middle of the International Group of P&I Clubs’ reinsurance renewal. Apparently, some reinsurers demanded, and ultimately received, a substantial additional premium from the group as a result, which was needed for the reinsurance placement to be finished. The International Group of P&I Clubs had already informed its members of renewal terms and could not pass the increased cost on. It now seems that new business is being rated higher and that at renewal of P&I business next February, clients will face some stiff rises in premiums.

Hull insurance markets

Hull insurers are trying to move to ‘premium increase’ mode too, and while it is too early to tell what the results of this effort will be, there is probably still too much capacity available currently to force much of an increase in hull rates.

Cargo insurance markets

Cargo insurers continue to plod on with some reductions available to clients with good records (and some larger ones without). Capacity has grown slightly, so there is no immediate prospect of a hard market, but perhaps better risk selection by insurers, which should be the first move towards clients with ‘bad’ loss records paying more.

Therefore, specific areas of the market are moving in response to growing losses and the need to remain solvent; others just carry on, with some minor tweaks in coverage.

Marine in captives—how, when and why?

The cargo decision

"If the cargo programme consistently makes a profit, then the whole, or that part, of the programme is a prime candidate for inclusion in a captive."

If the cargo programme consistently makes a profit, then the whole, or that part, of the programme is a prime candidate for inclusion in a captive. It may be that the risk manager has one worldwide programme that covers all inland and all ocean cargo movements. Perhaps, for example, the inland part runs well, and the ocean marine is marginal, or vice versa. There is nothing to stop you breaking up the programme to take the inland cargo into the captive, keeping the ocean cargo with commercial markets. Even if you irritate the commercial market by doing so, there are still plenty more players out there currently. Overall it may still be worth taking the whole programme into your captive as the frictional costs should be lower, making it more profitable.

If, on the other hand—and particularly in the case of very large programmes—the commercial markets are still prepared to underwrite risk at less than burn cost, then let them. Sooner or later they will have to stop, but in such circumstances why would anyone burn their own capital now? Even then, there may be elements of such cover that might be worth considering for a captive.

The importance of recoveries in cargo

In my experience, the success or failure of many a cargo programme has been in the recovery of losses from those that caused them. In general, unless you are using your own transport, then there is almost always someone to recover a loss from, and unless you or your insurer are pursuing that rigorously, then your results will always be worse than they should be. Your broker can assist you in finding the right ways to recover losses to make your programme more attractive to your own captive.

Hull and P&I decisions

Considering that the P&I clubs are, in all likelihood, looking for larger than normal increases in February 2013, then now is the time—if you are a ship owner—to start considering taking some element of P&I risk into the captive. This may be low down at the ‘money swapping’ level to take the frictional cost out and, where applicable, receive more favourable tax treatment in a captive, which would help that layer’s results. Ultimately doing so will push your P&I club deductible up and help to contain any rises proposed.

Those with profitable hull business may also seek to include some element into their captives at this stage. Hull rate increases will not be far behind P&I increases, albeit a little later in arriving. And why should owners with good records suffer potential increases because of others with poorer records? Frictional costs should be less again, which in turn may make the placement of a line in the captive more attractive.

How to take such risks into a captive?

For those who are comfortable and have long-term marine experience, this is easy. For those who prefer terra firma property and casualty risks, and get seasick just looking at a puddle, it may be a little tougher. Professional direct brokers with good marine teams will be able to assist in this task, analysing what to take into a captive and what not to, as should captive management companies. People like me—rare as we are in captive terms—will also be delighted to assist if required.


One of the keys to success in placing marine business in a captive is ensuring that the captive is not overexposed. I have heard arguments that one reason captives do not take marine business is that they have to go to the same reinsurers for their reinsurance protection as they would for direct placement, and lose some of the potential savings along the way. This is a myth—a captive tale. As United Insurance Company’s marine underwriter, I provide reinsurance capacity exclusively to captives in the marine area which have little or no direct writing ability.

In these difficult times, risk and captive managers are under pressure to continue to reduce costs, contain price rises and capture profits that would otherwise be transferred to third parties. Marine insurance, simply expressed, is property and casualty afloat or on wheels, with some difficult words thrown in for fun. Marine insurance has long been a poor cousin of property and casualty in captives, for many reasons. With certain changes coming in direct markets, it is now time to review those possibilities, with the right advisers to assist where needed.

Andrew Cater is assistant vice president at Aon Insurance Managers (Cayman) Limited and a senior underwriter for United Insurance Company, specialising in marine business. He can be contacted at:

Cayman, United Insurance, marine, captive, insurance

Captive International