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Gulf Shipping Insurance Trends in 2016

The first half of 2016 has justified what many analysts have forecasted in regards to the shipping insurance sector in the Gulf Region – that it will maintain the trends witnessed in 2015, with one salient exception – Iran. Regional developments have not necessarily spiraled, but economic conditions have not improved significantly either. Thus, the primary trajectory of the shipping insurance market is an interplay of two counter-poised factors: The implications of Iran’s unimpeded entry into the regional market supplemented with the likely boosting effects sanctions lifting will have on shipping insurance, as well as the offsetting effect that the plummeting (but now gradually stabilizing) prices of oil will augur for this projected boost.
Oil Prices
Oil-price decline and slower growth in key commodity importing nations, has already impacted development, engineering and infrastructural projects, eventually reducing insurance premiums for those insurance classes. Some insurance players have already undercut pricing, affecting their operational bottom-line, while not reaping any comfort from increased administrative costs and inflationary dynamics not reflected in insurance rates. This might seem tailor made to encourage profit-margin erosion.[1]

Yet, other trends have contested that evaluation, especially supply-side. Insurers in Gulf oil-producing economies have demonstrated a resilient capacity to grow premiums proportionately with GDP. Net oil importers, “will see premiums grow in excess of GDP growth”[2], due to domestic development plans and the ancillary consumption benefits of low commodity prices.
Non-Shipping Insurance
Given the current business and intermediary-actor saturation of the insurance market in some Gulf States, their upward trends tend to be mitigated by relatively low levels of penetration, neglect of risk assessment pricing facets, and a lack of mechanisms to reverse low yields (Kuwait and Bahrain). Diversion of limited and already restructured capital reserves to buttress ailing revenues is an added drag. Environments which boast low barriers to entry against foreign insurers and reinsurers, such as Turkey, tend to display a more fragmented and more competitive market that must jostle for dwindling clientele.

On a more positive appraisal, markets like the UAE’s have adopted supervisory regulatory schemes providing for mandatory monitoring of auditable financial statements designed to preserve fiscal viability and shareholder equity, as well as actuary oversight to “review and assess technical provisions” to abide by best international practices and standards. Consumer confidence has proven to be vital to price correction.[3] Regulators in regional jurisdictions have labored for more in-depth sophistication of available insurance mechanisms in response to demands for greater returns from invested stakeholders - insurers, re-insurers, affinity partners, advisors, brokers, etc. Overall, observers and experts have noted a regulatory “paradigm shift” in the regulatory regimes for both shipping and non-shipping insurance in the region, especially in the UAE, Qatar and Saudi Arabia.
Shipping Insurance
Over all, Marine cargo is a profitable insurance sector because of a relatively limited pool of providers with registered low-loss ratios in the Gulf.[4] These premiums are not entirely unscathed, since they are at least peripherally reliant on public spending and internal growth within their respective jurisdictions. Administrative costs for shippers, which include insurance premiums, and the inflation levels that inevitably affect them are dependent on GDP Growth, and the economic downturn in many Gulf jurisdictions has made 2016 a challenging year.

Shipping companies in the Gulf continue to hunt for competitive terms and rates, both from carriers and insurers, the condition of whose underlying financials and performance metrics might vary. Many Gulf multipurpose/heavy-lift vessels are financial institution or nationally owned. While they adjust pricing “to make interest payments”, they subsequently reduce expenditure on maintenance. Insurers will need to account for heightened awareness of “environmental, security, health and safety regulations” in their premiums, as well as more attractive insurance policies to encourage demand [5]

One cannot ignore the growing trend toward overcapacity and continued consolidation. Typically, the fewer the players in the project market, the less the competition. Shipping line consolidations typically results in less choice for clients. However, if those few players themselves are comprised of numerous formerly separate entities organically merged or non-organically acquired, the project market must absorb a supply-side surfeit of shipping capacity. This will negatively affect shipping rates, and insurers will concomitantly have to adjust their premiums more modestly in order to stay viable and competitive.

Excess spare capacity encumbers Gulf ocean carriers’ attempts at rate increases, even if project activity is at a rise. Gulf shippers are affected by global trends displaying reticence rather than dynamism, cautiously evading commercialization of demand-side project shipping. For that reason, new vessel funding has reduced in response, and insurers have become more cautious given increasing counterparty risks and the occasional bankruptcies. Both ocean freight and pressure-hit air cargo are on a plateau from an insurer’s perspective.

Oil devaluation occasioned by global over-supply, might be reversed in the short-term by Middle East tensions, but shipping insurance still suffers from low premiums. The lifting of sanctions on Iran have after all, palliated these tensions; The Hormuz Straits are in no immediate danger and Somali piracy is neutralized. The threat to Bab Al Mandab has been provisionally relieved because of the Gulf Coalition’s Yemeni intervention.
While oil/gas price decline has affected the volume of shipments, shippers in the Gulf have actually registered a modest increase in private shipping charters, given the spare income that household budgets can allocate. While this has not dramatically ameliorated nor stimulated shipping demand per se, it has had a derivative and auxiliary effect on non-shipping insurers, because clients are less risk-averse when they are more securely solvent.

Some Gulf shippers have responded to the above challenges by reducing costs to encourage activity. This nonetheless potentially incurs operational risk characterized by “vessel seizures, aging assets, declining reliability, and maintenance on ‘need’ basis”.[6] Insurers and shippers have derived some benefit from this, but it is decidedly short-term.
Iran Sanctions
The tip of the sanctions-lifting repercussions iceberg has already registered with many insurance players in the Gulf. The mere announcement of sanctions lifting fostered a rise in the Iranian stock index, although it hampered global markets, especially in regional competitors Qatar and Saudi Arabia.[7] U.S. companies still endure trading limits with Iran. The U.S. government on the other hand will ease insurance, shipping, and banking restrictions, while releasing more than $100 billion in frozen assets. If so, then the projected GDP growth of 6-8% for 2016-17, the expected $50 billion FDI in a near-$500 billion economy bodes well for shipping insurance. Anyhow, the takaful insurance industry in Iran is pervaded by influential national standard-bearing entities boasting a notable record of market leadership and savoir faire, which has produced a highly-saturated market structure, as opposed to those characterized by less protectionist regulatory environments.[8]

Intensification of developmental projects for Iran’s refining capacity, even if to the detriment of regional OPEC competitors, will increase shipping volume, and nourish a market of well-capitalized and expertise-driven insurers. Iran has eagerly commercialized its petrochemical sector, and augmented revenue encourages internal investment in a variety of Iranian indigenous markets like power and industry. With greater volume for domestic commercial activity, the realignment and reactivation of previously frozen proposed oil and gas projects, coupled with offshore gas-production monetization and an expected medium-term rise in global demand, the more likely the impetus for takaful operators in Iran to assume risk in export-shipping through more secure trade relations with formerly recalcitrant countries becomes.

Shipping to Iran should become significantly easier. Previously, all Iran-bound cargo had to be transshipped through other Gulf states. Direct shipments spell reduced costs and timely delivery for shippers. This might reduce their risk and suppress premiums, however, the added revenue will encourage them to take out more qualitatively comprehensive insurance policies – a trend encouraged by the fact that more than 11 international shipping companies are established in Iran’s Shahid Rajaee port alone.[9]

Should Iran abide by the JCPOA (Joint Comprehensive Plan of Action), the full range of sanctions will shrink significantly. Many have echoed the need for swift familiarity with Iran’s internal policies, customs regulation, and import/export logistical data in order to adequately assess insurance policies’ compliance awareness, audits, contract terms, and verification for project, breakbulk and carrier cargo both imported from and exported to Iran.[10] Enforcement and remedy mechanisms have proven exigent for Iran-bound exports and transit-docking where insurers reasonably assess risks that factor into their policies, eventually determining the extent to which Iranian insurers are “protectionist” in light of their crude hitting the regional and global markets.
The partial dissolution of sanctions on Iran means the infusion of 800,000 barrels daily spare capacity, given Iran’s growing reserves (at an annual rate of 3%), in spite of hitherto limited export destinations.[11] Other projections posit that production will increase from 1 million to 2.5 million daily barrels. While shipping insurers will see this as a veritable bonanza in terms of exponential growth in coverage-demand, the potential further depression of oil prices and subsequently lower commodity demand in the current supply glut might diminish enthusiasm. These surpluses dampen appetite for refined products imports, while infrastructure development and FDI in logistics for the natural gas sector is likely to taper off “both in pipelines and in LNG terminals”.[12]

Furthermore, previous initial policy exclusions corresponding to banned goods, (non-blacklisted) entities/individuals “of interest” will become “legal tender”. Insurers hence conduct due diligence for the potential ramifications of paragraph 36 of the JCPOA, or “snap-back” provisions, which could affect pre-existing shipping charters, contracts, subcontracts, and their insurance schemes with Iran, along with consequently unforeseen delays and disputes. Iran maintains its own snap-back provisions, although only major violations are expected to trigger them from both ends. Trade restrictions will endure post-sanctions, as they apply to full “US persons” “unless an OFAC license is in place potentially making the delivery process difficult for multinational firms”.[13]
Given the rather complex picture concerning shipping trends in the region, numerous observations and recommendations for models that maximize efficiency and improve returns and profitability abound. To effect a positive transition, regional shipping insurers should:
  1. Update customer-responsive technology and marshal this innovation to adapt to their customers; Shippers will now demand more justifiable premiums that respond to the changing dynamics in the region, including intricate policies oriented toward the nature, destination and capacity of their cargo, advice quality, and client-education;
  2. Invest in improving operational processes and increasing efficiencies to accomplish more with less disposable resources;
  3. Maintain strict regulatory compliance by infusing the market with expertise-prizing entities and trade associations;
  4. Revaluate established and emerging risks in light of new geo-political and environmental realities;
  5. Distribute risks cross-jurisdictionally, and maintain systems to successfully “transfer risk offshore”[14]; and
  6. Control and ease consolidation of the shipping industry in order to preserve efficiency and capital liquidity without sacrificing adequate variety, competition, and ultimately, demand.

[1] http://www.asiainsurancereview.com/News/View-NewsLetter-Article?id=34629&Type=MiddleEast

[2] http://www.qfc.qa/en/Documents/MENA_Insurance2015.pdf

[3] Furthermore, the Gulf’s largest financial advisory group, Nexus, as per the Asian Insurance Review, has “forecast that the greater adoption of medical insurance policies, higher uptake of pension schemes, and increased penetration of individual savings plans will drive UAE insurance trends this year”. At: http://www.asiainsurancereview.com/News/View-NewsLetter-Article?id=34629&Type=MiddleEast

[4] http://www.qfc.qa/en/Documents/MENA_Insurance2015.pdf

[5] http://www.breakbulk.com/up-for-the-challenge/

[6] http://www.breakbulk.com/up-for-the-challenge/

[7] http://knowledge.wharton.upenn.edu/article/how-low-oil-prices-are-battering-the-mena-region/

[8] http://www.qfc.qa/en/Documents/MENA_Insurance2015.pdf

[9] http://www.breakbulk.com/first-european-carrier-to-open-offices-in-iran-post-sanctions/

[10] http://www.breakbulk.com/lifting-iran-sanctions-poses-contract-risks/

[11] http://www.breakbulk.com/oil-recovery-problematic-for-sanction-free-iran/

[12] http://www.breakbulk.com/oil-recovery-problematic-for-sanction-free-iran/

[13] http://www.breakbulk.com/lifting-iran-sanctions-poses-contract-risks/

[14] http://www.informa-mea.com/latestnews/Press-Releases/Insurance-Leaders-from-the-region-met-in-Dubai-to-discuss-the-market-trends-and-strategies/

Published: June 2016
Practice: Insurance & Reinsurance
Publication: Logistics News (LNME)- page 42-44
Authors: Michael Kortbawi, Akram Rashid.

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