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Inflation pushes up severity╠řof hull and machinery losses

Expert risk article | May 2023

Supply chain disruption, labor and material costs and delays are driving up the cost of hull and machinery claims.

Global inflation hit 8.8% in 2022, more than╠řdouble its pre-pandemic level, although it is╠řforecast to fall back to 6.6% in 2023 and 4.3% in╠ř2024. [1] However, higher prices are now baked╠řin, while the outlook for inflation is uncertain,╠řgiven current geopolitical and financial╠řmarket instability.╠ř

Increased commodity prices, higher labor╠řcosts and supply chain disruption have had a╠řsignificant impact on marine insurance claims, in╠řparticular hull and machinery claims. The price╠řof steel, a key cost driver in hull claims, increased╠řsharply post-pandemic, as did the price of spare╠řparts. A typical propeller or machinery damage╠řclaim, for example, now costs around two times more than it did pre-pandemic.╠ř

Shortages and delays in obtaining replacement╠řparts also led to longer stays in repair yards. Labor shortages have also increased╠řcosts, contributing to longer repair times and╠řincreased yard costs. Industry estimates calculate╠řa +18% increase in ship repair costs between 2020╠řand 2022 from inflation.

The severity of partial and attritional claims has╠řrisen since the pandemic, according to R├ęgis╠řBroudin, Global Head of Marine Claims at╠řAbout usGlobal Corporate & Specialty (AGCS).╠řÔÇťAnalysis of claims across our portfolio shows╠řan increased severity for attritional claims for╠řhull and machinery from higher labor, repair╠řcosts, availability of spare parts and dry docking╠řfor repairs, as well as the increased cost of╠řmaterials like steel. This comes on top of the╠řincreased expense of dealing with large vessels,╠řwhich face higher costs for repairs, salvage and╠řtowing,ÔÇŁ says Broudin.╠ř

Addressing inflation is a challenge for both shipowners and insurers in the current environment,╠řsays Justus Heinrich, Global Product Leader╠řMarine Hull at AGCS. ÔÇťInflation-led increases╠řin repair and yard costs are beyond the control╠řof shipowners and can significantly increase the╠řcost of claims for insurers. Even companies with╠řthe best risk management on earth will see the╠řimpact of inflation on claims.ÔÇŁ

The post-pandemic boom in container shipping╠řhas also impacted values. Cargo values have risen╠řwith the increase in the price of goods and raw╠řmaterials, while the shift to increased levels of╠řcargo storage in ports and warehouses has led to╠řhigher costs and aggregation issues for insurers.╠řThe value of container vessels has also been╠řvolatile, having doubled in 2021, but since falling╠řback sharply with the decline in freight rates.

Based on analysis of 244,451 insurance claims between January 1,╠ř2017, and December 31, 2021, worth approximately ÔéČ9.2bn in value.╠řÔÇťOtherÔÇŁ causes of loss account for 32% of the value of all claims.╠řClaims total includes the share of other insurers in addition to AGCS.
Source: About usGlobal Corporate & Specialty (AGCS)

[1]╠řInternational Monetary Fund, World economic╠řoutlook update, January 2023

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