A new consortium will allow seven marine insurers to more efficiently share coverage for small and medium-sized projects.
Liberty Specialty Markets (LSM), part of Liberty Mutual Insurance Group, has a new Lloyd’s facility, the Liberty Project Cargo Consortium, to insure small and medium-sized global project cargo risks. The facility, Consortium 7763, has underwriting capacity of up to US$205 million.
Coverage includes comprehensive project cargo, heavy lift, cargo delay at take off (DSU) and full risk engineering services. Consortium 7763 will underwrite and commit risks under a single brand on behalf of seven supporting syndicates, including Aegis and Munich Re, to name a few.
In particular, the DSU component of the project sector has become an increasing challenge for underwriters, as global supply chain disruptions have resulted in increasing delays in spare times, even when sourcing raw materials.
Nonetheless, insurers in the cargo and some other shipping lines can benefit from strengthening markets and rising premiums. These were detailed at the International Union of Marine Insurance (IUMI) Annual Meeting held September 18-21 in Chicago. Gross freight premiums hovered around $800 million from 2011 to 2019, but grew sharply to nearly $1.3 billion in 2020 and more than $1.4 billion in 2021.
“The energy transition, changes in global supply chains, new manufacturing processes and other industrial and civil society developments are leading to an unprecedented number of new projects worldwide,” said Michael Burle, Head of Marine Division at LSM. “The consortium offers significantly greater capacity than any other currently on the market, making the placement and claims processes much smoother.”
Chris Hicks, Underwriting Manager, Ocean Freight at LSM added: “We are excited to unite insurers to provide much-needed capacity and simplicity. The initiative will provide brokers and clients with market-leading capabilities at a time when the need for such coverage is significant and growing.”
A bigger market for smaller projects
The $205 million limit is per policy, for cargo and DSU as a package. LSM and its partners intend that there are multiple policies. “The idea is to hedge the smaller end of the project sector,” Hicks said.
“If you look at how the sector has developed over the last 10 years, the mega projects used to dominate: the huge offshore drilling and production platforms and the onshore LNG terminals. There are still many of these, notably gas projects and even some nuclear projects, but these are not the target of the new consortium; we would write it ourselves.”
The target market for the consortium is rather the numerous small and medium-sized projects, often for renewable energies in wind, solar and battery storage.
“For these, $205 million makes sense,” Hicks explained, adding, “If we got a $250 million project, we wouldn’t hesitate to go to our subscribers, but most of the business will be less.” – some far less.”
The goal of the consortium, Hicks explained, is to make the smaller end of the market more efficient. “A billion cover would always be shared. On the London market they also want to share smaller projects. But for $50 million of coverage, that’s very inefficient, especially given how homogenous many of the smaller renewable energy projects have become.”
To that end, the new consortium is a pre-arranged microcosm of the type of share agreements that would be made for large project loads and DSU coverage. “Insureds deal with a party, a broker, a team of engineers, a claims process and an adjuster,” Hicks said. “It’s just an easier and less frictionless way to trade. There is a lot of appetite for project cargo underwriting. capital is available. This is an efficient way to use that.”
Preparations for the maiden voyage
While the LSM press release on Consortium 7763 was issued in late September, shortly after the IUMI meeting, it was off to a soft start. “The formal launch, where we begin the positive marketing, will take place in early November,” Hicks said. “We have already tied some risks because they have been in talks over the past few weeks. We also have some live quotes out there.”
However, the projects that the consortium would cover and the underwriting process itself all have much longer lead times than is typical for other shipping sectors. LSM and its partners are therefore expecting formal marketing efforts to begin towards the end of the year, with business actively ramping up in early 2023.
The inclusion of DSU coverage is an important part of the consortium’s business proposition, especially in times of supply chain disruptions, logistical complications and shifting sanctions. Risks have increased in DSU, but underwriting has gotten better, Hicks claims.
“There is no doubt that DSU has become more valuable to owners and project managers,” he said. “For the filings we receive, we need look no further than key component replacement times. When I started, DSU was a fixed cost item. Now it can be very variable, with balloon payments and compensation. This requires particularly strong underwriting with an understanding of operations, technology and construction.”
Still, projects can take many years, and while insurance companies can work closely with policyholders and their service providers to actively mitigate risk, they cannot charge higher premiums even though the potential costs of delays have increased. &