No reinsurer panic on Baltimore casualty, insists Gallagher Re
Compromise settlement could swerve worst-case payout even if limitation not upheld, with bridge heavily underinsured and perhaps insufficiently protected
‘This was a marine loss, not a black swan event. A ship had an accident, and I don’t think it’s going to have the impact that people who don’t know the market are expecting,’ says Cudlipp
REINSURERS remain sanguine in the wake of the Baltimore bridge collapse, with no evidence of either higher rates for marine risk or resultant pressure on the hull & machinery market, according to two prominent brokers.
The outlook for the protection & indemnity class is less certain, but the worst-case scenario of a multibillion-dollar payout on what would rank as the most expensive marine casualty of all time could still be swerved by a compromise settlement, they added.
Another variable will be the insured value of the bridge, which will cap the ability of primary insurer Chubb to seek reimbursement from the insurers of the vessel at the centre of the incident.
Singapore-flagged boxship Dali (IMO: 9697428) lost power and allided with the Francis Scott Key Bridge spanning Baltimore harbour and the Patapsco river on March 26, felling the structure and killing six people. The marine insurance community has been gripped by the fallout ever since.
The US is not a party to the Convention on Limitation of Liability for Maritime Claims 1976, abbreviated to LLMC in industry jargon.
But owners Grace Ocean and managers Synergy Marine quickly filed an action under the relevant domestic legislation, the Limitation of Liability Act 1851, submitting that their liability should not exceed $44m.
That will in turn limit the claim on Britannia P&I Club, and given that it busts the $10m International Group retention limit, the wider IG pool scheme.
The best estimate of the overall cost of the incident — including loss of life, crew injury, hull repairs, general average and salvage, repair or replacement of the bridge and business interruption to the port and the surrounding region — is somewhere between $2bn and $4bn.
Even the lower end of this range, the sums involved top the payout on the total loss of cruiseship Costa Concordia (IMO: 9320544) in 2013 and the closure of the Suez Canal following the grounding of Ever Given (IMO: 8320901) in 2021.
At the upper end, they go higher than the $3.1bn capacity of IG pool, hitherto assumed to be bulletproof, with the clubs responsible for anything not mopped up by overspill cover. As a last resort, they would have to find that money from members.
Most legal commentators believe the owners’ limitation claim, which will take years to work its way through the courts, is sound in legal principle. The question is whether it is politically tenable, given that it will inevitably seem minimal to the public.
Estimates from brokers suggest that the 12 clubs making up the IG would face a collective $207.1m claim, with the rest passing to a reinsurance programme led by AXA.
Ultimately, shipowners pay for this reinsurance, known as general excess of loss or GXL, through a reinsurance levy on top of P&I premiums. This is calculated on a dollars and cents per gross tonne basis differentiated by vessel type.
Reinsurers calmer
Some hull underwriters have opined that the casualty will see lasting upward pressure on H&M rates, as reinsurers realise that marine can be a big-ticket risk, and hike reinsurance premiums accordingly.
Those rises would be passed on to hull insurers, and ultimately their shipowner clients.
But Nick Croxford, head of marine, aviation and energy at Gallagher Re, and his colleague, executive director Jason Cudlipp, counter that reinsurers seem a little bit calmer than their direct insurer colleagues.
The firm understands that the bridge was underinsured at a value deemed appropriate by the local authorities, somewhere around $350m. The cost of a new bridge could be at least four times that level, according to specialist engineers cited in the media.
This could prove crucial, as insurance payouts on assets cannot be higher than what the assured thought the asset to be worth.
Moreover, the structure was old and not well-protected, which raises the question of whether lack of protection was a factor in the collapse.
The owners’ legal team could also run the contention that bridge protection systems — colloquially known as “dolphins” – should have been retrofitted to protect the bridge and that the authorities failed to do so.
Another potential argument, given that the sections of the bridge closest to either shore are undamaged, is whether insurers should have to pay for an entire new bridge, or simply the replacement of the middle section.
The first element to be settled will the loss of live claims. This will probably prove straightforward and happen swiftly.
Croxford pointed out there was ample capacity in the marine reinsurance market right now and Gallagher had not seen any significant pressure on rates outside of the P&I world.
The numbers that are swirling could be designed to push up rates, which have been flat at recent renewals.
Not black swan
“This was a marine loss, not a black swan event. A ship had an accident, and I don’t think it’s going to have the impact that people who don’t know the market are expecting,” Cudlipp maintained.
“A category five hurricane going through Florida, even if the marine losses are small, will see much more of a spike.”
Croxford said that incident is best depicted as a substantial property claim. The issue now is whether the subrogation — the ability of bridge insurer Chubb to recoup its outlay from the vessel’s insurer — sticks against the owners.
The people on board the ship, including the pilot, appear to have done everything they could to avert the casualty. The port released the vessel to trade, so there doesn’t seem to be much evidence at this stage to support claims of unseaworthiness.
In P&I terms, the costliest element is usually wreck removal and pollution clean-up. But there is no wreck to be removed in this instance.
“We’ve got to wait for all of these aspects to be judged by a very long court process in the US. In the meantime, the marine market is going to make a lot of money on other lines of business.
“The limitation act in the US is there to encourage trade and protect shipowners.
“The knock-on effects on US trade would be enormous is shipowners don’t have the protection of well-established law.”
Even if the $44m limitation does not hold, that does not mean that liability will be unlimited.
The International Group cut a deal with the Suez Canal Authority in the wake of the Ever Given grounding.
Numbers have never been made public, but it is widely believed that Egyptians demanded somewhere just south of $1bn and were talked down to somewhere around $400m.
There is leeway for a similar compromise over Dali, which would save face for the city and state authorities and still prove manageable for P&I insurers.