The Intelligent Quarterly from the publishers of The Insurance Insider

Summer 2013

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Despite cumulative losses from the grounded Costa Concordia cruising past the $1bn mark due to massively increased wreck removal costs, the 1 June renewal of owner Costa Crociere's hull insurance programme has enjoyed widespread support from its existing underwriters, with a 56 percent rate increase imposed.

As sister publication The Insurance Insider reported in late May, although initial estimates for wreck removal had ranged from $150mn-$200mn, senior market sources have since reported that neither of the two major international salvage consortia tendering to complete the operation has submitted a bid below $325mn.

This has pushed up current estimates for the protection and indemnity (P&I) claim to around $530mn, which when added to the $500mn total hull loss brings the overall total reserve to $1.03bn.

Joint P&I insurers The Standard and Steamship Mutual and the underwriters backing the International Group (IG) reinsurance programme are now expected to foot the bill for the removal of the passenger liner.

Lines were going down on the hull and machinery (H&M) and increased value (IV) placement at the end of May.

Market sources suggest the late renewal may have meant that broker Aon had had trouble selling the increase to its client, or that the placement may have been reallocated between markets to minimise cost increases.

The bulk of the Costa placement comes into the London marine market. And while Aon may have tried to source an increased share of capacity from US and Scandinavian markets to achieve cost savings, it is expected that the final order would have been completed relatively easily.

Overall, it appears the terms of the renewal remained attractive to primary underwriters, with none of the major underwriters withdrawing support, although the Norwegian Gard group has scaled back its leading 12 percent line on the expiring programme.

However, the relatively harmonious experience of underwriters on the Costa Crociere programme has not been reflected by the wider P&I club market, with IG members revealing widely divergent underwriting experiences in their reporting for the 2011/12 financial year to 20 February. Click to enlarge

Norwegian club Skuld has continued its nine-year run of underwriting profitability with a 96 percent combined ratio; closely followed by the UK P&I Club, which produced a combined ratio of 97 percent.

The West of England club has improved its underwriting result for the third year in a row, but underwriting profit still eludes the club, which posted a combined ratio of 108.7 percent.

Costa Concordia co-insurer The Standard had the most volatile claims experience for the year with a combined ratio of 115 percent, up from 94 percent the year before, but was rescued by a net investment income of $47mn, delivering a $3mn surplus for the year. The P&I clubs referenced the higher-than-anticipated group claims on the IG pool, including the major and deteriorating P&I claims from the now $325mn Rena and Costa Concordia disasters, as a driver of the varying results.

The double loss creep means that the IG P&I clubs should prepare for further major increases in reinsurance costs at their next renewal in February 2013.

As the February 2012 renewal was negotiated the Rena reserve suffered its first 50 percent deterioration to $175mn, which was a major factor behind a $40mn additional premium being levied in order to complete the first excess layer.

The Insurance Insider also revealed in May that the IG renewal had taken place with leaders noting formally on the slip that Costa Concordia had "not been taken into account" when calculating pricing.

This means that the $530mn Concordia reserve and the additional $150mn deterioration in the Rena reserve will be major factors at the 2013 renewal.