A better understanding of exposure and aggregation risk is vital to mitigating reinsurance shortfalls

With increasing global geopolitical tensions and the rise of complex conflicts, reinsurance companies have become more cautious in underwriting marine war risks.  The escalating nature of these risks, including piracy, terrorism, and political unrest has led to higher potential losses and increased uncertainty.  Consequently, reinsurers have tightened their belts, demanding higher premiums, increased exclusions, and stricter T&Cs with some reducing their exposure or withdrawing from covering marine war risks altogether.

Andy Yeoman, CEO of Concirrus, believes a step change is needed.  A better understanding of exposure and aggregation risk is vital to mitigating reinsurance shortfalls.  Technology is central to achieving this – a sentiment that is echoed by IUMI.  Drawing on lessons learned from other markets, Andrew explains what’s possible reinforcing that “this is more than simply data analytics.”  This is about addressing a fundamental human challenge by transforming isolated data into a shared understanding, allowing marine (re)insurers to take this understanding and determine how to change the way they do business and reap the commercial benefits.

The world has become a more uncertain place in the last five years. This was first due to COVID-19 and its various impacts upon consumer spending, global workforces, and manufacturing, and ultimately, supply chains. The most visible example of this is, of course, the ill-fated and well documented story of the Ever Given and the Suez Canal in March 2021.

Next to rock global industry was Russia’s invasion of Ukraine. The conflict has, and is still, causing significant headaches for the insurance industry. Back at the beginning of the conflict in 2022, Russia confiscated around 400 foreign-owned planes they had originally leased, resulting in $10+ billion worth of insurance claims. Western powers have been confiscating yachts and private vessels attributed to Russian oligarchs since the war began.

As we speak, maritime merchant shipping faces significant challenges. Insurers began reviewing policies for any ships travelling to Ukraine’s Black Sea ports.  In July 2023, Russia quit a U.N.-backed deal that allowed grain exports through a safe Black Sea corridor. Three days later, Russia sent a warning to any ships willing to make that journey.

Questions surrounding the export of grain and the ships carrying it from Ukraine remain – leading Russia to make good on its threats by firing warning shots at a cargo ship in the Black Sea on August 13th 2023. Furthermore, potential conflict isn’t limited to Europe – as shown by China’s continued testing of the territorial integrity of its Pacific neighbours.

Insurers and reinsurers have very quickly felt the sting of these developments and altered conditions and pricing in the face of these growing risks. New technology, however, can help provide much-needed certainty. It can’t insulate an industry from the impact of global conflict, but Artificial Intelligence (AI), when used effectively, can provide transparency, information, and ultimately wisdom, in an increasingly busy and opaque world.

Conflict and the reinsurance industry

Courts may take years to sort out the confiscation of foreign-owned assets, but the impact of the Ukraine War on insurance premiums very quickly took effect. Reinsurers wanted to know more about the assets they had underwritten – namely, what vessels were where, and why. More data, and therefore better information, was needed.

Reinsurers also started adopting stricter terms and conditions or withdrew from the market completely. As a result, markets hardened and insurers had to retain more risk or withdraw cover with rates inevitably going up. Many reinsurers have started refusing to cover any shipping in the Ukraine region completely – and subsequently this has hit the brokers and insurers too.

What AI can do for marine insurance

AI has always been an exciting, if sometimes worrying, innovation – and there won’t be a market or industry it leaves untouched. Simply put, AI enables more accurate risk assessment, and therefore pricing, through the collection and analysis of vast amounts of data – and it is a tool that can be used to great advantage by maritime insurers and reinsurers.

Firstly, it is the data AI can harvest and analyse in the world at large. By analysing vast amounts of data from a multitude of sources, such as satellite imagery and weather patterns, it can give insurers and reinsurers a real-time, accurate look into the world around them – which makes risk assessment and underwriting much more accurate.

This extends to information about shipping specifically. AI programs can harvest and analyse vessel tracking data, for example, to understand more about past, present and therefore predicted future routes, speeds, etc. Even more specific still is how AI can impact the maritime insurance and reinsurance industry itself. By bringing together all enquiries and claims, both past and present, it can provide new insights into the challenges its customers are facing and any potential opportunities to increase revenue, limit risk, and improve service.

Insurance vs. reinsurance

Reinsurers have broad guidelines and narratives around the risks they are willing to cover, and this gives some security to the insurer. The reinsurer, however, doesn’t have detailed visibility of an insurer’s written book, which leaves them operating in the dark – which is just another reason to tighten belts and reduce risks.

We’re now in a situation where advancements in technology can provide a shared set of data for both parties – securely, in real-time, and without silos. The reinsurer can have visibility into its aggregate exposure across its cedents, and therefore its potential risks, without those cedents having to specifically expose the exact details of its book and therefore its competitive advantage. This provides confidence and security so reinsurers can more accurately set policies without blind, sweeping judgements about the market and their assets.

Data into wisdom

New technology including AI can turn raw data, past and present, into an understanding of behavioural patterns which you can use to predict future events.

Another less obvious benefit to gain from this innovation, however, particularly for the insurance industry, is the democratisation of this knowledge. This wisdom, that includes how underwriting decisions have been made, can be captured by the technology and accessed by the whole organisation.

No longer is this ‘wisdom’ solely the purview of an individual but rather, it belongs to the company.

Not all AI is made equal

As with all AI, however, there is a warning. This does not come in the form of prophecies of sentient machines and robot uprisings, but rather, the fact that many of today’s AI tools that rely on large language models are not truly secure.

Analysis continues to be published that highlights privacy and security concerns of programmes like ChatGPT. The maritime industry therefore needs a secure, specialist AI tool that protects private data and competitive advantage, while sharing insights and creating wisdom.  Only then will the industry truly reap the benefits of such advanced technologies.