If you’re like me, you have that one friend who always has a solution to every problem. One may argue that in the property & casualty world, inland marine insurance is that friend.
Jessica M. Frankovich knows this situation all too well: “I think inland marine becomes the default in many cases,’ says Frankovich, senior vice president of customer property & inland marine at Seneca Insurance Co., a Crum & Forster company. “If brokers aren’t sure what to do with something because it is very unique, they will usually call the inland marine underwriter. And if the inland marine underwriter can’t do the risk, (that person) will at least know where to point the broker to because somebody has probably asked about it before.”
Not to be confused with ocean marine coverage, inland marine is property insurance for products, materials and equipment transported over land or for property warehoused by a third party. The inland marine insurance market roots date back centuries to when ocean marine insurance principles were applied to land shipments as ground transportation gained popularity.
Today, the transportation and construction sectors comprise most inland marine business; however, inland marine insurance benefits a wide swath of businesses and risks, from computer systems and communication equipment to fine arts and sports memorabilia. And through the chaos of the past year, inland marine has proven itself to be a valuable line of business with real staying power.
The pandemic’s impact
Unlike many property and business lines of coverage, inland marine has remained relatively stable, shares Rich Soja at Allianz Global Corporate & Specialty (AGCS). Based in New York City, Soja leads an experienced group of inland marine specialists as the global head of inland marine and North American head of marine at AGCS.
“There are a lot of lines of business — property included — that have gone through substantial increases in the last year,” Soja says. “While some inland marine carriers are achieving rate increase in the high single-digit range, the market itself is not as hard as some other lines of business.”
Although the market is steady today, its outlook wasn’t as positive a year ago.
According to a September 2020 Fitch Ratings report, inland marine experienced unprecedented volatility in the first half of 2020 as the COVID-19 global crisis raged on. Many insurers immediately responded by raising premium rates and adding exclusions and tighter policy terms upon renewal to limit losses.
Two of the most directly affected insurance lines of 2020 — travel and event cancellation — are both inland marine products, adding scrutiny to the market. The claims that emerged in these lines and other industries caused inland marine’s direct loss ratio to skyrocket to 73.4% in the first two quarters of last year, Fitch Ratings notes. For comparison, other commercial P&C lines impacted by the pandemic saw an average mid-year loss ratio of about 45.7% for the past 10 years.
“We will continue to see some strengthening, and anything that is catastrophe exposed or has some volatility to it will see double-digit increases,” Soja adds. “But in comparison to others, it’s a relatively stable market.”
Climate change concerns
When reviewing inland marine claims trends in recent years, Tom Postol, vice president of underwriting at IAT Inland Marine, points to natural disasters as one of the top drivers of loss.
“Wildfires, hurricanes, and tornadoes seem to be more frequent with equal to greater severity than in the past,” he says. “Many of these disasters are happening in non-coastal states i.e. tornadoes in Tennessee and freezing in Texas.”.
In 2020, global economic losses from natural catastrophes totaled $190 billion, indicating the larger scale of losses that could result if an event of the past were to occur today, according to a recent Swiss Re report.
Insurers across the board cannot afford to ignore the risks associated with climate change, especially inland marine carriers. More carriers in the market are modeling for weather risks today than 10 years ago, says Soja, adding that convective storms in the Midwest are of particular concern because of the many inland marine exposures in the region.
Construction tests the market
Today’s challenges also are putting incredible pressure on the construction side of inland marine. First, the costs of materials are rising along with the costs of claims, Frankovich says.
Then, the pandemic caused significant disruption with the slowing down of projects due to capacity restrictions and social distancing, ill workers, and projects being delayed by manufacturers affected by supply shortages. As a result, many construction clients have needed to extend builder’s risk policies that were set at an aggressive pace prior to COVID-19, Postol explains.
Chelsea Bergen, area assistant vice president at Risk Placement Services (RPS), has 10 years of experience underwriting inland marine risks. She knows how project delays can cause headaches across the insurance value chain: “Single building builder’s risk policies are tailored for the length of any project. So when we have these delays, extensions to the builder’s risk policies are needed. That is creating a huge issue within this space,” Bergen says.
Some carriers only allow for one extension to a builder’s risk policy, regardless of the timeframe, she adds. Others may only extend for a maximum amount of time, such as three or six months.
“What ends up happening is if we have an underwriter on a builder’s risk policy that for some reason said they could not extend this policy, and the project needs an additional two months, then we have to go to an alternative builder’s risk market, which is a mid-term builder’s risk market and ask them to jump on the project for the remaining time of the construction,” says Bergen, who works out of RPS’ Chicago office. “Those underwriters are very few. There are only a handful of carriers that will do mid-term builder’s risks. That means the supply is low, and the price is high.”
While some interruptions are unexpected and unavoidable, Bergen recommends that agents and brokers have early and honest conversations with construction clients to ask if an extension is needed on projects currently under construction or for new projects to see if the client has factored in potential delays into their timeframe.
“You never want to be in the position when, at the last minute, your client says they need another month [on their policy], and the carrier says ‘no,’” Bergen cautions.
But it doesn’t have to be all doom and gloom for builder’s risk. Frankovich sees plenty of untapped business for carriers willing and able to offer any kind of capacity for the coverage.
Also, as the U.S. economy gains back strength, construction challenges may become a worry of the past for inland marine.
“Many construction sites went dormant in 2020. When they came back, there were labor shortages and disruptions in supply chains to get materials to the job site. While there are still some elements of that that remain today, the number of new projects that we see are actually quite brisk,” Soja explains. “I think there will be continued growth in the construction segment, which is good news for inland marine insurance.”
The insurance industry knows that it can find pockets of opportunity even in the most difficult markets.
As 2021 progresses, public entities and municipalities are expected to experience significant reductions in revenue, which will directly impact how they pay for insurance. Here is where inland marine insurance providers can get creative, Bergen says.
“There is a lot of opportunity in the inland marine space to provide coverage for these large public entities, where, historically, all of their inland marine exposure would automatically be included within their property program,” she says.
There also are opportunities for inland marine to adapt to market changes as “normal” business resumes post-pandemic, says IAT’s Tom Postol. He identifies four areas worth watching in the months ahead:
- The infrastructure of street and road projects that have been approved but in delay;
- Many construction projects that have been financed and approved but await labor and supplies to get started;
- The continued transition from fuel to alternative energy; and
- The need for energy farms and work related to transformation.
Inland marine underwriters unanimously agree that brokers must seek specialization when securing clients’ policies, especially given how extensive coverage can be applied.
“There are so many options in the inland marine space,” says Bergen. “We have this old saying, ‘If it doesn’t fit in property, then try inland marine.’ So if you don’t know a lot about inland marine, start forming a relationship with a wholesaler” specializing in the market.
Frankovich echoes this sentiment, stating that underwriters love to educate brokers who have questions about coverages. She also adds that the Inland Marine Underwriters Association is a great resource for brokers looking to continue their education or network with other inland marine professionals.
Rich Soja with AGCS emphasizes how important it is for agents and brokers to focus on the coverages.
“That is because most inland marine forms in most states are not regulated as oppose to property insurance where you have regulators looking at the file forms in each state,” he says. “So the one piece of advice I have for agents and brokers is that every inland marine insurance carrier is not created equally when it comes to coverage. Make sure you understand the forms that you are being offered and the difference between them as you’re preparing carriers for clients.”
UPS shipment snafu
The everyday consumer may not understand the breadth of risks inland marine insurance can cover. One insured went as far as taking an insurance broker to court over the sale of what was thought to be an inland marine insurance policy.
David Murray purchased used computer equipment for nearly $40,000 and arranged for it to be shipped from California to Texas with UPS. When Murray inquired about insuring the shipment beyond the $100 per package limit, UPS referred him to its insurance division, UPS Capital. Murray submitted an application to UPS Capital to insure his shipment in the event of any loss or damage. He paid $350 for “house policy coverage” underwritten by Tokio Marine America Insurance Company, which issued him a Marine Certificate of Insurance.
Murray filed a claim after the equipment was damaged while on route to Texas. Tokio Marine rejected his claim, stating that the coverage he purchased only covered catastrophic losses such as the entire destruction of the vehicle in which the shipment was carried and not damage caused by factors such as mishandling the freight.
Murray sued UPS Capital for breach of contract and negligence, arguing that UPS Capital “clearly holds itself out as specializing in inland marine insurance covering UPS shipments.” A trial court found no heightened duty of care and granted summary judgment in favor of UPS Capital.
Murray appealed the decision, and the Fourth Appellate District Court reversed the lower court’s decision. The appellate decision stated that Murray raised triable issues of fact as to whether UPS Capital undertook a special duty by presenting itself as an expert in inland marine insurance and whether Murray reasonably relied on that expertise. The appeals court, however, did reject Murray’s request to create a rule that brokers/agents, by specializing in a specific field of insurance, thereby hold themselves out as experts and are subject to a heightened duty of care towards clients seeking that particular kind of insurance.