Marine insurance as the practice of paying a premium in exchange for an indemnity in case of a specific loss came first to be in 14th century Italy and readily spread to the rest of Europe over the 15th and 16th centuries. From its inception, this practice involved accurate risk assessment on behalf of underwriters (Puttevils & Deloof, 2017).More generic practices of risk diversification were common in China already 5000 years ago, when traders started to divide their wares on several boats to limit their losses in case of incidents. The modern concept and practice of insurance, however, was first introduced in Asia by European traders in the early XIX century.
Over the last two centuries, progress in maritime technology and engineering has undoubtedly contributed to lowering the risk of losses, at least temporarily and for some types of voyages. At the same time, risk assessment and mitigation became a matter of calculation rather than speculation. Enter the era of actuarial science and modelling. Gradually, a general trend towards a steady decrease in premium rates emerged, leading to a "cheap-as-chips" era in marine insurance, with underwriters often struggling to realize profits (or even limit losses) in a highly competitive market.
A recent report from Lloyd's Register suggests that things have already changed and that the change is going to last (Marine Insurance, 2021). According to David Osler, following a trend that emerged in the last few years, insurance companies will keep increasing premium rates. Already in the first half of 2021, Hull and Machinery insurance rates have grown by almost 10%, rising up to 15% by the end of the year. The Ever Given incident is likely to have had an impact. But perhaps there is more to it. Perhaps, despite its exceptional nature, the incident is but one extreme manifestation of a more general trend.
The end of marine insurance "cheap-as-chips"era is upon us. Recurring incidents and the complexity of the post-pandemic market have caused premium rates to reach dangerously high levels, risking to negatively affect the maritime sector.
The trend is clear: technology will benefit all parties, underwriters and insured, by providing accurate and reliable data, allowing a new level of analytics to emerge, shifting the risk from ship operators and owners to software and AI, and leading to more efficient, safe, and consistent processes(Fig.1).
In other words, as data are processed to become increasingly accurate and reliable, their potential is unleashed, so they can give access to a deeper level of insight for a broader population, not just for data scientists and actuaries.
The implications are as immediate as they are apparent. On one hand, risk assessment will be even more accurate, faster, and easier. On the other hand, risk itself will shift from ship operators and owners to software and AI processes. Machine learning will provide incremental accuracy and, therefore, better, deeper, and more reliable insight.
Human expertise will still matter, but at a higher, more conceptual level. It will be possible to check the validity of any claim against accurate real-time readings, historical data, and easy-to-access explanatory models.
Companies using analytics and predictive modelling saw their loss ratios improve 3% - 9% more than their competitors.
- Valen Analytics
A study conducted in 2018 by Valen Analytics found a strong correlation between advanced data analytics and profit for insurers. Companies using analytics and predictive modelling saw their loss ratios improve between 3% and 9% more than their competitors (Woodie, 2018). The study also suggested that digital innovators among insurers have been able to consistently expand their market share by accurately aligning their offers to risk exposure. And this is just the beginning of a transformation that is bound to radically change marine insurance in the near future.
The technology is already here, and as ML algorithms will keep improving, data will become increasingly accurate and reliable. Likewise, data fusion and contextualization are going to bring about a new and higher level of understanding to data consumers across the marine industry.
Trust architecture enabling secure sharing of real-time data, applied AI enabling real-time control over events and incidents, and augmented analytics, making data insight truly accessible and actionable are already transforming marine insurance. Innovators are not waiting and have already started reaping the benefits of early adoption.