President & CEO, Water Quality Insurance Syndicate (WQIS)
The Premium income and growth factors in the marine insurance industry are very stagnant right now. And competition is quite heavy in all areas. In the U.S. market and in the marine market in general, there are new players. The London market has gotten more aggressive over here.
There has been a prolonged contraction among ship owners and operators. How has this impacted your business?
To put it simply, there is not a big increase in marine transportation. (While there is a boom in the energy markets), a lot of the shale oil and gas is carried via pipeline and railroad car into various ports. (In short) today there are fewer, bigger ships.
In the long range, do you see the shale oil and gas as having a bigger impact on the U.S. marine business, and as a result WQIS as well?
There are two answers to that question. The first is “what is the U.S. government’s position on energy export,” because that will have an impact. And then you have to consider how the various states will react to the transit of the oil through their states. Barge are the safest means to transport oil. It has the best historic loss record and the best safety record.
What else do you count as most recently impacting your business?
The Macondo oil spill is impacting pollution cover fairly heavily.
BP made the decision to set up a $20B dollar fund and, as a response to the spill, to throw at it every resource that could be found, whether or not that resource was productive or efficient. They established in the minds of a lot of responders who were new to response, because we haven’t had a lot of big spills, an idea of how a spill response should be run. And the BP fund paid claims that are not required, per se, by law.
So today oil spill responses, especially in the areas of the Gulf and lower Mississippi River, are taking on a different kind of life and are becoming much more expensive because there is an overreaction in terms of resources being put on the spill. There is an increase in inefficiencies in the responses because people trip over each other. It’s just too much, and has built an expectation on the part of some parties that they deserve to be paid for claims that should not necessarily be paid.
To what do you attribute this overreaction?
I think they had a terrible public relations problem. I think they handled it brilliantly. I think they did a very good job for their own interests. And so that’s why they reacted that way, and I would never criticize them for it.
How does this have a material impact on WQIS and on insurance in general?
The trickle over is simply the expectation of people from the liability side of insurance that have damage, whether or not from an oil spill, potentially may be looking for payments of claims that would not historically have been paid.
We have always expected over time that costs, comparatively as all other inflatable items, would go up on a spill. But we’ve seen a jump of expectations. To give you an example, when the government sets up a command center you need to run a good command center 24/7 and you probably need 60 to 70 people. Today, command centers are being set up with 300 to 400 people.
And you just have to wonder what they are all doing. The Coast Guard officer who ran the Houston Astrodome evacuation after Katrina set up the emergency response, set up a shelter and hospital for approximately 25,000 displaced residents. He did it with 19 people. Because that’s what you need. You need an efficient organization in the command center, but that’s not how it works today. And you have to pay for all the people in the command center.
And that’s the way it’s evolving: everybody wants a piece of the spill. Everybody wants their input on the spill. They want to be in the command center where all of the action is.
Let’s discuss the price pressures you alluded to.
The price pressures are not necessarily from the insured. Everybody would like to get the best deal, so of course you would like a reduction in your insurance payment, especially when you haven’t had a claim. But what we’re in is an insurer-driven price competition which is a little different. This is where insurers themselves would like a bigger piece of the market and may choose to write business at prices that, in the first instance don’t seem economic, in order to get a larger piece of the pie.
Legislatively, there has been some big activities with the advent of the new non-tank rules and firefighting rules, and the relationships between salvors and their clients. What does this mean for insurers in the oil pollution markets?
The difficulty is that in a marine event, you can have Sue and Labor under the hull policy involved, you can have salvage involved, you can have removal of wreck involved, you can have cargo offloading to save cargo, and you can have pollution.
In the pollution world, you cover the threat of discharge or discharge. At what point does a vessel become a threat of pollution … where the pollution underwriter should respond rather than the hull or the P&I or the cargo insurer. So when you offload a cargo from a grounded barge, is that for cargo interest? Is that for pollution interest? Is that for hull interest to refloat the vessel? So we have a situation where portions of a pollution event could be covered by none of them or all of them.
And therein lies a grave difficulty. You are an insured. You have paid to place your insurance with three best insurance companies in the United States. Then an event occurs. There is no doubt that you are covered, but who’s going pay you? And that process of determining who is going to pay can take time, and you are not getting your money while that’s going on. So that is a problem for the industry that we are struggling to deal with.
Okay, so what’s the solution?
I have raised the issue with the American Institute of Marine Underwriters. I have raised the issue with my subscribing companies. But if you make a formal decision to transfer the risk to only one entity (insurer), there has to be a commensurate premium. When you transfer it to that entity, it means that the other pieces (insurers) have to give the premium up. The other insurers are not prepared to give the premium up. Cleaning up the oil is not questionable. We know who covers that. If a bird gets oil-soaked, we know who covers that. But if we have to offload a grounded tanker, who covers that?
So what about the new non-tank vessel rules and the new firefighting rules.
Now you have a vessel response plan that is designed for how you’re going to deal with a discharge, or a threat of a discharge of oil. But now you have a second section then, how are you going to deal with firefighting. But in the insurance market, they are not all covered by one person. So there are some difficulties there in that, and it also causes the Coast Guard to consider it to be one event, whereas from an insurance perspective it’s multiple events. And now there are some issues regarding responder immunity. I won’t name names, but there are three different groups: one group is in favor of the responder immunity; one group is opposed to responder immunity; and there is a third group that doesn’t feel it is productive to reopen the OPA 90;They are scared to reopen the OPA. They may either agree with responder immunity, or disagree with responder immunity, but they feel that if Congress reopens OPA 90, it would not be limited to just responder immunity. And that’s one of the big things that’s coming out of firefighting salvage and all of that, and response to oil spills. There is a limited responder immunity in OPA for response organizations, but there is not the equivalent for firefighters and salvors.
We talk about the marine industry improving its environment footprint, what is your thought on that? What have you seen over the course of your career?
In 1973, the captain of the Port New York had 2,200 reported pollution events from facilities and vessels in the group New York region. I would be shocked if that number was even a hundred today. So the first thing that I’ve really seen in my career is OPA worked; OPA has worked very well.
And the environmental nature of this business has increased exponentially.
Absolutely. In 1973, the Coast Guard could go out, and when they sent in their pollution report, they could make a judgment it the oil was uneconomical to clean up. Can you imagine that now; can you imagine anybody being able to do that today? Or even wanting to?
What do you consider to be the greatest challenges to your business today and how are you addressing them?
A challenge would be an unknown change in the law. And that is what we are most susceptible to, as a challenge would be an event which causes the government to overreact and impose a different type of liability or different conditions of liability on the insured.
Would you say the trend has been toward the government overreacting to these types of events?
I thought that after Macondo that Congress would act, but it did not. There are other issues in the United States today, which I’m not going to talk about, but there are other issues that have the attention of our government. And the environment is not a high priority in terms of statutorily changing the laws, nor is there a great need for it. The laws we have are working very well. But the challenge would be the next major event. That’s a challenge for us every year.
A second challenge is that the individual states are becoming more active. There are at least 19 states now that impose unlimited liability on the vessel; no cap on the liability. Delaware was the most recent to change their law. That’s a challenge for both response and for insurance.
When you look at the states, what do you consider to be… which states today are most aggressive?
Well, let’s just simply say the most active.
Okay, ‘most active.’
The west coast states historically. Florida is always a bit active. You never know with Massachusetts. But really the west coast states are the most active on these environmental issues, including Hawaii. And how are we addressing it? Well, we have a legal liaison on the west coast and he attends and sets up liaison with the government agencies and the legislatures. On the east coast we have a registered lobbyist in Washington, DC.
Just one more question: I saw you launched “Stories from the Sea Campaign,” which I found interesting because I would assume that the last thing that anybody involved with insurable events would want to do is tell a story about it.
It has two purposes. One is education, and the other is engagement. Now, by engagement we want to get people to respond to us, because that’s a stronger impression, that’s a stronger involvement with WQIS’ name brand.
Education is that people misunderstand how their liability could arise. I like to tell this story when I give a speech. A grandfather decides to take his two grandchildren fishing on the Hudson River. He has a 14-ft. Zodiac inflatable boat. He paddles out, he’s got no engine. They’re fishing and having a good time. The youngest kid gets rambunctious and throws the paddles over the side, the oars. Downbound is an oil barge and a tug captain sees them floating in the middle of the stream. The tug captain makes a fateful decision – he decides not to kill them, because he sees the children and he runs the barge around. The grandfather is personally liable for $854,000 cleanup, which is the minimum liability for any vessel. And he is personally liable for that because he was the sole fault, 3rd party who caused the oil spill.
We try to engage people to think about protecting themselves and their liability for the things they would have never thought of. It’s education and engagement.