The blocking of the Suez Canal and resulting disruption to global shipping is likely to cause a large loss event for the reinsurance industry, Fitch Ratings says. This event will reduce global reinsurers’ earnings but should not materially affect their credit profiles, while prices for marine reinsurance will rise further as a consequence of the container ship ‘Ever Given’ grounding in the canal.
Canal officials said on 29 March that Ever Given, which has been stuck in the canal since 23 March, had been partially freed and that they hoped traffic along the Suez Canal could resume again within hours. The ultimate losses will depend on how long it takes the salvage company to free the container ship completely and when normal ship traffic can resume, but Fitch estimates losses may easily run into hundreds of millions of euros. Accidents involving large container ships can cause property claims of over USD1 billion, but these are mostly related to salvage. As the Ever Given should still be able to travel once freed, claims related to hull and cargo insurance, including salvage (which will be borne by the shipowner’s hull insurer), should remain significantly below this level.
However, the shipowner’s protection and indemnity club will probably also face claims from the owners of the cargo on the Ever Given and of the other ships that are blocked in the Suez Canal for losses related to perishable goods and supply chain disruptions. In addition, they may face claims from the Suez Canal Authority itself for loss of revenues. According to press reports, more than 300 ships are stuck at either end of the canal. Environmental pollution through spillage of oil or oil products into the canal seems to have been avoided.
A large share of those losses will probably be reinsured by a global panel of reinsurers. In isolation, this large loss event should be neutral to their credit profiles. However, it will add pressure to global reinsurers’ 1H21 earnings – earnings that have already been knocked by catastrophe events such as winter storms in the US and flooding in Australia, as well as by additional coronavirus pandemic-related losses.
Last year, global reinsurers reported heavy declines in earnings due to paid claims and claims reserves related to the coronavirus pandemic. However, underlying performance improved due to significant price increases in non-life primary and reinsurance (see Global Reinsurance Sector Outlook Stable on Hardening Market), and their capital positions remained very strong at end-2020. The sequence of catastrophe events in 2021 will put additional strain on commercial insurance and reinsurance markets, pushing prices even higher in an already hardening market.
The canal blockage therefore does not change our view that communicable disease exclusions in renewed treaties and a hardening market should lead to better results in 2021.
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