SEVILLE, Spain—Marine insurers were told last week at the International Union of Marine Insurance conference in Seville, Spain, that the current state of the market is dire and that shipowners can afford to pay higher rates.

One solution put forward to correct the poor state of the insurance market is to simply extract more money from shipowners, knowing that they need the coverage and have the capital to pay for it.

Simon Beale, chairman of IUMI's ocean hull committee, said that increasing premium rates is the "last chance" to correct the "loss-making" market. He said that shipowners are making significant profits and so underwriters can seek rate rises with very little impact on the bottom line of companies.

"We are very close to being too late to correct our course," said Mr. Beale. "We must not worry about losing business. This is usually only lost in the short term, but we shall have to lose business which we consider is underpriced. Clearly, we need more money in the sector, and the good news is that shipowners can afford to pay for the strong and healthy market we all deserve."

Mr. Beale said that, without increasing premium rates, hull insurance would collapse, reducing the market to just a few operators. He added that current rating levels are wholly inadequate and that "capital is bound to withdraw unless we take serious action now. The marine market is losing huge amounts of money."

Tore Forsmo, managing director of CEFOR, the Norwegian marine insurance association that annually compiles statistics on the state of the marine insurance industry, said that a collapse in the global hull and machinery insurance market may be the only solution to improve conditions in the competitive sector.

"Maybe the market, and the marine hull market in particular, regretfully needs a collapse," he said. "Maybe there are too many of us making a living out of a business that is too small. Maybe the only way to a more healthy situation is through a radical shake-up of the hull and machinery market, similar to the collapse...a couple of years ago in the energy market."

Mr. Forsmo added: "It seems to me we've tried and tried again for so many years to communicate the dire state of this market and the need for quality underwriting and correct risk assessment and pricing. Perhaps we should all go back to the tariff-based underwriting model in such a way that a possible return on capital may be within reach."

CEFOR's figures show growth in total marine premiums and a steady rise in the underlying business over the past four years, with total marine market premiums reaching $13.6 billion in 2002, compared with $11.7 billion in 2001.

But Mr. Forsmo said about half the premium volume increase can be attributed to fluctuations in exchange rates. And he pointed out the loss ratio for the sector has not broken even since 1996, despite the recent upturn in rates.

In 2002, the marine market's gross loss ratio was around 120%, he said. Mr. Forsmo said that, assuming a 30% expense ratio, marine insurers' loss ratio must be 70% or lower to break even. He added that hull underwriters need to increase rates again.

Most speakers recommended that rates be increased as a way of boosting premium income. Patrick de la Morinerie, chairman of the IUMI facts and figures committee, said that "at least half the increase in premiums is down to currency fluctuations and, therefore, clearly demonstrates that the overall increase is very modest compared with the unsatisfactory results of the past," he said. "Under no circumstances should underwriters resign themselves to the possibility of nonprofitability."

Jose Sanchez-Crespo, general manager of European operations for A.M. Best Ltd. in London, said further increases of 30% to 40% are needed to bring rates to economic levels. He said there could be two further years of rate increases in the sector, but "we are all witnessing strong and active competition which could shorten the cycle."

But John Baxter, chief financial officer for the property/casualty business group of Zurich, Switzerland-based Swiss Reinsurance Co., said in a keynote speech that the marine market had suffered the same fate as other product lines, though he conceded that "hull had clearly been one of the worst performers."

Mr. Baxter said that the industry needs to concentrate on managing the cycle, "rather than just paying lip service to doing so." He also added that insurance fundamentals have seldom been more favorable than now, but that the property/casualty area is very vulnerable to shock.

"Marine insurance cannot rely on recouping losses in the future," said Mr. Baxter. "The capital markets are far too competitive. The cycle is not a natural phenomenon. It is the result of market actions."

Mr. Baxter said there are many positive aspects of the current market—such as demand for coverage—but there is a risk of negative thinking becoming self-fulfilling. He stressed that underwriting must be aligned with corporate planning. He added that Swiss Re would manage the cycle and would withdraw capital if it could not reach its targets for any segment of the business.

IUMI's Mr. Beale also said insurers might think they are getting higher prices in parts of their book, but brokers are placing percentages of the orders elsewhere, with the result that the average price to the shipowner remains static.

Mr. Beale had informed delegates that most of his talk would make for uncomfortable listening, especially given the fact that, according to his figures, the insurance market as a whole had "destroyed capital in staggering proportions" and that "the hull market has certainly played a significant part in that destruction."

He added that hull losses in recent years totaled about $6 billion, which Mr. Beale said is probably twice the current annual worldwide premium.

But other attendees said one of the major factors squeezing margins in marine underwriting is the duplication of services and high acquisition costs of placing business.

Hans Terje Anonsen, chairman of global marine at broker Aon Ltd. in London, said that there is a clear duplication of efforts, with the work of brokers, underwriters and reinsurance overlapping. He argued that "too many of us want to do the same job, and get well paid for it."

Mr. Anonsen complained that there is no clear definition of the core role of each of the professions in the chain. He said that in some cases reinsurers are offering coverage that shipowners find more favorable, bypassing the traditional marine market.