Whenever you fill up your petrol tank or refill your spice rack, a component of the cost involved relates to maritime insurance. Aside from the day-to-day risks associated with the seaborne transportation of goods and commodities, Lloyds of London syndicates and reinsurance specialists have been factoring in a rising war risk premium since Tehran-backed Houthi militias launched attacks on shipping in the Red Sea last November. The attacks prompted London's marine insurance market to expand the area in the Red Sea it deems high-risk.
Reuters recently quoted insurance sources as saying that risk premiums had risen by 30 basis points to around 1 per cent of the value of a given ship – a sizeable increase in dollar terms. Subsequent events could see the rate rise further given that the rerouting of vessels around the Cape of Good Hope adds around a fortnight to the duration of the voyage. Yet it may turn out to be the more cost-effective option given the trajectory of Suez Canal transit fees and insurance premiums. Indeed, AP Moller-Maersk (DK:MAERSK.B) and its German container shipping rival Hapag-Lloyd (DE:HLAG) have been diverting their vessels around the Cape despite the knock-on impacts to supply chains.
Some insurers may even take the decision to pull insurance cover on cargo vessels altogether should they risk travelling through the Red Sea. The war risk premium still constitutes a relatively modest burden where shipping companies are concerned, at least compared with the costs associated with fire and/or cargo damage. Indeed, higher labour costs, supply chain disruption and increased commodity prices have had a more deterministic impact on premium prices in recent times.
However, events are moving rapidly, so it would be unwise to assume that the Houthi attacks won’t spur a wider conflict in the region, the impacts of which will doubtless be felt back in Blighty. To take the most extreme example from history, it's worth remembering that there was a run on the pound after Egypt nationalised the Suez Canal Company in 1956 – the same waterway now carries about a third of our liquified natural gas requirements, so it doesn’t pay to become too complacent.
Leaving aside specific issues linked to the maritime market, the FTSE 350 insurance index is now 15 per cent in advance of its five-year low recorded in October 2020. General insurers have outstripped the life segment over the past year, perhaps not too surprising given that motor insurance premiums have increased for nine straight quarters, although the latter group of insurers come with an appealing average dividend yield of 5.6 per cent. It’s certainly true that both the life and general segments look more viable investment options on a total return basis.
The insurance industry is a major lever of the global economy by dint of the colossal premiums it collects and the scale of its investments. It also encourages investment in the economy as it affords policyholders protection from a wide range of risks. Domestically, the industry’s investments are equivalent to around a quarter of the UK’s total net worth, according to the Association of British Insurers, although the industry’s proportional share of the UK equities market has contracted markedly. This seems remarkable and somewhat unsettling given the industry imperative to invest in long-term assets to match its long-term liabilities.
Unfortunately, insurers have gradually lost their lustre in public markets, particularly in the US, where general economic growth has outpaced the cumulative rise in premiums. It has become more difficult to achieve returns above the cost of capital, yet it is interesting to note that the US industry has become awash with private equity capital over the past few years.
Could this reflect some compelling market drivers? Over the long haul, the demographic shift in emerging markets and the inability of western governments to fund future health and retirement costs should support volumes in the life assurance market. This point has not been lost on the likes of Prudential (PRU) and Legal & General (LGEN), nor, obviously, those affected by the switch away from defined-benefit pension schemes.
Abid Hussain, insurance director and research analyst at Panmure Gordon, commented to Investors' Chronicle's sister publication FTAdviser last year, that the “market tends to treat life insurers and the broader insurance market as if it is a bond market” – he may have a point. If you look at, say, the rating of a general and life insurer such as Aviva (AV.), it may be that the market hasn’t adequately priced in the premium response to what seemed like chronic supply chain inflation. If so, a company with a 7.7 per cent forward dividend yield and a solvency II ratio of 200 per cent probably deserves a second look.
