A well-functioning market?

As most markets, the Marine Loss of Hire (LOH) market is a cyclical market. The competition is fierce, the total premium volume is limited, claims are random and statistics are volatile.

The origin of LOH insurance dates back to the Suez Canal crisis in 1956, and since then the market has been dominated by a handful of players, mostly located in Scandinavia. Nevertheless, and despite the limited volume, new players enter and exit the market, constantly creating cyclicality in rates and profitability.

The situation remains the same; the players that dominated the market some 20, 30 years ago, still dominate the market today.  At the same time Executives and Underwriters continue to execute diversification strategies by entering the LOH market, only to exit the same market a few years later. Why is this phenomenon repeating itself?  

In the business for Loss of Hire insurance there are two factors that stand out as crucial in relation to whether one succeeds or not. 
First it is essential to establish a sufficient volume that enables the players to determine the correct price of the product, and thus spreading the risk which in turn provides greater likelihood of profitability. Secondly, the experience with claims handling and the ability to find creative measures and solutions that can be of great importance for the repair time, thereby reducing claims cost.  

Important structural barriers of entry that must be taken into consideration are; irreversible investments, scale advantages, learning curve effects and access to scarce inputs.

If assumed that current intruders will be players who are already in adjacent markets, access to capital (capital) and licenses (official regulations) is considered to be relatively easily accessible.There are reason to believe that the industry is experiencing constant startups, mostly because of relatively low barriers in relation to capital and official regulations. The fact that new players also have experience from adjacent markets can cause them to conclude that they have sufficient competence also within the LOH segment.

However it is proven that market share has been relatively stable over time, despite a number of new entrants. There is reason to believe that the established have an advantage because of their size.  Moreover, insurance is also about a sense of trust, and customers will largely be loyal if they have good experience with the established. Then the price is of less importance.

New players will often need to lower the price significantly as it will not be good enough to match the same price as those established. Because of their knowledge (access to statistics) and experience the established players will know the point of reservation, i.e. when one would expect to lose money subject to advanced and first class claims handling procedure. If new players write the risk at this level or even lower in order to rapidly build a book of business, it will over a period of time not be sustainable. In fact one could say that new players operate with so-called anti-selection (they are building a portfolio with an expected loss).

The conclusion is that what initially may seem like a market with relatively low barriers to entry and thus interesting for new players, it is in fact the opposite. For the established players it will be important to maintain their large volumes and to develop skills, knowledge and experience to the benefit of the industry. In the meantime the phenomenon continues.

 


6. May. 2015