Given that Sri Lanka’s position along major international shipping routes places marine insurance at the centre of global trade movements, geopolitical developments, and cargo risk management, the country has long promoted its location in the Indian Ocean as a strategic advantage. However, it is less clear how effectively that position has translated into growth within the marine insurance sector. 

In an interview with The Sunday Morning Business, marine insurance expert and George Steuart Insurance Brokers Ltd. Director – Strategy Kumar Muthiah discussed changes in marine risk pricing, the impact of geopolitical disruptions on shipping and insurance, industry awareness gaps, and the opportunities and challenges facing Sri Lanka’s marine insurance market.

Following are excerpts:

Given your seasoned expertise in marine insurance, what would you say has changed the most about how marine risk gets priced, from when you started out to now?

I started in the early 1990s, and at that time marine insurance pricing was clearly structured. There used to be a market rate determined by the nature of cargo, packing, and shipment method. In addition, there used to be further rates added for war and strikes risks to arrive at the all-inclusive rate.  

A committee sitting in the London market used to issue advisory rates in the form of an advisory schedule, and most underwriters at the time charged accordingly. There were a few other criteria for rates as well. 

Over time, however, the local market became accustomed to all-inclusive rates and moved away from maintaining specialisation of the marine class of business. I believe that such changes affected pricing with all-inclusive rates eventually plunging to absurd levels. 

I dare say such changes in the market raised underwriters who lost sight of the actual risk rating and priced by setting rates simply to secure business. This is the case today in the local market, perhaps it is so globally too. Given that Sri Lanka is a small market, it has affected the marine business.

Comparing where we were when I started and where we are now, the decline in pricing has been significant.

Could you specify the kind of effect this has had on the Sri Lankan market? 

There is an impact on the local market when local pricing tries to compare with larger overseas markets. 

For example, think of a steel exporter in India or China who may be shipping large volumes to all parts of the world, and secures competitive pricing from an insurer from their market based on such volumes. Then think of a local importer who imports a fraction of that volume and secures a local rate for such a low volume, albeit comparable with the overseas rate. Then think of the potential loss ratio if volumes vary drastically with similar rates. 

As a result, our rates do not really make sense. They are extremely thin. Developed markets can operate with very low rates because of the scale they enjoy. When I started my career in the 1990s, rates were at levels such as 0.5% or 0.6%. Today, rates have fallen considerably. That has had a significant impact on the local market, with most rates being at least a single zero after the decimal. 

How much of the financial risk for maritime shipping and cargo involving Sri Lanka is absorbed by domestic Sri Lankan insurers versus international reinsurance companies? What does that ratio mean for Sri Lanka’s insurance sector, as well as for the economy in terms of capital flight and risk exposure?

I do not have a statistic for these numbers, but would venture to say that a large volume of export cargo is shipped on Cost, Insurance, and Freight (CIF) basis, which makes it imperative for export insurance to be obtained locally. 

On the other hand, in the case of imports, there is a fair share of shipments being insured by overseas sellers. It is in the interest of our economy to secure the insurance of such shipments in the local market. Local importers should be convinced that importing cargo on international commercial terms (Incoterms) that allow the seller to dictate the insurance coverage could be detrimental given the danger of the responsibility not being fully clear, especially when it involves land transit prior to loading at the loading port. 

All insurance business, including business written locally, is reinsured. Every insurance company has its own limits, which we refer to as capacity. Beyond those limits, companies obtain reinsurance capacity from international reinsurers.

Premiums are ceded to reinsurers, and the corresponding share of risk is transferred as well. Sri Lankan insurance companies are generally well reinsured, and there is no major concern regarding exposure levels or fluctuations in ratios, given that the country is a rather small part of the global marine insurance market. I don’t see this as a major problem.  

Our general insurance market is around Rs. 158 billion in size. In dollar terms, it is relatively small. If marine insurance were priced properly, it should probably rank just behind large property insurance classes. Instead, marine insurance currently accounts for only around 4–5% of total general insurance business.

Moving on to the war in the Middle East, war risk premiums for vessels crossing the Strait of Hormuz went from a fraction of a percentage point to around 5% of vessel value earlier this year. How does such volatility affect how marine underwriters price risk in Sri Lanka and what are the implications for the sector?

There are two aspects to consider. One is hull war insurance, hull being the insurance of ships. Rates initially rose to around 2% and then increased to 5% of the vessel’s value, which is a substantial increase. Ultimately, that cost is passed down to cargo owners.

The Sri Lankan market would not have a direct impact from a hull war rate increase, as we do not insure large ocean-going vessels in the local market. However, the indirect impact is that such shipping lines would naturally pass those costs to cargo owners.  

On the other hand, cargo destined for markets in the Persian Gulf, the Red Sea, and the wider Middle East would have faced higher insurance costs, due to the local market being mandated (in some instances) to add a war surcharge for such shipments. This represents additional costs for exporters to the region, and in some instances, refusal of war coverage.

One area often misunderstood is the purpose of war insurance. When war breaks out and insurers decline to provide cover, many people ask the question as to why they cannot obtain insurance at the precise time they need it. 

Insurance does not operate that way. Insurance is intended to cover unforeseen losses. The purpose of war insurance is to provide protection against unexpected losses arising from conflicts anywhere in the world. 

The Persian Gulf became a major hotspot during this period. The Strait of Hormuz, situated between Iran and the Arabian Peninsula, attracted global attention. Some vessels were forced to consider alternative routes through other regions, including the Red Sea. Once routes change, insurance rates can also change.

Another important point is that war insurance contains specific conditions regardless of whether cover is available. Standard marine contracts generally include a seven-day cancellation clause. An insurer may provide war cover under a blanket arrangement covering multiple shipments, but still retains the right to cancel that cover with seven days’ notice.

That cancellation generally does not affect shipments that have already sailed, but it does mean that war cover can cease even if it appears to exist on paper, in open policies.

In marine insurance, war is considered a waterborne risk. Once cargo is discharged at a port, war cover ceases. If a vessel arrives at a destination port but has not yet discharged its cargo, cover may continue for a limited period, usually up to 15 days. After discharge, the cover ends. Cover for war-related risks on land is a separate type of specialised insurance altogether.

During the 2022 forex crisis, insurers had trouble meeting those dollar-denominated obligations against rupee income. Is the industry in a better position to handle that should similar complications reoccur? Does that mismatch make marine cover harder to price today, given the currency pressure stemming from the Middle East crisis? 

I would not say it makes marine insurance harder to price. Insurance companies can adjust pricing if necessary, depending on what the market is willing to pay.

As you mentioned, there were difficulties during the economic crisis when insurers had to remit premiums overseas. Those were temporary issues that arose under exceptional circumstances. Eventually, those situations get resolved. 

In general, geopolitical developments affect our market directly. For example, failure of tea shipments, which is one of Sri Lanka’s largest exports, to reach their destinations will have a direct impact on local businesses. The same applies to imports, especially in relation to vessels traversing the Persian Gulf. 

Before the current conflict escalated, piracy was a major concern in and around the Arabian Sea and Indian Ocean. There were opinions that it did not affect Sri Lanka, but in reality it did, even if many people were unaware of it. Cargo travelling between Europe, the Middle East, and Sri Lanka passed through the Arabian Sea into the Indian Ocean, where piracy posed a real risk. Today, that threat has declined considerably, or rather is not top priority. 

There have been similar situations in the past. During the Iran-Iraq conflict some decades ago, the Red Sea became a major hotspot, and it is still one of the principal shipping routes for Sri Lanka’s imports and exports. If disruptions occur in this narrow shipping route such as the Strait of Hormuz or the Suez Canal, they inevitably affect this part of the world.

Recently, a Centralised Insurance Data Repository was launched. Does the country’s marine insurance sector also remain silo-based, and what does integration into the system mean for the industry?

As far as I understand, the Centralised Insurance Data Repository was to initially cover the areas of motor, medical, and life insurance. While I would not describe myself as an expert on that particular initiative, I would say that insurance companies too maintain their respective claims data. 

You were instrumental in introducing Sri Lanka’s first web-based marine insurance platform, eMarine, in 2001. Today, how would you say the improvement has been in the digitalisation aspect?

In 2001, I and a colleague were instrumental in introducing eMarine to the local market. 

This was when I was Head of Marine at Zurich Sri Lanka. The system allowed customers to issue their own policies online, download them, and even complete the documentation from their own offices. We provided pre-signed documents that could be attached, allowing customers immediate access to their policies.

In many ways, not much has changed over the past 25 years in this technology. We introduced the name eMarine, and today it has become widely used, although we never patented it.

In terms of digitalisation in general, the main developments have been in document handling. Claims documents can be scanned and submitted electronically instead of being submitted in original physical form, and claims can be settled through email correspondence rather than depending entirely on paperwork, as was the case before. Those processes have improved but there are no substantial changes.

In general, do you think there is adequate awareness about marine shipping insurance among Sri Lankan exporters and importers?

Unfortunately, I do not think there is adequate awareness. For many people, insurance is simply another requirement to complete the paperwork. They obtain the policy because it is necessary for the transaction rather than because they understand what it provides in terms of protection. 

How important would you say that awareness is?

It is very important. For instance, with respect to the current global situation, it is important that an exporter or importer understands what follows when conflict breaks out and what action to take. They can discuss alternative shipping routes with buyers or sellers and understand how insurance will respond under different circumstances. That knowledge helps businesses make better decisions.

In terms of innovative insurance solutions that are in the market today, are there any specific ones that you would say are very important to consider for the marine market?

Marine insurance has stayed largely consistent in its basic form. While product features are tweaked, most of them originate from the same foundation. The main changes have come through developments in logistics and cargo handling, which have resulted in updates to the clauses and conditions attached to policies. Many of the original clauses were drafted decades ago and have gradually been revised to keep pace with changes in the industry.

In your view, what are the most vital requirements to improve Sri Lanka’s position in the international marine and reinsurance market?

Sri Lanka had opportunities long before the development of institutions such as Lloyd’s of London. Historical records refer to the ancient port of Mahatittha in Mannar, where Persian traders sailing in from the Middle East are believed to have engaged in trade through this port. The port of Mahatittha apparently served ships in ship-related services at this location.  

That being the case historically, and as an island nation, Sri Lanka has not been able to capitalise on opportunities for the country’s marine sector. 

Why do you think we have not capitalised on such opportunities? Are there specific bottlenecks?

We talk a great deal about Sri Lanka’s location in the Indian Ocean, but we have not translated that into commercial advantage. One port alone may not be sufficient. Regardless of the different views surrounding it, I believe the Hambantota Port is important because of its location.  

Moreover, Sri Lanka has also not made full use of opportunities in tourism linked to the maritime sector, including yachts, marinas, and cruise ships. There is much more that can be done in those areas. We are only now discussing developments like marinas. Given Sri Lanka’s location and coastline, the country could have reached a position further ahead. 

Another issue is the lack of understanding about trading terms or Incoterms. In the past, there were only a handful of commonly used terms such as Free On Board (FOB) and CIF. In 2010, the International Chamber of Commerce introduced a more comprehensive set of Incoterms, and these were updated again in 2020. They clearly define responsibilities, the point at which risk transfers, and who is responsible for different stages of the transaction.

I still find that many traders and even insurance practitioners are unfamiliar with these developments. Policy wordings are also sometimes too general and do not capture the technical detail contained in modern clauses, conditions, and Incoterms. Those are areas where insurance companies, industry institutes, and organisations such as ours still have work to do in educating the next generation.

What would you say are the biggest opportunities to watch in the years ahead, and how should we move forward?

Looking at others alone is not enough. We need to act. That means developing ports, building the necessary infrastructure across the country, and attracting the proper foreign direct investment to the right projects. Those investments also need to be managed properly.

The opportunities are there, but they require capable leadership and proper execution.

Another area that deserves attention is attracting young people to the marine insurance industry. At present, very few young people are entering the profession, and that knowledge is gradually disappearing. In marine insurance specifically, at this stage, there should be young experts leading the sector. We have not seen enough people coming through to replace the previous generation.

There is currently a significant gap in talent availability. Many young professionals have left the country for employment overseas. At the same time, insurance is not seen as an attractive career option. As a result, there is a shortage of experienced professionals in the field.