Weighing anchor on commercial hull with BHSI

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Berkshire Hathaway Specialty Insurance has launched its first-ever commercial hull product in Australia – a class of marine insurance steeped in history but with modern growth potential

WHEN JAKE HESSON looks at an insurance contract, he thinks about pirates, rovers and other ‘perils of the sea’ that are sometimes the cause of claims in his area of expertise. The underwriting manager for marine at Berkshire Hathaway Specialty Insurance (BHSI) has been interpreting the arcane world of commercial hull insurance for the better part of 20 years. It’s a class of marine insurance like no other, with rules that insurance experts have gamely hammered into modern practice for as long as ships have plied the oceans. The frustration of a legal scholar writing in the Harvard Law Review in 1893, trying to define the concept of ‘perils of the sea’, is palpable 130 years later:

Berkshire Hathaway Specialty Insurance (BHSI) Australia provides commercial property, mining and energy, construction, casualty, executive and professional lines, marine, transport and logistics liability, accident and health, healthcare liability, surety, and multinational solutions and risk engineering. BHSI’s wide range of insurance products is expanding; this is combined with financial strength, a yes-oriented culture and great flexibility in customising solutions for clients’ needs. BHSI is customer-first, through and through. It views every claim as an opportunity to strengthen its customer relationships and industry reputation because, as BHSI says, ‘Claims is our product’.

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Incurred losses and average losses for hull globally, 2013–21

“BHSI’s entry into the hull market has been well received by brokers, and while it’s early days in terms of building our portfolio, we’re looking forward to the journey ahead”

Jake Hesson, Berkshire Hathaway Specialty Insurance

Luckily, you don’t have to go down to the docks on a foggy night and search the corners of dingy pub houses for peg-legged old sea dogs to access this knowledge. Hesson is more than happy to help those in need over a cup of coffee in a modern office. “To be able to relate those concepts in what I hope are fairly easily understandable concepts is something that I've always enjoyed – just that transparency and guidance piece I think is quite important,” he says. Hesson launched the commercial hull line at BHSI in January after extensive preparation in the latter half of 2022. The

While hull, as an insurance line that has a history dating back hundreds of years, might seem like an obvious choice for a ‘forever business’, Hesson explains that the market makes it anything but. “Historically speaking, commercial hull by and large isn't known for being a profitable class of business. If you have a look at the global hull results for about the past 30 years, globally, it has lost money,” he says.

In particular, the historical poor performance of the commercial hull class and the resulting portfolio management has caused a reduction in Lloyd’s insurance capacity for the class, but this has also provided an opening for a player like BHSI. “That kind of renewed focus on insurance profitability from Lloyd’s has had some quite far-reaching ramifications globally, seen in Lloyd's syndicates reducing some of their capacity for commercial hull – so less competition and fewer players has generally led to more of an increase and a correction in pricing,” says Hesson. Several high-profile marine disasters – notably the Rena foundering on Astrolabe Reef off the North Island of New Zealand and the Costa Concordia cruise ship sinking in Italy – have prompted a renewed focus from maritime regulatory bodies on seafaring safety around the world. There has also been a growing focus on environmental sustainability in shipping; new international maritime law on what types of fuels vessels can use; as well as momentum towards the International Maritime Organization fully decarbonising international shipping by 2050. “There have been a lot of changes over the course of the past 10 years to make the standards much more onerous for shipowners, considering how they actually manage their vessels,” Hesson says. These factors have helped premium rates improve recently and may continue to have a positive effect. “The Australian market has been subject to cumulative rate increases around the double-digit mark for the past five years.” Even if there happens to be a short-term dip, BHSI is a company that stakes its reputation on being there for the long term. “When I think about BHSI being a forever business, I think it's safe to say that we are not the kind of organisation that is going to dip our toe in and out of market segments. When we commit to offering a particular product, we are 100% committed to it,” Hesson says.

Commercial hull isn’t just about pirates and enemies on the high seas. It mainly covers two areas known as H&M (hull and machinery) and P&I (protection and indemnity). “Hull and machinery covers risks of physical loss or damage to the vessel itself as well as the machinery, engines or equipment, and P&I covers the liabilities arising from the ownership of the vessel,” Hesson explains. On the H&M side, around 50% of claims are related to the machinery – damage to the main propulsion equipment or

the engines, for example, caused by breakage of shafts or negligence of the masters or crew. “Other leading causes of claims include fire and explosion, jettison, piracy, lightning and, of course, perils of the seas, which include – amongst other things – heavy weather damage, and damage caused by collision with another vessel or contact with fixed and floating property such as wharves, jetties, buoys, pontoons and the like.” Other costs or charges relating to salvage of the vessel, general average as well as sue and labour (or, for the uninitiated, those expenses incurred by the shipowner to prevent or minimise a loss) are also generally recoverable. On the P&I side, BHSI covers liabilities arising from the ownership of the vessel, including liabilities caused by collision with another vessel or contact with third party property, as well as personal injury. “If the vessel is a total loss, and it sinks, we cover the removal of the wreck, passenger liabilities, pollution… It's pretty broad,” says Hesson. Clients are divided into brown-water and blue-water segments, signifying vessels that stay close to shore and those that operate in the open ocean. Much of Hesson’s work so far involves brown-water clients – things such as tugs, dredges, barges, general workboats, as well as vessels that trade in the tourism and charter industries. There are no official figures, but Hesson estimates the value of the commercial hull market for Australian and New Zealand-flagged vessels to be around A$115m.

Commercial hull sits within BHSI Australia’s well-established marine business of around 30 people, some of whom jokingly say they have no idea what Hesson does. He says it comes with the territory, and helping educate people is part of the job. “A lot of marine hull accounts are handled by non-marine-specific brokers, who may not often deal with marine classes of insurance. Sharing with them my views and translating some pretty archaic policy wordings and fairly strange terms and concepts is enjoyable.” A key part of his role is to help vessel owners reduce their risk and improve safety practices. Hesson gives the example of a client in the far north of Western Australia. “Access to ship repairers and general marine services is not always easy for vessel owners in such regions, so in those cases, it's even more important that they have all their ducks in a row locally,” he says. BHSI sent a risk engineer who spent about a week having a look at the account. “The shipowner was very happy and excited that an insurer was willing to go that extra mile and travel there at its own cost to consider all those additional hazards and nuances of operating a fleet of vessels in such a remote area. The shipowner may not have considered before getting an independent set of eyes on their risks.” That attention is far from a special case. “We will be offering guidance and utilising marine-specific expertise, whether it's maritime risk engineers, marine engineers from a machinery and equipment perspective, naval architects, surveyors or ex-salvage masters to help go into the vessel owner’s business and effectively look at their operation from top to bottom,” Hesson says. After all, there is no telling what perils of the sea could be lying in wait for the unsuspecting ship operator. Ever heard of barratry? Not many people have, and there aren’t many places to find out if you need coverage or not – something that Hesson knows is part of his value proposition. “I wouldn't say that if you're a broker placing commercial hull risks, you're awash with an abundance of capacity and options.” The scarcity of good guidance backed by the assurance of BHSI makes Hesson all the more valuable to local brokers, a bit like a long-lost treasure map with a secret watermark to guarantee its authenticity. “A number of the large general insurance companies have a marine division, but only a few of those offer commercial hull. Understandably, I think it scares quite a few marine practitioners off,” Hesson says. “For us to be able to enter the market and offer quite a compelling product with all the positives that Berkshire Hathaway Specialty Insurance as an insurance company can offer, I think it's a great solution for brokers.”

Historically unprofitable, but the tide is turning

Improving practices and educating the market

Published 17 July 2023

“Sharing with [brokers] my views and translating some pretty archaic policy wordings and fairly strange terms and concepts is enjoyable”

Jake Hesson, Berkshire Hathaway Specialty Insurance

2013

200m

400m

600m

800m

1,000m

435

$1.6m

Total incurred losses (US$)

Average loss (US$)

Total number of claims

1,200m

2014

2015

2016

2017

2018

2019

2020

2021

1,400m

1,600m

1,800m

$1.2m

$1.1m

$1.3m

$1.8m

$1.5m

$1.6m

640

722

831

1,134

885

963

709

764

Source: International Union of Marine Insurance

BHSI launches commercial hull line for ANZ

January 2023

“It is one of those phrases which are intended to describe a collection of facts of no very exact or determined character, and, therefore, a strict definition is extremely difficult to come at, if not, indeed, impossible.”

Diving into the murky depths of the topic reveals a treasure trove of obscure historical rulings, such as a shipment of tobacco getting struck by lightning being covered as a ‘peril of the sea’, but not a vessel left stranded at low tide. Hesson is one of a handful of specialists in Australia experienced in navigating the intricacies of such terms and is a present-day guardian of centuries of marine insurance practice. “Some of the concepts that apply to commercial hull and marine insurance are 3,000 years old, dating back to the ancient Phoenicians – and those practices are still written, still encoded in international maritime law to this day,” Hesson says.

Australia and New Zealand commercial hull business is the only line of its type that BHSI operates anywhere in the world – partly due to the difficulty of finding strong expertise that also fits with BHSI’s underlying ethos of building a ‘forever business’.

“The portfolio of clients that we have at the moment goes from small single-vessel owners that operate a small charter business, to the middle-range segment – so larger commercial operators that carry thousands of passengers per year – to large commercial tugs, barges and cargo-discharging vessels, Hesson says. “We have a number of clients in Sydney, we have things up in the far reaches of the Northern Territory, in South Australia; we've got charter operators up in Cairns; we have a large tourism operator over in New Zealand. Our strategy is to take a very broad approach in terms of risk appetite, vessel owners and types across all the various geographies in Australia and New Zealand. “So far, BHSI’s entry into the hull market has been well received by brokers, and while it’s early days in terms of building our portfolio, we’re looking forward to the journey ahead.”

The components of commercial hull insurance

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