Marine Insurance Market and the Lessons Learned from Superstorm Sandy. February Sponsored by:

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1 Marine Insurance Market and the Lessons Learned from Superstorm Sandy February 2013

2 Marine Insurance Market and the Lessons Learned from Superstorm Sandy Executive Summary 2012 was one of the costliest years on record for the marine insurance market. First, the cruise ship Costa Concordia grounded and partially sank off the western coast of Italy, likely becoming the largest shipping loss ever for insurers. Then, Hurricane Sandy, a storm of such epic proportion it was dubbed a Frankenstorm and later a Superstorm, slowly made its way up the eastern seaboard of the U.S. and slammed into southern New Jersey. Aside from its strength, which weakened to a sub-tropical cyclone just before landfall, it was a worst case scenario as it made a direct hit on the most densely populated region of the United States. Claims from Sandy have since overwhelmed the marine market and, when all is said and done, it will likely be the largest marine loss event of all time. Impact on the Insurance Market Three months after Sandy made landfall, its overall impact on the Property and Casualty (P/C) insurance market is yet to be determined. According to estimates released by Munich Re, industry-wide insured losses are expected to reach $25 billion. If these estimates prove correct, Sandy will end up being the third costliest storm in U.S. history, after only Katrina in 2005 and Andrew in Sandy hit the marine market particularly hard with marine insurers responsible for a disproportionate amount of the total claims. Total U.S. marine premiums in 2011 stood at approximately $2.3 billion and accounted for less than 1 percent of the P/C industry s $442 billion net premium written. 2 Sandy-related marine losses are estimated to fall somewhere in the $2.5 $3.5 billion range. 3 According to these estimates, the marine market will be responsible for no less than 10 percent of the storms total claims payouts, an overwhelming percentage for such a small segment of the overall market. Impact on the Recreational Marine Market Sandy left the coastline littered with damaged boats ranging from wave runners to 40+ foot yachts. Thanks to the massive storm-surge, many boats were recovered hundreds of yards away from where they were stored. Approximately 70 percent were considered to be total losses. 4 The total damage both insured and uninsured-- to recreational boats is estimated to be in excess of $650 million. Sandy may not have been the strongest storm in terms of wind speed, but its size, which was more than twice that of Katrina, combined with its powerful storm surge, contributed to extensive losses over a huge portion of the Atlantic seaboard and as far inland as the Great Lakes. 5 To date, the number of boats damaged in the Sandy affected region is more than 32,000 in New York, 25,000 in New Jersey, 2,500 in Connecticut and 6,000 in other states. Damage estimates are $324 million, $242 million and $23 million respectively for New York, New Jersey and Connecticut. 6 According to the Boat Owners Association of the United States (Boat U.S.), the overall damage to U.S. recreational boats by Sandy is the largest ever as a result of a single event since it started keeping records in In fact, the total of Sandy related yacht and pleasure craft losses already are nearly as large as the $700 million in combined losses as result of both hurricanes Wilma and Katrina, which hit the Gulf Coast in February 2013 Advisen Ltd.

3 Impact on Commercial Marine Market As hurricane Sandy made her way up the eastern seaboard, ports along the East Coast began to prepare. The storm ultimately forced the closure of port facilities from Virginia to New York as it was forecasted that Sandy could make landfall anywhere from North Carolina to New England. When it became apparent that the storm would hit the Mid-Atlantic region just as a large frontal system was stalling out over the area, creating a potential Superstorm, ports from Baltimore to New York prepared for a worst case scenario. Carriers also made alternate arrangements instructing some ships to stay at sea and others to go to alternate locations. The Port Authority of New York and New Jersey, the third largest seaport in the country and the largest maritime cargo center on the East Coast, activated its hurricane contingency plans. Forecasters were predicting the hurricane would make landfall during high tide, a scenario that would amplify the flooding in and around the port due to massive storm-surge and one that the hurricane preparation plans did not fully consider. The plans were primarily designed to minimize wind damage and included securing equipment, welding blocs onto crane rails and lowering containers to stacks of two to prevent them from blowing over. 8 Some of these preparations may have caused more harm than good since they increased the exposure to the storm surge. Meanwhile, the ports in Baltimore and Philadelphia were taking similar precautions and sustained significantly less damage because the storm surge was not a factor at these locations. Although the damage sustained at the Port Authority of New York and New Jersey was not as severe as it could have been, and even though the ports were able to open and operate at a reduced capacity within a week of the storm, the destruction caused by the surge and subsequent flooding was still extensive. New automobiles accounted for a huge portion of the commercial losses. An estimated 16,000 new vehicles had to be scrapped because of the storm-surge that inundated Port Newark-Elizabeth Marine Terminal. At an estimated $30,000 per vehicle, which is the average price in the U.S. for a new automobile, total losses will likely be in excess of $400 million. 9 Nissan Motor Co., Toyota Motor Co., Ford Motor Co., Honda Motor Co., and Fisker Automotive were among the companies that lost new car inventory. Although the damaged vehicles have been the most visible commercial losses, there also have been others of significance. For example, approximately 15,000 containers were damaged along with 2,500 trucks that serve the ports. Wind turbine components and heavy construction equipment also sustained heavy casualties. 10 Supply chain losses as result of widespread damage to the regional logistics and transportation network also were substantial with total supply-chain interruption losses from Sandy estimated to be as high as 15 percent of the total insured commercial losses February 2013 Advisen Ltd.

4 Loss Prevention & Recovery While no amount of preparation may prevent extensive damage from storms like Sandy, being proactive and having a hurricane preparation plan in place will definitely reduce the likelihood, and at the very least reduce the severity, of a loss. Cargo and hull losses at marinas and ports would have been much worse if not for the hurricane preparedness and business recovery plans enacted prior to, and immediately following, the storm. For this reason, individuals with marine exposures should take the loss prevention lessons learned from this and previous storms and develop a plan of action for future events. A comprehensive plan should include: 12 Proactive loss prevention: Identify exposure and develop strategies to avoid or minimize potential losses. Reactive loss control: Analyze historical loss trends to address future vulnerabilities. Communication: Develop an open line of communication with all involved parties including insurance companies to enhance loss prevention efforts. Almost as important as preparing for a hurricane are the steps taken after a storm if a boat or merchandise has sustained damage. Quick response can help to significantly reduce the severity of the loss. Responsible parties should: If insured, notify the insurance company immediately; Remove anything of value to protect from looters and vandals; and Protect damaged boats and/or merchandise from additional exposure to weather. Personal Yacht and Pleasure Craft Hurricane Preparation Common sense leads most boat owners to take basic precautions in preparation for a hurricane or even just a powerful storm: strip the sails, biminis and anything else that is removable and can catch wind, and add extra linage to boats that will remain in the water so they will hopefully rise with the storm surge. Unfortunately, however, for storms that are the size and strength of Sandy, the bare minimum likely will not be enough. Just as Florida boat owners learned after the storms of 2004/2005, having a well-defined storm plan in place before a storm occurs is crucial to minimizing a loss. Just throwing an extra line or two is not enough, explained Raymond Stahl, Senior Vice President, Recreational Marine, AIG Property Casualty. I am sure Mid-Atlantic boat owners will be more prepared the next time. Boat owners should develop a hurricane preparation plan that is unique to their situation and to their boat. Reasons for a hurricane preparation plan are twofold: 13 To prevent damage to the boat; To prevent the boat from causing damage to other boats or property; and consequently reduce legal liability due to damage caused by the boat. Depending on the unique situation of the boat owner, a hurricane preparation plan may include hauling the vessel, trailering it to a safe location, securing it in its berth, or moving it to a Hurricane Hole. Some boat owner considerations when developing this plan include the following: Trailing to a Safe Location: Ensure that both the trailer and towing vehicle are in good operating condition. Check tire tread, tire pressure, tail and brake lights, electric brakes (if equipped) and that the wheel bearings are lubricated. Pre-plan a safe destination, preferably on high ground and away from areas of storm surge. Pre-plan the trailer ramps to be used, as well as alternates. Plan for a primary and alternate route to the destination. Furthermore, it is always a good idea to negotiate a storage agreement in advance. 4 February 2013 Advisen Ltd.

5 If the boat is not being taken to an indoor hurricane-resistant structure, the trailered vessel should be parked in a safe area, preferably away from trees and flimsy structures that might be toppled by wind. Remove all canvas, sails, electronics, and valuables. Place wooden blocks between the trailer frame and the axle to allow for the additional weight of added ballast water and storm water. Secure the boat to the trailer using suitable synthetic straps, then let about half of the air out of the tires. Depending upon the type of boat, it may be beneficial to fill the bilge area with water ballast to help hold it in place. Be careful that the water ballast does not submerge electrical or mechanical systems. Using heavy strapping or lines, secure the boat to in-ground anchors, heavy objects, etc. It is best to secure the boat in all four directions as the wind direction will shift during the storm. Remaining at the Marina: If possible, it should be pre-arranged for the vessel to be hauled out, placed on blocks, and secured to the ground with suitable lines and lashings. This is usually much safer for the vessel rather than remaining afloat in its berth. Remove all canvas and store it away. If the vessel must remain in its berth, check with the harbormaster for their requirements. Examine both the vessel s and the dock s cleats, chocks and other mooring hardware to ensure that it is in good condition. Do not leave the vessel on a boat lift as these are often unstable in storm conditions. Keep additional mooring lines, fendering, backup batteries, and an additional anchor on hand. When a storm is approaching, position the vessel away from directly alongside its berth, deploy the additional mooring lines, fendering, and anchors as needed. Use crossed spring lines fore and aft. It is very important to protect all lines with chafing gear. If lines are secured to pilings, be sure that it is high on the piling to allow for storm surge, and install preventers to stop lines from slipping over the tops of pilings. Ensure that all batteries are fully charged in order to run the bilge pumps. It may also be prudent to install a backup battery and bilge pump. Relocating to a Hurrican Hole : Many areas have protected waterway areas informally known as Hurricane Holes. Their location can often be found by talking with knowledgeable boaters and marine professionals in the area. In many cases, these are the best option for larger vessels that are unable to leave the area or be easily hauled out. It s best to identify these areas in advance, all possible routes to get there, and potential obstructions such as bridges, water depth, tides, etc. Keep the fuel tanks topped off during the hurricane season. Ensure that fuel filters are clean, spares are on hand, and that batteries are in good condition and charged. Keep in mind that bridges may be kept closed by local authorities as part of their land hurricane evacuation routes. Pre-plan how the vessel will be moored or anchored. Purchase additional lines, anchors, fendering, etc. as needed to safely moor or anchor in this location. If anchoring, set the anchor to minimize its swing radius, particularly to avoid striking other vessels anchored nearby. Consider setting a stern anchor as well. Remove all canvas and sails, store chairs, dinghies, and loose equipment. If the vessel is being relocated to an area outside of the hurricane threat, make the move well ahead of the storm, ensure adequate fuel and food for the crew, and closely monitor weather forecasts as storm tracks can frequently change. 5 February 2013 Advisen Ltd.

6 Other Considerations: Keep a folder with copies of all of the vessel s documents and paperwork in a safe location off of the vessel. This file should include copies of the insurance policy, USCG document or state registration, surveys, equipment lists, etc. Also keep a list of important telephone numbers, such as insurance agent, Harbormaster, U.S. Coast Guard, etc. The Hurricane Plan should be shared with a reliable person who can execute the plan in the event of the owner s absence. If the vessel involves an absentee owner, the execution of the Hurricane Plan should be formalized with a contract with competent marine professionals. After the storm has passed, check the vessel as soon as it is safe to do so. If damage has occurred, take all necessary steps to minimize or prevent further damage. Contact the insurance agent to report any damages and to file a claim. If theft or vandalism has occurred to the vessel, file a police report and note the case number. Commercial Marine Hurricane Preparation The scope of the damage caused by Sandy to ports and terminals in New Jersey and New York raises the question as to what more could have been done. Although hurricane preparedness and business recovery plans were enacted, major commercial marine losses still occurred. In this circumstance, the proactive loss prevention strategies helped to minimize wind damage, but left a tremendous amount of inventory (especially new cars) exposed to flooding. One lesson learned from this event that should be considered in planning for future events (Reactive Loss Control) is the importance of reducing exposures due to an accumulation of values. As evidence by the thousands of new vehicles that had to be scrapped, there was little control over accumulations. Terminals are often used as storage facilities for cars in transit and double as intermediate processing facilities by car manufacturers (e.g. air conditioning etc.). As a result, thousands of cars can accumulate creating a significant exposure to a single event. By the time the ports and terminals enacted their hurricane preparations there was no reasonable way to move thousands of cars to safety. To minimize this exposure would require fundamental changes in business practices, the benefits of which would need to be weighed against the costs of transporting and storing vehicles at less vulnerable locations. While ports and terminals will have comprehensive hurricane preparation and business recovery plans in place, this event highlights the need for shippers, particularly those with potential large port accumulations, to have their own plans in place as well, according to Scott Brown, Senior Vice President, Marine Loss Control Engineering, AIG Property Casualty. Depending on the size of the company and the amount of potential accumulation, these plans will range from the very simple to the extremely complex, potentially involving multiple business units and functions such as production, logistics, warranty, insurance, security, etc. as well as third party vendors and other stake holders. A comprehensive hurricane preparation and recovery plan will consist of three phases: monitoring conditions prior to and during the approach of a storm, loss prevention activities prior to and during a storm and recovery after a storm has impacted and passed the affected area. 6 February 2013 Advisen Ltd.

7 The monitoring phase may include: Personnel dedicated to monitoring storm activity for designated areas, Communication chain activated at pre-determined risk points (3 day cone, 5 day cone, etc.) to alert designated stakeholders (logistics, production, insurance, etc.) to take pre-determined actions as required by the plan, and Coordination with USCG and port authority requirements. The loss prevention phase may include: Pre-storm measures such as a port or storage site hurricane vulnerability study, developing and securing plans for vulnerable cargo in place (i.e. wind turbine blades), pre-determining designated sites for evacuation or staging of cargo during a storm, etc., Diverting inbound cargo from affected ports, Evacuating cargo from affected ports (prioritized based on value, business critical nature, logistic assets available, etc.), and Additional protective measures for remaining cargo in place at the affected ports (move to higher ground, additional securing, taping or removing vulnerable parts, etc.). The recovery phase may include: A pre-assembled recovery (or triage ) team with the necessary credentials to access the affected port as quickly as possible to assess status and determine disposition of affected cargo. This team may consist of product experts to accurately identify condition, logistics personnel to coordinate disposition of cargo, and claims surveyors to coordinate requirements with insurance carriers. Liability and Insurance Approximately one half of all recreational boat owners carry insurance on their watercraft. 14 Unlike automobiles, no state requires boat owners to carry insurance, but most lenders and marinas do. The final tally of insured Sandyrelated yacht and personal water craft losses is still being determined. Many losses were boats stored near the shoreline at lower elevations and were washed inland as result of the strong storm surge. If the losses are consistent with the overall market, and half of the recreational boat losses are insured, there will be approximately 32,500 insured recreational boat claims valued at $325 million in insured losses. On the commercial marine front the question is less about whether insurance was in place, but more about what coverage, if any, was triggered and who is liable. In addition to the damage sustained at the ports and terminals, significant shipping losses were incurred due to the substantial delays. At this point it is still not entirely clear where the liability stands because a principle of contract law and insurance, force majeure, may apply. Force majeure protects parties in the event that a portion of a contract cannot be performed due to causes outside the control of the parties, such as natural disasters, that could not have been avoided through the exercise of due care. As a result, in all likelihood the losses incurred will end up in litigation to determine liability, if any. Events like Sandy reinforce the value of a partnership between the insured and their insurance company, Rich Decker, President Global Marine, AIG Property Casualty explains. The insured s responsibility to act as a prudent uninsured can be supported with knowledge and experience of expert loss control, claim and underwriting staff. Not only are there lessons to be learned from an insured s perspective, but underwriters need to self-reflect and determine what lessons they should learn from Sandy, adds Brian V. Wood, EVP and Chief Underwriting Officer, Global Marine, AIG Property Casualty. In particular, underwriters should carefully consider an apparent emerging exposure landscape, as illustrated by Sandy, global warming and changing weather patterns, that requires an improved understanding of the associated risks for our cargo, hull and recreational marine businesses and make certain these risks are measured, underwritten, controlled and priced. 7 February 2013 Advisen Ltd.

8 NOTES: 1 Pantagraph (Bloomington, IL), Three months after Sandy, State Farm tallies $644M in Claims, (January 16, 2013) 2 Insurance Information Institute, Industry Overview: Insurance Industry at a Glance, 3 Interview with members of AIG Global Marine Property Group 4 The Star-Ledger, Sandy s wrath hit NJ s maritime Industry hard, (01/27/2013), 5 Michael Buck, BestWeek, Update: Recreational Boat Loss Estimate at $650 Million From Sandy; Might Be Larges Hit Recorded, (11/16/12) 6 Global Marine Insurance Agency, Hurricane Sandy Caused Record-Setting Boat Damage, 7 Global Marine Insurance Agency, Hurricane Sandy Caused Record-Setting Boat Damage, 8 Elizabeth Parke-Kincaid, The Journal of Commerce Online, Northeast U.S. Ports Prepare for Hurricane Sandy, gateway-group.com/articles/northeast-usports-prepare-for-hurricane-sandy/ 9 Richard Newman, NorthJersey. com, 16,000 vehicles damaged by Sandy at NJ port, (November 13, 2012), news/ _16_000_vehicles_damaged_by_sandy_at_nj_port.html Conclusion Sandy s impact on the marine insurance market has been unlike any other catastrophic event. A simultaneous combination of meteorological factors turned a relatively weak hurricane into a Superstorm affecting an enormous chunk of the Eastern seaboard and as far inland as the Great Lakes. When all is said and done and marine insurers wade through the ongoing wave of claims, determine what and how much coverage applies and settle impending litigation, the overall losses will be staggering. But, with every disaster there are lessons to be learned, lessons that will help to reduce the severity of future events. The question now for the marine market is what exactly are these lessons? A few lessons are clear for example, every person or company with potential exposures should have a hurricane preparedness plan and hurricane preparedness must fully account for storm surge as well as for wind. For other lessons, only time will tell. The story is still unfolding, and many of the most valuable findings undoubtedly are yet to be discovered. American International Group, Inc. (AIG) is a leading international insurance organization serving customers in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional, and individual customers through one of the most extensive worldwide property-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG common stock is listed on the New York Stock Exchange and the Tokyo Stock Exchange. AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc. For additional information, please visit our website at Products and services are written or provided by subsidiaries or affiliates of American International Group, Inc. Not all products and services are available in every jurisdiction, and insurance coverage is governed by actual policy language. Certain products and services may be provided by independent third parties. Insurance products may be distributed through affiliated or unaffiliated entities. Certain property-casualty coverages may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. 02/ American International Group, Inc. All rights reserved. 10 Star-Ledger (Newark, NJ), N.J. ports still aren t running at full steam, (12/2/12) 11 Fran MatsoLysiak, senior associate editor, BestWeek, Exposures at East Coast Ports and Terminals Could rack Up Record Post-Sandy Supply Chain Losses, (1/30/13) 12 AIG, Loss Control/Engineering, 13 United States Power Squadron, Hurricane Preparedness for you Boat, Preparing-for-a-storm.pdf 14 Global Marine Insurance Agency, Hurricane Sandy Caused Record-Setting Boat Damage, 8 February 2013 Advisen Ltd.