Falling Oil Prices – How do they affect your insurance rates?

From 2010 until mid-2014, oil prices had been fairly stable, at about $110 a barrel. However, as we have seen constantly in the news, the oil price has fallen sharply over the past seven months (as at January 2015) with Brent crude oil now dipping below $50 a barrel.

Why does the price of oil keep falling? Very briefly – oil production couldn’t keep up with the oil consumption in countries like China, so prices increased. High prices caused companies in the US and Canada to start drilling for new crude and countries like Iraq began producing more oil. At the same time, due to weakening economies, demand for oil in places like Europe, Asia, and the US began to drop. In September 2014, oil prices started falling sharply.

From a cargo insurance perspective, one of the factors in determining cargo premium is the total value of the cargo being shipped (turnover) during the policy year.  Due to the dramatic reduction of the oil prices, the estimated annual turnover of oil to be insured in 2015 will undoubtedly fall sharply.  Where turnover reduces, the rates increase because the ‘discount’ offered for the high turnover is eroded.

But, will underwriters increase the premium rate this year due to the reduction of turnover? As we are still in a soft market in the marine cargo insurance industry, the answer will be “No”.  With a good loss record, even with a reduced turnover, reductions in premium continue to be available where comprehensive marketing of the risk has been undertaken.

Contact us on [email protected] or Wendy Jiang, our marine cargo specialist, at [email protected] for more information.