Low interest rates mean insurers can no longer rely on robust investment returns and must understand and reduce their growing vertical and horizontal exposures, according to the American Institute of Marine Underwriters.

Chairman Frank Costa told the annual general meeting that while the current combined operating ratio for property and casualty of 97.5% is the same as in 1978, the earlier period boasted a 14.3% return on equity, while today it is about 9%.

In 1978 a 30-year government bond paid 8.5%; today the same bond pays just 3%.

When insurers invest premium while waiting to pay claims and other expenses, they receive far less income, Mr Costa says.

“That means we have to carefully select and balance our portfolios, particularly our accumulations. We can’t have too much vertical exposure – too high a limit on one exposure. We don’t want a single event scuttling our portfolio.”

While the number of ships lost each year has steadily declined (75 last year, about half the number in 2005) the size of vessels is growing, giving increased vertical exposure.

The MOL Comfort, which sank two years ago, was the size of the seven largest vessels lost last year combined, Mr Costa says.

The biggest US ship is the MSC Oscar, which is a 19,224-twenty-foot-equivalent-unit (teu) container vessel.

Mr Costa says the larger cargo means more exposure, and salvaging such huge ships presents another problem.

“By some estimates it would take two years to remove all the containers in a 19,000-teu operation. Imagine what that would cost.”

Mr Costa says underwriters must also understand horizontal exposures, and how individual risks can be drawn together into a “huge clash exposure” such as the Tianjin port explosion in China.

Estimated insured losses for the explosion are up to $US3 billion ($4.11 billion).

Mr Costa called Tianjin “a tragedy of unintended consequences that all underwriters should embrace”.

It shows underwriters must consider not only the risks they insure, but also the risks they are close to.

He says Tianjin is also a reminder how difficult it is to underwrite overseas markets and settle complex claims from a distance.