Maritime losses are lower than ever yet insurance costs continue to increase as regulation expands
 On the whole, shipping safety has much improved in recent years from an insurers point of view, but with better performance come new risks they have not faced before.
First, there is the very size of ships today, which in terms of dollar loss, magnifies the extent of a marine casualties when they do occur.
And with new and increased incidents of shipboard fires, there are more electric vehicles in transit with their massive fire-prone lithium-ion batteries. Couple that with a widespread temptatiion to misdeclare hazmat consignments as perfectly safe and the risk of fire afloat grows even more.
Fires often start in containers, which can be the result of non-/mis-declaration of hazardous chemicals – around five per cent of containers shipped may consist of undeclared dangerous goods. Fires on large vessels can spread quickly and be difficult to control, often resulting in the crew abandoning ship, which can significantly increase the final cost of an incident.
Then there are new government mandates on wreck removal - regardless of expense - recently demanded by the environmentally sensitive regulatory authorities. In the past wrecks could be be left to rust away if they did not pose a hazard to navigation. But no longer.
This, and much more has come to light in this year's
Allianz Global Corporate & Specialty SE’s (AGCS) Safety & Shipping Review 2022.
First, the authors admit, much has improved in the area of maritime safety. “The shipping sector has demonstrated tremendous resilience through stormy seas in recent years, as evidenced by the boom we see in several parts of the industry today,” said lead author Rahul Khanna, head of Allianz's chief marine risk consultant. “Total losses are at record lows – around 50 to 75 a year over the last four years compared with 200+ annually in the 1990s.
Yet not all is smooth sailing ahead. "Sustainability concerns drive up costs of salvage. Decarbonisation of shipping industry creates new risks. The growing use of non-container vessels to carry containers, working life of vessels being extended, port congestion putting crews and facilities under pressure. All contribute to insurers' risk, said Captain Khanna.
"The tragic situation in Ukraine has caused widespread disruption in the Black Sea and elsewhere, exacerbating ongoing supply chain, port congestion, and crew crisis issues caused by the Covid-19 pandemic. At the same time, some of the industry’s responses to the shipping boom, such as changing the use of, or extending the working life of, vessels also raise warning flag," he said.
Said Justus Heinrich, AGCS’s global product leader, marine hull: “The insurance industry is likely to see a number of claims under specialist war policies from vessels damaged or lost to sea mines, rocket attacks and bombings in conflict zones. Insurers may also receive claims under marine war policies from vessels and cargo blocked or trapped in Ukrainian ports and coastal waters.”
The evolving range of sanctions against Russian interests presents a sizeable challenge. Allianz analysts fear an expanded ban on Russian oil could contribute to pushing up the cost of bunker fuel and impacting availability, potentially pushing shipowners use of alternative fuels.
If such fuels are of substandard quality, this can result in machinery breakdown claims in future, Allianz said. At the same time, security agencies continue to warn of a heightened prospect of cyber risks for the shipping sector such as GPS jamming, Automatic Identification System (AIS) spoofing and electronic interference.
Violating sanctions can result in severe enforcement action, yet compliance can be a considerable burden. It can be difficult to establish the ultimate owner of a vessel, cargo or counterparty. Sanctions also apply to various parts of the transport supply chain, including banking and insurance, as well as maritime support services, which makes compliance even more complex.
Growing environmental and humanitarian sensitivity multiplies the risk and therefore the insurance costs of both the unsured and the insured.
"When large vessels get into trouble, emergency response and finding a port of refuge can be challenging as well. Specialist salvage equipment, tugs, cranes, barges and port infrastructure are required, which add time and cost to a response," said this year's review.
The X-Press Pearl, which sank after it was refused refuge by two ports following a fire, is one of several incidents where containerships have had difficulty finding a safe haven. Meanwhile, the salvage operation for the car carrier Golden Ray, which capsized in the US in 2019, took almost two years and cost in excess of $800 million.
Said Capt Khanna: “Too often, what should be a manageable incident on a large vessel can end in a total loss. Salvage is a growing concern. Environmental concerns are contributing to rising salvage and wreck removal costs as shipowners and insurers are expected to go the extra mile to protect the environment and local economy. Previously, a wreck might have been left in-situ if it posed no danger to navigation. Now, authorities want wrecks removed and the marine environment restored, irrespective of cost.”
The report also points out that the losses last year have to be set against the estimated 130,000 ships in the global fleet today; 30 years ago, the global fleet comprised only around 80,000 vessels. Allianz believes that this progress reflects the increased focus on safety measures over time through training and safety programmes, improved ship design, technology and regulation.
The report noted that there have been 892 total losses over the past decade. The seas off Indochina, Indonesia and the Philippines are the global loss hotspots; these areas accounted for a dozen - or one in five losses - last year, and 225 or one in four losses over the last decade. These losses were driven by factors such as high levels of trade, congested ports, older fleets and extreme weather.
Globally, cargo ships accounted for half the vessels lost in the past year, and 40 per cent over the past decade. These vessels were classified as having sunk. In 60 per cent of the cases, this was the main cause of total loss in the past year.
Total loss declined over the past year, but the number of reported shipping casualties or incidents rose. The British Isles accounted for the highest number (668 out of 3,000). Machinery damage was at the root of more than a third of incidents globally (1,311), followed by collisions (222) and fires (178). The number of fires rose by almost 10 per cent.
It would seem inevitable that losses and casualties will climb this year. The shipping industry has been affected on multiple fronts by Russia’s invasion of Ukraine, with the loss of life and vessels in the Black Sea, disruption to trade, and the growing burden of sanctions. The industry also faces challenges to its day-to-day operations, with knock-on effects for crew, the cost and availability of bunker fuel, and the potential for growing cyber risks, said the report.
Said Mr Heinrich: “The evolving range of sanctions against Russian interests presents a sizeable challenge. It can be difficult to establish the ultimate owner of a vessel, cargo or counterparty. Sanctions also apply to various parts of the transport supply chain, including banking and insurance, as well as maritime support services, which makes compliance more complex.”
In other words, marine insurers will now have to be very careful about not selling insurance to Russian shipowners.”
A prolonged war is likely to have deeper consequences, “potentially reshaping global trade in energy and other commodities”. For many, that would seem to be a silver lining, a move towards decarbonisation. However, insurers are in the business of being professional pessimists. You don’t need to be a pessimist to see dark clouds on the horizon right now, but that should not detract from the conclusion that shipping has generally become much safer over recent years. |
