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Bigger ships, Arctic routes, cyber threats raise stakes for marine insurers

Posted On: Apr. 12, 2015 12:00 AM CST

The worldwide shipping sector faces several growing risks despite total marine losses falling to a 10-year low.

Seventy-five large ships were lost worldwide in 2014, down 32% compared with 2013 and the lowest in 10 years, said a March report by Allianz Global Corporate & Speciality S.E., a unit of Allianz S.E.

Separately, the International Union of Marine Insurance in an April report said less than 0.1% of the tonnage of the world fleet of ships weighing at least 500 gross tonnes (551 U.S. tons) was a total loss last year.

But growing risks such as the increasing size of vessels, more navigation in Arctic waters and cyber attacks must be addressed, experts say.

Rahul Khanna, London-based global head of marine consulting at the Allianz unit, said a steady improvement in the quality of ships being built and a more proactive regulatory safety approach have helped reduce total losses to that 10-year low.

The International Maritime Organization, an agency of the United Nations, now has become more influential, and the shipping industry is learning lessons from accidents that have occurred, such as the loss of the cruise ship Costa Concordia in 2012, the industry's largest-ever insured loss, Mr. Khanna said.

More proactive regulators include the IMO, which last year adopted the Polar Code, which governs safety and environmental issues concerning shipping around the North and South poles, he said.

Increased “policing” of vessels also is improving safety, said Stephen J. Harris, senior vice president in the global marine practice at Marsh L.L.C. in London.

For example, he said, under the Paris Memorandum of Understanding on Port State Control, which covers 27 maritime administrations across European coastal states and the North Atlantic basin from North America to Europe, more than 18,000 safety and environmental inspections of ships in foreign ports take place each year.

Another regulatory effort, the Nairobi Convention on Wreck Removal, goes into effect April 14. Mr. Harris said the effort imposes strict liability on shipowners to remove wrecks and is likely to improve safety standards.

Still, the shipping industry faces several major risks.

The increasing size of container ships — the largest of which currently is the MSC Oscar, with a capacity of 19,224 20-foot equivalent units — poses a risk for the shipping industry as well as insurers, experts say.

Ships with capacity of up to 22,000 units will be in service by 2018, the Allianz report stated.

A single loss of a so-called megaship could have a catastrophic effect on insurers and rates, Zurich Insurance Group Ltd. said in a report last year.

The loss of a ship of that size and its cargo could result in an insured loss of about $1 billion, Mr. Khanna said. While such ships offer great economies of scale for shipowners, detailed risk assessments and mitigation efforts need to begin at the design stage, and crew training is essential, he said.

Increased navigation of the northern sea route through the Arctic, which the Allianz unit said grew from four in 2010 to 71 in 2013, also poses risks, experts say.

They include difficulty in getting assistance to stricken vessels in Arctic waters, the risk of pollution and complicated salvage efforts, Mr. Khanna said.

While the Polar Code is to be welcomed, he said, it must be “dynamic” to incorporate lessons as they are learned. Sanctions under the code, which will come into force in 2017, have yet to be detailed.

Shipowners also face political fallout from reputational risk should there be a pollution incident, Mr. Harris said.

Cyber attacks, which are a threat to many industries and governments, also are a threat for the shipping industry.

While there have been relatively few cyber-related losses in the shipping sector to date, the fact that about 90% of global trade is carried by sea means the potential risks are enormous, according to the Allianz report.

In addition, the shipping industry's awareness of cyber risk still is relatively low and needs to be addressed, Mr. Khanna said, since such risks could disrupt supply chains and economies.

Any disruption to systems used in the industry, such as electronic bills of lading tracking cargoes, could wreak havoc on global trade, Mr. Harris said. Currently, there are no meaningful loss statistics on cyber attacks in the marine industry and more “joined-up thinking” is needed, he said.