By Niklas Bengtsson, General Manager of Marine – Scandinavia

The maritime sector faces some big challenges. The COVID-19 pandemic will dampen global trade and reshape supply chains, potentially creating new risks and larger accumulations for the cargo market. Even before the pandemic, the industry’s risk profile was being altered by the trend for larger vessels, a growing reliance on technology alongside measures to address climate change.

With such challenges ahead, a strong and stable insurance market will be essential. Marine underwriters will also need to be flexible and innovative if they are to respond to the rapidly changing needs of ship owners, operators and cargo interests.

The COVID-19 Effect

As an essential service, maritime trade has continued throughout the pandemic. Yet, COVID-19 has had an impact on the sector, from the slump in the price of oil to the ability to change crews and carry out repairs and maintenance. Of more immediate significance for insurers, the economic fallout of COVID-19 has hit global trade – the WTO estimated that trade fell 18.5% in the second quarter of 2020 – a trend that will most likely lead to a reduction in cargo premium.

The coronavirus outbreak has also affected global supply chains, disrupting manufacturing output and causing delays to cargo in transit. Longer term, moves to improve business resilience could see companies hold more stock in storage and warehouses. This might prove challenging for insurers where accumulations of cargo exposures are already a key driver for losses.

Larger Losses from Larger Accumulations

Exposure accumulation is one of the biggest issues for the marine insurance industry today. Hull and cargo insurers are experiencing larger losses with growing frequency, driven by increases in the size of vessels and higher concentrations of cargo in warehouses, ports and in transit. The cargo and hull industries, for example, have seen a marked escalation in large losses in recent years, in particular from fires breaking out in on-board containers or at static storage locations, and extreme weather events in the US and Europe.

The explosion at Beirut port in August is the latest example of an accumulation event– analysis by Guy Carpenter estimates the hull, cargo and port insured loss to be around $250m. However, the 2015 explosion at the Chinese port of Tianjin, as well as the major US hurricanes in the past decade have caused even larger losses for the marine insurance industry. These growing concentrations of cargo values are difficult for underwriters to assess, and are currently not adequately reflected in pricing.

Next Steps for Containership Fires

Another area where insurers have experienced significant losses has been with fires on large containerships, including the Yantian Express, APL Vancouver and Grande America, which all occurred in 2019. In recent years, insurers have highlighted this important safety issue, and IUMI recently submitted proposals to the IMO, requesting changes to SOLAS regulations to improve firefighting capabilities on board large containerships.

However, the problem of containership fires will not be solved by regulation alone. Improved firefighting capabilities will help, but the shipping industry and insurers must work together to address the root cause of containership fires, that of misdeclared cargo. More and more hazardous products are being shipped in containers – calcium hypochlorite, lithium batteries and charcoal are all suspected of having caused fires in recent years – yet too often cargo is incorrectly-declared and wrongly stowed.

What’s on the Horizon?

We see climate change and cyber as important drivers of risk in the maritime sector in coming years. The growing use of technology brings opportunities to mitigate risks and improve safety, but it also can have unintended consequences. Human error linked to an overreliance on electronic navigation has emerged as a significant cause of claims for insurers, while ransomware attacks and spoofing incidents highlight the growing cyber threat for ports, shipping and logistics companies.

Environmental regulation continues to have a growing impact on marine insurance. IMO 2020, which limits sulphur emissions from ships, has led ship owners to use low sulphur blended fuels or fit scrubbers to clean vessel exhaust fumes at source. The change is likely to cause an increase in machinery damage claims as low sulphur fuels carry an increased risk of catalytic fines, which can clog filters and centrifuges, as well as damage other essential equipment. Teething problems with scrubbers have also led to claims, with fires during retrofitting and flooding caused by acid corrosion.

IMO 2020 is just the beginning. Even tougher emissions rules are on the horizon. The IMO is calling on the industry to cut carbon emissions by at least 40% by 2030, and all greenhouse gas emissions by at least 50% by 2050. While COVID-19 is currently dominating the agenda, the shipping industry will need to increase its investment in green forms of propulsion and vessel designs, suggesting a significant period of technical innovation is likely to emerge in the next decade.

Flexible Yet Reliable

A likely consequence of the pandemic is that cargo customers will demand broader cover from insurers, in particular to help mitigate the impact of COVID-19 related risks. Growing accumulations of cargo exposure and the increased reliance on technology will also both have implications for exposures and the types of cover sought by customers.

If the insurance industry is to support the shipping industry in the months and years ahead, it will need a sound footing. At present, the marine insurance industry has a problem with profitability. Despite growth in seaborne trade, global marine insurance premiums have not kept pace, and are lagging behind the increase in exposure from larger vessels, bigger ports and higher cargo values and accumulations.

Insurers are under intense pressure from stakeholders to produce underwriting profits, and we have seen capacity contract in major markets like London, where some insurers have withdrawn from marine lines. A healthy insurance market is essential for customers because a strong insurance industry is better able to respond to their needs. Rates are now increasing, but they have yet to reach levels that will compensate for the growing numbers of large claims, while the industry has yet to solve the problem of how to assess and price for accumulation.

HDI Global Speciality SE is a long-term player in the marine insurance market, backed by a team of industry experts with a vast specialist sector knowledge. We are a strong and reliable insurance partner that listens to clients and responds to their needs with tailor-made solutions. HDI Global Specialty SE remains committed to the maritime industry and ready to take on the challenging times ahead.

We take a flexible and problem-solving approach in Marine underwriting. Our specialist team is experienced in providing insurance cover for a range of risks.