The marine cargo market is faced with soft conditions in insurance, but harder conditions at sea. Marc Jones writes

Seaborne trade now accounts for more than US$4 trillion worth of goods every year, according to the World Shipping Council. Despite this healthy number, it’s not all good news for the marine insurance market.

A softening market is one of the challenges the market is currently faced with. In fact the International Union of Marine Insurance says global marine premiums fell by 1.7 per cent last year, dropping from US$34.8 billion in 2012 to US$34.2 billion.

“The marine cargo market is still extremely soft,” Stephen Harris, senior vice-president of marine practice at Marsh UK says. “Capacity is still very high in certain markets such as London and the Asian markets. Attempts at raising premiums are not working. Underwriters are therefore looking at new developments and new areas, such as Arctic transit routes, to bolster their premium income.”

Harris points out that there has been a great deal of interest in the opening up of the Arctic to shipping – but that such interest might be a little premature. Although there has been a decline in the amount of sea ice in the summer months in the region, the fabled North West Passage along the top of Canada is not yet viable, with just one commercial vessel, the Nordic Orion, having successfully navigated the full passage so far - and that was over a year ago.

The Northern Sea Route (also known as the North East Passage, along the Northern coast of Russia) has seen more traffic. “According to the figures released by the Northern Sea Route Administration, in 2013 there were 71 transits,” Harris explains, “of which 46 were Russian and 25 were Western vessels.

“But this needs to be put into perspective – 2013 saw over 16,000 transits of the Suez Canal. There is a lot of excitement about the opening of the Arctic, because ship owners and cargo owners can see the savings in time and distance by going via the Arctic. But there are problems. The Northern Sea Route is only open in the Summer, most practically between August and November. It can be foggy there for up to 90 per cent of the time, even in Summer. There can be wild temperature fluctuations depending on where you are – it can be 25C in some areas and -40C in others. And it is very undeveloped; there are few settlements, so salvage or crew rescue would be difficult. In addition charts are patchy and suspect at times – and underwriters hate the unknown.”

The bulk of current traffic in the Northern Sea Route is mostly related to the oil and gas industries, according to Harris. However, he added that China is showing increasing interest in the route – particularly after its recent rapprochement with Russia, and the route may be one to watch moving forward.

IUMI is also concerned about the safety aspects of shipping around the North and
South Poles. It has been heavily involved with work on the Polar Code, which covers the full range of design, construction, equipment, operational training, search and rescue and environmental protection matters relevant to ships operating in the inhospitable waters surrounding the poles. The Code will become mandatory for SOLAS (Safety of Life At Sea) countries and is close to being finalised by the International Maritime Organisation.

Size matters

The ships themselves are changing. Cruise liners, container ships and tankers are continuing to grow in terms of size, as shipowners strive to reduce operating and shipping costs through greater economies of scale. One such example is the introduction in 2013 of the Maersk Triple E generation cargo ships (the ‘e’ refers to economy of scale, energy efficiency and environmentally-improved) which are the largest container vessels in the world, at 400 meters in length and carrying more than 18,000 teu.

According to Sean Woollerson, partner at the marine division of JLT, insuring these new, huge vessels is not a problem. “There’s enough capacity in the market to cover the increase in the size of these vessels,” he says. “The main concern is the sheer size of the container vessels, which can carry huge numbers of containers – it is not uncommon for the value of a cargo to exceed the value of a vessel but in the case of these large container vessels the cargo can be worth significantly more than the value of the vessel. The associated potential salvage and contributory general average costs associated with a large container vessel can be extremely expensive and complex to resolve, which...can lead to long delays in the production of final adjustments.”

While these vessels may be efficient, they are also so large that they cannot transit the Panama Canal and cannot even enter some ports. Although they can get through the Suez Canal, there are fears that should a major accident occur to one of these vessels in mid-transit, it might result in the Canal being blocked.
Such an incident almost happened in February 2013, when the Emma Maersk – a smaller but still very substantial ship – suffered severe flooding in its engine room whilst passing through the Suez Canal, eventually becoming unmanoeuvrable and having to be towed.

The extent of automation on the ships is another area of concern to the market. “The cyber threat is a hot topic at the moment,” Woollerson explains. “There’s a lot of automation in tonnage these days – lots of equipment for cargo monitoring, navigation, radar, and other aids for the crew. There are concerns that this makes them vulnerable to cyber attack – this might range from data breaches, to property damage from changing the ship’s speed to making the ship...immobile. This is a very complicated subject and the market is currently addressing it.”

In July this year, Marsh’s Global Marine Practice released a report that looked into the cyber attack issue. According to Marsh, while these attacks are not presently that common, they have the potential to be serious: “In June, 2011 hackers working with a drug smuggling gang infiltrated the computerised cargo tracking system of the Port of Antwerp to identify the shipping containers in which consignments of drugs had been hidden. The gang then drove the containers from the port, retrieved the
drugs and covered their tracks.” This continued for a two-year period, until it was stopped by joint action carried out by Belgium and Dutch police.

The computerised systems that the maritime sector now relies upon were designed to meet the needs of the 20th century, but are not equipped to meet the threats of the 21st century. “The vulnerabilities within these essential systems,” the Marsh report concludes, “present an open door and it is probably only a matter of time before an attacker walks through, with potentially devastating consequences.

“The Institute Cyber Attack Exclusion Clause (CL 380) 10/11/2003), or a variant of that clause, has appeared on marine policies for the past 10 years, excluding any loss, damage, or liability caused either directly or indirectly by the use of a computer and its associated systems and software ‘as a means of inflicting harm.’ While there appears to be no suggestion from the industry that this clause will be withdrawn any time soon, there are now a small number of major insurers that are prepared to consider offering significant underwriting capacity to cover the risks that have been excluded since 2003.”

In the meantime, the marine insurance market is still dealing with the more low-tech problem of piracy. In recent times, the problem with using the Suez Canal has been the infestation of pirates in the Western Indian Ocean, and in particular off the coast of Somalia. However, attacks in this region have diminished sharply in recent months.

“Somalia is now more stable politically,” Harris explains. “The government in Mogadishu now controls more land around it and that has had an impact on piracy, as indeed has the increased use of PMSCs (private maritime security companies) on board the vessels, along with greater adherence to BMP4 (Best Management Practice 4) advice on securing vessels better in those waters. The number of successful attacks in the area is greatly reduced these days.”

The same cannot be said for waters elsewhere. According to a recent report by Allianz, there has been a 700 per cent rise in the number of attacks in the waters around Indonesia, for instance. For the most part, these are opportunistic thefts, which the International Maritime Bureau (based in Malaysia) has classified as being piracy. The nature of these attacks has also changed, with more attempts to seize cargo – not ships or crew.

Most worrying, however, is the situation off the coast of Nigeria, where there is organised piracy. There it is again a matter of cargo seizure, primarily gas oil,” Harris explains. There is some doubt about the ability of local government forces ability to stop this, so remains the one of the greatest concerns for cargo underwriters at the moment, certainly as far as oil and gas shipments out of West Africa are concerned.


This article was published in the October/November 2014 issue of CIR Magazine.

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