Introduction

As the size of cargo ships continues to increase, so does the concentration of value on a single vessel, which raises many issues for the insurance industry.

The marine cargo industry is seeing some of the largest ships ever built being deployed on the world’s trade lanes – ships that can transport in excess of 18,000 20-foot containers – and it is possible that even bigger ships will replace these giants within the next several years.

The efficiency gains, and particularly the cost savings, due to the accumulation of tonnage on board these ‘super’ ships, which are the size of multiple football fields, have to be balanced against the risks, however.

These vessels are becoming increasingly common on the Asia-to-Europe route, and the values involved are staggering, says Phil Skelton, UK-based Head of Transportation risk management at ACE.

The vessel values for these ships can be upward of $120 million to $180 million, says Skelton, and that does not include the cost of each container (about $2,500), bunker fuel (valued at about $1.5 million), and approximately $250,000 in diesel fuel.

But such values, while large, are often dwarfed by the total value of the contents in those containers. Indeed, the value of a single container, depending on its contents, could be in the millions, says Skelton.

Thus, a vessel valued at $120 million, loaded with 14,000 containers of high-tech consumer goods from Asia, could have an estimated cargo value of $1.12 billion. “Those are the sort of values the insurance market has to underwrite,” says Skelton.

• $180m Upper vessel value of a ‘super’ ship
• $2.5k Approximate cost of each cargo container
• $1.1bn Possible total cargo value of a vessel

The high values involved have created coverage issues for the shipowner’s liability insurance and the individual shipper’s cargo insurance. For instance, an individual shipper’s cargo value, due to unplanned accumulations of containers, may exceed the insurance limit per ship should an incident occur during the voyage.

What's in the box?

One concern for shipowners and insurers is that they don’t always know the exact contents of a ship’s cargo at any given time. “The contents of a shipping container can be as benign as food, toys or clothing, or as lethal as toxic chemicals or fuels, which could have devastating effects on the environment if the container became lost at sea. But we only know when there is a disaster,” Skelton says.

The contents of a shipping container can be as lethal as toxic chemicals or fuels.

Also, the odds of having containers on board with undeclared dangerous goods, or goods that are not safely stored, are much higher on larger ships. Some shippers misdeclare dangerous cargo to garner cheaper freight rates from carriers.

Should an accident occur, the rogue containers put all the containers on the ship at risk and the accumulated loss potential for the shipowner and the individual exporters is substantial. Such was the case with the M/V Rena, which ran aground off the Bay of Plenty in New Zealand in October 2011. Investigations into the incident reportedly found 21 containers with dangerous goods that were not originally declared by shippers on the ship’s manifest.

And shippers sometimes forget that there is still an element of danger in shipping goods by container, even if all protocols are followed, notes Skelton. For example, a shipper could be transporting fairly innocuous cargo and have made all the declarations, but the container could be stowed next to another unit carrying mis-declared, highly flammable swimming pool chemicals. “You could be unlucky because the ship you use could have been overloaded over the years, and breaks up, or catches fire because of dangerous goods being mis-declared. Using containers is still risky,” says Skelton.

Shippers should try to limit their exposures on any single ship, Skelton advises, and spread their risk across several ships, if possible. “There is no real means of mitigating the risk, but it is still important to be aware of it. And it does help if you can split shipments up,” he says.

Spreading the Risks

Overweight containers on deck were a contributing cause in the cracking of the hull of the MSC Napoli in severe weather in the English Channel in January 2007, eventually leading to the vessel’s demise.

Salvaging the containers from a ship that has run aground is fraught with challenges. “The problem is aggravated when the ship lists after going aground – this presentsan incredibly dangerous operation getting the containers connected to a crane. The bigger the list, the more complex it becomes,” adds Skelton.

Salvage operations following accidents come at tremendous expense. The figure quoted for the MSC Napoli salvage was between $300 million and $400 million.

“It is therefore important for companies to have some idea of the possible accumulation of shipments on a particular vessel, as they will have a limit on their policy,” says London-based Peter Seymour, Executive Vice President of Global Marine at ACE. “If there’s a $5 million limit on the policy and the average values per container are $200,000, it may seem that there’s adequate cover. But if a forwarder decides to accumulate cargo on a vessel, the overall value of the containers might then well exceed $5 million. So agreeing upon realistic limits is very important,” says Seymour.

“The nirvana for all of us would be real-time access to all our exposures,” says Seymour. “At present, one can access websites to see where vessels are anywhere in the world. The next stage will be to know what is onboard those vessels.”

Companies should have some idea of the possible accumulation of shipments on a particular vessel, as they will have a limit on their policy.

A unified software system to identify where insureds have big exposures onboard does not yet exist, but it would enable shipping companies, insurers and cargo owners to understand where the hot points are in terms of potential accumulation. Individual companies have made significant progress in this area, and the next logical development would be real-time access for multiple users, who would then need the capability to manage the high volume of newly available data.

Mapping Your Supply Chain

Supply chain disruption is another significant risk for shipping companies. Disruptions can be caused by something as straightforward as a vessel becoming trapped on a container berth, to more complex issues like strikes by stevedores or truckers, piracy, port closures or a ship running aground.

Time differences between getting parts to a factory in time to deliver it to customers, or miss the delivery date, can sometimes be very small.

Any supply chain disruption can prove difficult, as illustrated by the case of the MSC Napoli, where a Volkswagen plant in South Africa was forced to close because spare parts loaded onboard the vessel were not available. “There have been several incidents where supply chains are so tight that if there is an accident or port congestion, companies experience severe business interruption,” says Skelton. “The time differences between getting parts to a warehouse or factory in time to make the finished product and deliver it to customers, or miss the delivery date, can sometimes be very small. Delays at sea can have a huge domino effect.”

When perishable, time- or temperature-sensitive cargoes are held up, the result can be a total loss on the cargo. In most cases, the shipper’s insurance will not cover pure delays in delivery, and third-party claims against the supplier company as a result of strikes and other politically motivated actions are also unlikely to be covered under standard insurance terms.

“Some companies don’t always understand the potential impact of an event, whether it be a natural catastrophe or otherwise. Those companies can often find later that they don’t have the coverage they thought or hoped they had,” says Seymour.

Knowing all Your Exposures

From a simplistic point of view, a property insurer is better positioned to assess a client’s exposure, but a marine underwriter is never quite sure where an insured’s products are, which makes things more difficult to underwrite, says Seymour.

Greater data availability will improve this position in the future, hopes Seymour, and insurers will be able to look at their insureds’ risk profiles to understand likely future exposures and provide the most appropriate cover.

Companies will find it easier to secure coverage for specific projects, where the exposures are easier to manage, because the itineraries and the cargo are known in detail upfront.

A run-of-the-mill exporter with goods insured on a yearly basis will have more difficulty finding the best coverage, however, because the insurer is uncertain when the goods are going to be shipped.

Whether importing or exporting, companies need to do their research, understand their risks and plan for worst-case scenarios, including the third-party claims and major reputational issues that can arise when supply chains are disrupted.

“To get the best possible insurance protection, companies need to provide as much transparent and detailed information as they can on their extended supply chains, including their suppliers, customers and travel routes,” says Seymour. “There are insurance solutions in different pockets and in different areas, but to really get the best from the insurance market all parties need to fully understand the risk to be insured.”

All content in this material is for general information purposes only. It does not constitute personal advice or a recommendation to any individual or business of any product or service. Please refer to the policy documentation for full terms and conditions.

ACE European Group Limited, registered in England & Wales number 1112892 with registered office at 100 Leadenhall Street, London EC3A 3BP. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Additional information can be found at www.acegroup.com/eu. Published 01/15. All rights reserved