From pirates to drugs to ultra-concentrated risks

Maritime insurers have had an interesting time of it in recent years, affected by a range of hazards that should make anyone (or any marine insurer) stop, pause and take stock.

Just some of the challenges have included piracy, hurricanes and cruise liners being accidentally wrecked by captains trying to impress female guests.

But as is the case all too often in insurance, it is not the risks you understand that are the real problem. Other hazards have started creeping into the sector in recent years—risks that are less familiar.

“The marine insurance market is at a critical point at the moment, because our business is increasingly influenced by external factors,” says Dieter Berg, president of the International Union of Marine Insurance (IUMI) and senior executive manager at Munich Re.

“This trend is leading away from classical underwriting with claims experience and exposure rating, to more external factors such as the rapid change in technological developments which are out there with our clients, not to mention the impact that the capital markets are having on our industry.

“The technology challenges facing the industry come from the increasing digitalisation in ships and logistics, which are both a threat and an opportunity. We will see new technologies like e-navigation or unmanned shipping with ship-to-ship and ship-to-shore communications, which involve high amounts of data flow and are vulnerable to hackers.

“So-called ‘intelligent’ containers, with sensors and temperature controls to allow cargo to be monitored, will have a strong impact on logistic processes.”

Cyber war at sea

As an example, Berg mentions an incident that took place in Antwerp in 2013, when a Netherlands-based trafficking group hid cocaine and heroin among legitimate cargoes, including timber and bananas shipped in containers from South America.

The organised crime group allegedly used hackers based in Belgium to infiltrate computer networks in at least two companies operating in the port of Antwerp. The breach allowed hackers to access secure data giving them the location and security details of containers, meaning the traffickers could send in lorry drivers to steal the cargo before the legitimate owner arrived.

Another challenge Berg mentions comes from the increasing size of container vessels. The biggest ships now being built are able to carry 19,000 containers (and there are orders to build ones that can carry 21,000).

These huge ships could potentially present structural problems, especially in rough seas, and also represent a substantial concentration of risk. If the ship can cost up to $200 million and the maximum cargo carried could be worth $800 to $900 million, that represents more than a $1 billion worth of insured risk.

In addition, Berg points out that these new ships require ports to be upgraded to deal with them. “Ports need big changes to berth these ships,” he says. “More dredging of the sea bed and harbour bottom, wider piers, more cranes, more places to store the larger numbers of containers and better transport infrastructure to get the containers out are needed. There are huge problems on the US West Coast at Los Angeles and Long Beach because of the amount of congestion.”

The more congestion at a port then the more time shipping containers might have to be stored there—which has its own risks. The incident in August at Tianjin in China, when a chemical warehouse explosion caused massive damage to the port, is a tragic example of this.

Old and new challenges

IUMI’s annual conference at Berlin this year will also look at two other hazards, one old and one new. The old challenge is piracy, which thanks to naval patrols and armed guards on board ships seems to be under control now off the coast of Somalia, a hotspot for this problem for several years, but Berg urges the industry not be too complacent about it.

According to the International Maritime Bureau (IMB), which has a piracy reporting section, during the second quarter of 2015 there was not a single incident off the coast of Somalia. However, the IMB’s latest global report reveals that a total of 134 incidents of piracy and armed robbery against ships were reported to the IMB Piracy Reporting Centre in the first six months of 2015; an increase on the 116 reports for the corresponding period in 2014. The majority of these incidents were in the Straits of Malacca.

The new challenge has been created by global climate change, which has resulted in the Northeast and Northwest passages opening up in the northern hemisphere summer. They are still not widely used—according to Berg there were just 53 transits of the polar routes in 2014—as the ice-free season lasts only from June to November every year and even then varies due to wind currents blowing the ice pack around.