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Container Shipping

A Sea Change in Risk

Consolidation and related coverage issues have marine risk managers and underwriters scrambling.
By: | March 3, 2017 • 6 min read

It all seemed to happen in a heartbeat: A struggling industry went from bad to worse as one of its largest members filed for bankruptcy. Panic set in among Hanjin Shipping Co.’s customers over goods stranded at sea and litigation lawyers began lining global ports to pick up the pieces.

Suddenly, the risks posed to container shipping by overcapacity, low profitability, and volatile or inadequate pricing crystalized. What, asked other ocean shippers, did this mean for us?

Jim Blaeser pulled no punches when answering that question. In a study in February of last year, his New York employer AlixPartners warned that piecemeal cost-cutting, vessel-idling or slow-steaming in maritime container shipping would do little to curb overcapacity and stem falling profitability and precarious cash flow.

Jim Blaeser, vice president, AlixPartners

In fact, said the company VP, things would likely only get worse unless industry embraced a major alternative: consolidation.

Was AlixPartners’ prediction borne out? Well partly, said Blaeser. “The first three quarters were dismal as we called out; the fourth quarter when results are published in full by the companies should be considerably better. But I think the jury is out on whether carriers will be able to ride that wave into 2017.”

Blaeser said the idea that higher rates sustained into the Chinese New Year will chase the industry’s blues away were “wishful thinking.”

At the same time, Blaeser said, consolidation will place more and different demands on risk managers.

As fewer operators like Maersk and MSC control more capacity, “you’ll need to have a much stronger global reach for corporate control and command to ensure that your risks are understood and that they’re appropriately mitigated.”

By definition, the focus as a risk manager shifts “from your own backyard to a global field of play,” he said.

Consolidate, Communicate … Convert?

Where that field of play looms particularly large is information.

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“Ocean freight information is just terrible across the board,” said Blaeser. That stems in part from merger integration of companies with “three, four, five systems handling different pieces of information,” such as for truck, terminal and vessel operations.

“I would argue that, as consolidation takes root and there are fewer carriers, inherently information has to get better,” Blaeser said. That may happen as rates improve and companies spend more on effective software information management tools.

Rick Roberts, director of risk management at Connecticut’s Ensign-Bickford Industries (EBI), is sufficiently alarmed by this and other news to have begun reviewing his policies and risk management strategies.

But it’s not just the risk posed by overcapacity, it’s the risk of consolidation itself.

EBI transports hazardous military goods to Europe and pet food to South America. Insufficient information and possible changes in global routes as companies merge their respective customer bases, for example, give him pause.

“I see we’re going to have some issues where routes are changing and how long it could take for our products to get places. Maybe it used to take 10 days to two weeks and now maybe it takes a month.”

For his part, Ali Rizvi, senior vice president at Marsh in Houston, said the three biggest challenges shippers face are fuel, crew and ship management. Consolidation obviously allows merged companies to use crew more efficiently and renegotiate bunker fuels, while economies of scale present opportunities for more efficient operations overall.

Ali Rizvi, senior vice president, Marsh

“But does it solve the problem of overcapacity? We don’t think so,” said Rizvi.

What may help is for the number of relatively newer ships that are scrapped each year to continue or even increase. Another crucial step will be to effectively manage both the skill sets and “culture capital” among combined crew and ship management that can be disturbed or disappear outright when companies merge.

“If you’re merging two shipping companies you want to make sure that their respective HR groups have a synergy and understand each other, put together one team that understands the needs of each of their vessels, their routes, their customers and the ports they call in,” he said.

Rizvi said some companies might consider another option: conversion from cargo to other lines of business. Shipyards, for example, said Rizvi, can’t build cruise ships quickly enough to meet demand. Very different from cargo, of course, but if it makes economic sense, why not?

Another opportunity is conversion to LNG, which is expected to thrive over the next several years with rising demand in clean energy resources.

Bigger Ships, More Complex Cargo

But the issue for Joe Sheridan is what happens if more companies like Hanjin go under, specifically claims being filed for warehouse forwarding charges to pay for discharge of cargo at dockside, temporary warehousing and a replacement vessel to get cargo to its original destination.

“That’s where the claims are really going to come into play,” said the marine specialist at Lockton cargo and logistics. How insurance policies are written will be critical to how well container shippers fare going forward, he said.

Some underwriters, for example, attach sublimits to liabilities for a single occurrence. A bigger issue, said Rizvi and Sheridan, is the stipulation in some policies that each bill of lading be insured separately, in which case multiple deductibles would apply in exigent circumstances.

Continued reliance on megaships with their massive cargo loads and numerous clients poses an obvious challenge here, said Sheridan.

“If you go out and put a $10 million limit on one cargo account and a $20 million limit on another, you don’t know how many cargo accounts you have exposure to on one vessel because these ships are so big. There’s no way they can determine that.”

Bottom line, there’s an array of marine cargo insurance policies out there written along a broad spectrum of terms and conditions and it will be up to individual underwriters to determine how  language changes or stays the same going forward.

Some underwriters and clients weren’t really hit very hard after Hanjin went under while others were, said Sheridan. But changes are definitely afoot.

“They’re asking, ‘Is this something that could happen again?’ I’ve been in this business for over 20 years and I’ve never seen anything happen of this scale and magnitude. Our argument is that shippers should take a hard look at these policies before these things happen.”

Still at Sea Over Low Demand

Blaeser was happy to see consolidation continue apace since his company’s report a year ago, notably the joint announcement that Mitsui O.S.K. Lines, Nippon Yusen and Kawasaki Kisen Kaisha are merging their container shipping businesses this July to begin operations in April 2018.

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Overall, the industry will enjoy stable business from higher, compensatory freight rates as fewer hands control the capacity side, said Blaeser, while “the benefits to the manufacturers and retailers that rely on their services will be decreased volatility and more reliability in terms of services.”

“But with consolidation we’re still not out of the woods,” Blaeser added. “If fewer hands don’t manage the global fleet in a tighter manner, then those benefits won’t happen.”

Non-market forces, too, “have weighed on the market to the detriment of the ocean carrier business,” said Blaeser. Governments, in particular Asian governments, have backed companies unable to make it on their own — neglecting one crucial economic factor: global demand.

“If governments, be they American or European or wherever, reverse track on their trading policies then that will inevitably hit demand ferociously,” Blaeser said. “Where demand might be threatened, the industry absolutely has to take it seriously.” &

David Godkin is a freelance magazine writer based in Toronto. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]