7 Critical Risks Facing the Marine Industry

Onboard fires, cyber attacks and the risk that distracted captains will run vessels aground are all leading to increased cargo marine losses.
By: | January 7, 2019 • 5 min read

Dislocated insurance markets, aging cargo fleets and yacht losses that pile up by the hundreds when hurricanes strike are just some of the critical risks that assail the marine industry.

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Here are a few to keep an eye on in coming months and years.

1) Aging Fleets

Commercial insurance brokers need to pull out every maneuver at their disposal to find coverage for cargo fleets that in some cases are decades old and in need of replacement. Aging steamships and other vessels mean increased claims on hull programs, and higher premiums from increasingly skittish marine insurance markets.

2) Losses of Yachts in Hurricanes

The sloops, sail boats and yachts lost in Hurricanes Irma and Maria number in the hundreds. The Virgin Islands were particularly hit hard.

With so many boats lost, many of them of high value, several insurance markets have abandoned this space altogether.

3) Autonomous Vessels

Remote controlled and autonomous ships represent a sea change in how ocean-going vessels will be insured and risk managed. Experts interviewed by Risk & Insurance® for a March 2018 piece on this topic had a number of questions and concerns about this technology development. Rod Johnson, a director of marine risk management for RSA Global Risk, said he thinks the insurance industry is in denial about how rapidly its forms are becoming irrelevant in this rapidly changing environment.

Rod Johnson, director of marine risk management, RSA Global Risk

“The agreed uncertainty that underpins marine insurance is falling away, but we are pretending that it isn’t,” Johnson said. “The contractual framework is being made less relevant all the time.”

Rolls Royce is one of the major proponents and designers of autonomous sea vessels. The company tested a remote-controlled tug in Copenhagen in June, 2017. But how autonomous vehicles can be rescued and repaired while underway is a primary fear.

Given all the unknowns, Thomas Boudreau, head of specialty insurance for The Hartford, suggested remote ferry operations could be the most appropriate use.

“They travel fixed routes, all within one country’s waters,” he said.

Fully autonomous vessels are expected to be in commercial operation by 2025.

4) Trade Protectionism

While global merchandise trade is expected to remain strong in 2019, there are increasing concerns from cargo operators and insurers about the negative impacts of trade protectionism.

Sean Dalton, head of marine underwriting, North America, for Munich Reinsurance America Inc., and the IUMI Cargo Committee Chair, referred to the issue during an IUMI (International Union of Marine Insurance) meeting in Cape Town in September of 2018.

5) Underwriting Losses in Marine

The marine cargo market, according to IUMI, is the largest commercial marine line of business as measured by premium income. IUMI’s 2017 statistics showed global cargo premiums amounted to $16.1 billion, the marine insurance organization reported in a Sept. 19, 2018 press release. But for years, for a variety of reasons, the cargo line has been an unprofitable line of business. Loss ratios and expense ratios are rising, which is a concern for insurers.

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In a 2017 interview with Patrick Hickey, executive vice president, marine for Aspen Insurance, R&I questioned Hickey on the disturbing trend of higher marine losses, in particular, an increasing instance of vessel groundings.

“This is a very interesting, and disturbing trend, where human error is most likely the root cause,” Hickey said. “The question is what is driving it? I believe it is multi-faceted; however, there is evidence that we have become overly dependent on electronic navigation and enhanced technology to make decisions for us. Accordingly, we are losing critical human interaction and judgment to avoid these incidents,” Hickey said.

Given the size of container ships, Munich Reinsurance America’s Dalton also pointed to container ship fires as a disturbing loss trend. “The fire on board Maersk Honam, which tragically killed five crew members, is the most recent example of this issue and the loss is likely to generate the largest general average claim in history,” Dalton said.

6) CATS and other Outliers

There may be no more perfect example of a perfect storm for marine and cargo underwriters than the explosion at the port of Tianjin in 2016. But Hurricanes Harvey, Irma and Maria all caused large cargo losses.

Pat Hickey, EVP, head of U.S. marine, Aspen Insurance

“Tianjin was perhaps the perfect storm,” Aspen’s Hickey said in 2017. “However, we need to consider the underlying exposures and regulations that could contribute to a future event. The vast increase in the size of cargo vessels quickly translates to a greater exposure per vessel and significantly greater exposure at port facilities,” he said.

“While steamship lines and ports do an exceptional job of quickly and safely moving freight, a relatively simple error of misdeclared cargo (e.g. hazardous materials) could end up causing a catastrophic loss. It would be naive for us to suggest that ports operating 24/7 with increase accumulation exposure are not at risk,” Hickey said.

Insured losses from the Tianjin explosion were estimate by Swiss Re and others at some $3.3 billion.

7) Cyber Threats

In an August 2016 article in Risk & Insurance, freelance writer and editor Gregory DL Morris reported on the slow uptake of cyber insurance by marine risk managers. Although a future that would include autonomous vessels is being contemplated, and electronic navigation, for better or worse, is increasingly used by oceangoing vessels, cyber coverage is lagging. That, despite the risk that a hacker taking control of a massive marine vessel, say a tanker loaded to the gills with flammable substances, is a dreaded fear.

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“So far the consensus has been that a marine underwriter can understand cyber more easily, and add that to the policy form, than a cyber underwriter can understand the marine industry,” said Christine Marciano, president of boutique brokerage Cyber Data Risk Managers.

For Andreas Schlayer, a senior cyber underwriter for Munich Re, there is little material difference between a hack and a malfunction in terms of potential P&C losses.

That being said, the risk is real and any cyber losses at sea could well be under-reported, experts said.

“There have not been a huge number of instances or losses,” Marciano said.

“Physical losses from cyber perils may be happening more than we know and just not reported,” she said. “Marine companies are not obligated to report.”

They may not be, yet. But the losses that are bedeviling marine cargo underwriters need to be addressed.  If that means more transparency on the risks of autonomous vessels and cyber losses at sea, then so be it. There is too much risk out there to digest, otherwise. &

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

Risk Matrix: Presented by Liberty Mutual Insurance

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The R&I Editorial Team can be reached at [email protected]