11.09.2015
Magazine POSITIONEN

Hanging in the Balance

Whether it’s a giant container vessel or a luxury cruise liner: these steel mammoths on the world’s oceans are becoming bigger, more efficient and more expensive all the time. Today a single wreck can generate losses of up to a billion euros or more. The risks are growing at the same time, with pirates or cyber-attacks making the risks involved in sea voyages increasingly difficult to calculate for the insurance corporations. The industry needs a change of course.

Through his office window in Hamburg’s Grosse Elbstrasse Lars Lange can see the central problem for his industry at first hand. He has a clear view of the container giants which grow bigger every year and are finding it increasingly difficult to turn at the Tollerort terminal before they dock. He sees the luxury liners cruising past with up to 8,000 people on board. He sees the millions of containers which are loaded or discharged here every year, and of which nobody really knows what exactly they contain. For the 46-year-old these are not just ships and transport containers. They are risks.

Lange is General Secretary of the International Union of Maritime Insurance (IUMI), the international federation of transport insurers. His industry is currently experiencing choppy waters. Ever since the destruction of the “Deep Water Horizon” offshore drilling platform in 2010 and the spectacular capsizing of the “Costa Concordia” cruise liner in 2012 the risks involved in the twenty-first century’s high-tech shipping operations have also become clear to the layman, together with the astronomical costs that maritime disasters can generate. BP paid 18.7 billion dollars to clean up the consequences of the oil disaster in the Gulf of Mexico, and salvaging the “Costa Concordia” accounted for 1.5 billion euros – much more than the vessel had cost to build. In the final analysis it is the insurance corporations that have to stump up these record amounts. Are shipping operations threatening to become an incalculable risk?

“Any risk can be insured,” says Lange, adding: “Above all it’s a question of price, terms and risk assessment. Even amounts at the billion level can, in principle, be covered by insurance consortiums.” The precondition, however, is that we know exactly what we have insured and under what framework conditions. And this is often where the problem lies: many transport insurers are not sufficiently familiar with the risk, while the hull insurers are out of their depth when it comes to assessing voyages through Arctic waters or the risk represented by criminal attacks from the Internet. Changing this is part of Lange’s job.

Ships are getting bigger all the time

Five years after the shock wave generated by the global financial crisis the global economy has begun to grow again – and with it world trade. Since 2010 trade has increased by more than 3% year on year, and for 2016 and 2017 the International Monetary Fund (IMF) is forecasting growth of more than 5%. And because almost 90% of the world’s exports are transported by sea, pressure on the shipping companies is growing to transport more and more goods in a more and more efficient way. Because freight rates are low as a result of the excess supply of vessels and fuel prices are high, the trend is towards increasingly large but at the same time more economical vessels. This is a process with incalculable side effects – for the insurers, too.

Ten years ago container ships which could carry more than 8,000 standard containers (TEUs) were still regarded as giants. At the time the experts estimated that physical limits would be reached at around 10,000 TEUs. In August the “MSC Zoe” was christened in Hamburg. This current queen among ocean-going giants can carry more than 19,000 of the steel transport boxes, and the first vessels with the capacity to transport more than 21,000 TEUs are already on order.

For the hull and transport insurers these enormous vessels with their length of around 400 m represent risks of unprecedented dimensions. Although the number of total losses has been falling for years, the above-average costs per maritime accident have risen dramatically. “Such mega vessels carry an enormous accumulation of value”, states Dieter Berg, transport insurance expert at Munich Re, the Munich-based re-insurers.

As a typical calculation, he says that loads of smartphones and other high-tech products from the Far East will quickly add up to a goods value of 800 to 900 million dollars. If the value of the ship at 200 to 300 million dollars is added to this figure, the billion mark is quickly reached. To the present-day none of these monster vessels has experienced a major accident. “However,” says a Hamburg shipping surveyor who wishes to remain anonymous, “it isn’t the question of whether, but of when it will happen.”

“If a container vessel catches fire it is already more or less lost”

There have been plenty of warnings of what could happen. For example, in October 2011 the container freighter “Rena” ran aground on a reef off the coast of New Zealand. For weeks it wasn’t possible for the salvage vessel to approach the location of the accident. The containers had to be flown to the shore by means of a helicopter, and when the “Rena” broke up and sank three months after running aground, there were still hundreds of containers on board.

In July 2012 a part of the load of the “MSC Flaminia” caught fire for reasons which are still unknown. It took weeks to extinguish the fire and three members of the crew were killed. When salvage companies removed the last containers from the vessel six months later their contents were still smouldering. “If a container vessel catches fire it is already more or less lost. The containers are so tightly packed and stacked on top of one another that they make it very difficult for the extinguishing fluids to reach the fire,” says Uwe Schieder, transport insurance expert at the Federation of German Insurers (GDV). Extinguishing the cargo directly is almost impossible. “Instead an attempt has to be made to restrict the fire to a particular stack and prevent it from spreading. However, the fire-fighting equipment required for this purpose such as water cannons isn’t available.”

From damage to total loss

In June 2013 the 8,000-TEU “MOL Comfort” suddenly broke up and sank in the Arabian Sea. It was the largest container vessel which had ever been lost, and structural engineering experts are still not sure why it happened.

It is scenarios such as this one which give both shipping companies and insurers sleepless nights. A fire somewhere in the interior of a 20,000-TEU ship is impossible to get under control. Nowhere in the world is there a salvage crane big enough to unload a stricken giant on the high seas, and throughout Europe there is no dock which can repair damage below the waterline. As a result, any damage which on a smaller vessel could be contained quickly escalates into total loss. “The accumulated risk has multiplied by a factor of 10 in the past ten years,” states GDV expert Schieder. And this is happening on a market which is regarded as one of the most difficult of all. On average the hull insurers haven’t earned any money from their operations for over ten years now.

Entirely new threat as a result of digitalisation

In addition the shipping companies and insurers are faced with an entirely new threat as a result of digitalisation. Where loading lists are automatically read out or ships are steered by electronic nautical charts, interfaces open up to attacks by hackers. Criminals can hack into port management systems for the purpose of having entire container loads of expensive spirits, valuable cameras or luxury clothing loaded directly onto their own trucks. And even worse, terrorists could manipulate the steering systems of oceangoing giants. In the opinion of Allianz Global Corporate & Specialty (AGCS), the world’s biggest insurer of shipping, such risks are entirely credible. “A cyber-attack on the ship’s on-board technology, in particular its electronic navigation systems, could lead to a total loss”, comments Sven Gerhard, maritime insurance expert at AGCS.

In spite of these growing uncertainties, insuring worldwide goods flows remains an attractive business. What other area offers comparable stable growth prospects? In this highly competitive market those companies who are most familiar with the risks have a competitive edge. The more precisely you know what will need to be paid out in compensation if the worst comes to the worst, the lower your reserves of risk capital need to be. And the lower the capital costs are, the more favourably priced your policies can be. Knowledge becomes a significant competitive factor.

Because it normally takes years to agree uniform standards at the international level – the International Maritime Organization (IMO) which is responsible for this has 171 member nations – the insurers are, together with the shipping companies and industry, concentrating on achieving faster solutions. In particular this means analysing goods flows in order to identify in good time where major risks could arise. “We aim to support the shipping companies and not just to issue dire warnings”, says Munich-Re expert Berg, who is at the same time IUMI President. “We have to carry out the risk management operations together and minimise risks in advance, for example in fire protection. It is in our mutual interest to ensure that damage doesn’t occur in the first place.”

Shipping 4.0

The long-term goal of the insurance corporations is a kind of Shipping 4.0, in which the content of every container is recorded electronically and the information passed on to the shipping company, freight forwarders, insurers and the authorities. Every individual insurance company would then know for which part of the cargo it would have to provide compensation in the event of a shipwreck. “It is a major challenge to process the enormous volumes of data, but it’s also a tremendous opportunity which would be of significant benefit to our industry”, says Berg.

However, there’s still a long way to go before we get there. Even in the twenty-first century false declarations are made about the contents of containers – in order to avoid freight surcharges on hazardous goods, for example. Comprehensive checks are impossible because of the enormous volume of goods involved, and as a result even the captain of a ship often has no idea what he is actually carrying in the hold. Other problems are the need to sort out important issues relating to data protection, and the fact that there is no international standard for electronic freight documents. In addition, although it would today be technically possible to provide maintenance operations for ships online from anywhere in the world, regardless of the port in which the ship is located, the fact is that the necessary infrastructure is often not in place.

GDV launches the Internet-based ‘kumul-informations-service’ KIS

In addition it can’t be taken for granted that every port can offer Wi-Fi connections which will enable ships which dock there to transmit large data volumes to the shipping company. “In many places the communications facilities simply aren’t available”, states Christof Schwaner, spokesman for the Federation of German Shipping Companies (VDR). An important step towards improved risk management was the launch of the Internet-based ‘kumul-informations-service’ KIS by the GDV in 2013 (see Page 13). This system links geodata with insurance information and in this way enables the precise forecasting of accumulated risks. What will happen if the water level of the Rhine rises 2 m above the top of the dike? How seriously will individual insurers be affected if a hurricane hits Miami? “The information is all there, it only needs to be correlated”, says insurance lawyer Lange.

On the banks of the Oslofjord work on the next revolution has already started at the headquarters of the Norwegian-German classification company DNV GL. The “ReVolt” could be the maritime equivalent of the Google car: a 60 m long container vessel, driven by an electric engine – and entirely without a crew. The initial tests with a 3 m long model last summer proved highly promising. The ship steered itself and had no difficulty in navigating around any obstacles in its way. With its underwater lasers the “ReVolt” was even able to detect and avoid objects floating under the surface. “The necessary technical components are all already available”, comments Volker Bertram, project manager and expert for unmanned vessels at DNV GL in Hamburg, adding: “I estimate that such a ship could be operationally ready in 10 years at the earliest.” And then of course the insurers would be faced with entirely new issues.

Author: Claus Gorgs