EVER GIVEN – One Year Later

TheEVER GIVEN shipping accident in the Suez Canal has far-reaching consequences for supply chains.

Not only are all the companies whose goods were in the 18,000 containers of the EVER GIVEN affected, but also those whose goods were transported by the 400 cargo ships that reached their destination only after a considerable delay due to the traffic jam.

The container ship MS EVER GIVEN ran aground in the Suez Canal a year ago. The delays in delivery caused by the accident are still noticeable today – and are also shaking up the insurance market.

This picture went around the world on 23 March 2021: The stranded giant freighter MS EVER GIVEN – with a length of almost 400 metres and a width of 60 metres, one of the largest container ships in the world – lies transversely in the Suez Canal, blocking one of the most important trade routes. Fully packed cargo ships are jammed in front of the canal entrance and forced to wait seven days to continue their journey.

The shipping accident in the Suez Canal has far-reaching consequences for supply chains. Not only are all the companies whose goods were in the 18,000 containers of the EVER GIVEN affected, but also those whose goods were transported by the 400 cargo ships that reached their destination only after a considerable delay due to the traffic jam. Ultimately, this also pushes transport insurance to its limits.

High-risk transport

On the busy sea route between Asia and Europe, cargo ships are usually loaded to their maximum capacity, which poses a safety risk for the crew and the cargo, especially in bad weather. For example, crosswinds can cause very large container ships like the EVER GIVEN to run aground on a sandbank in a narrow waterway. The ever-increasing size of cargo ships also increases the risk and makes salvage operations more difficult in the event of an accident.

Supply chain mess

Even before the blockade of the Suez Canal, industries were struggling with supply bottlenecks. Incidents like that of the EVER GIVEN are the last straw. There are dramatic interruptions in the supply chain or even a production standstill but any case delays. In Europe, the automotive, chemical and pharmaceutical industries were particularly affected by the Suez Canal disaster, as were large discount retailers that source their goods from Asia.

Transport insurance and its limits

In the area of classic goods transport insurance, damage, as well as additional costs incurred for goods that are directly on the affected means of transport, can be insured to a large extent. This also includes the so-called general average, which exists when the captain arranges for extraordinary expenses to be incurred to rescue the vessel from an immediate and common peril, such as the sea throwing of goods, the flooding of holds in the event of a fire, or tugging and dredging operations, as in the case of EVER GIVEN.

Especially in the case of general average, the insurance cover enables the goods on the damaged vessel to be released. Those who are not insured have to pay themselves – a not inconsiderable cost risk. In the case of the EVER GIVEN, claims payments in the high three-digit millions were made by the insurers and reinsurers.

The situation is different for goods on ships that are only indirectly affected by the time delay. The mere delay of the voyage does not trigger a claim under conventional transport insurance policies, and this is precisely what is now bringing a new insurance company onto the scene.

New insurance for trade disruption and its limits

To provide a solution for indirect risks such as travel delays, a so-called “Trade Disruption Insurance” (TDI) has been developed on the London market. Unlike traditional business interruption insurance, this parametric solution covers those costs, expenses and lost profits that result from events that do not cause physical damage.

To stay with the specific case of the shipping accident, the blockage of waterways can be chosen as the coverage trigger. If the insured event occurs, payment of the agreed limit (less the deductible taken) is made. In this way, losses caused by delays or non-arrival of goods can also be covered.

The new TDI insurance is designed for major loss scenarios and can be customised. It can also be extended, for example, to cover loss of earnings, contractual penalties, liquidated damages or other costs and expenses such as additional financing costs. It thus offers a comprehensive solution for a complex risk that is becoming ever higher due to global development.

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A risk management look beyond the horizon

Events can lead to business interruptions and production shutdowns without causing any property damage. This is a difficult risk management starting point, especially for insurance companies. 

Natural disasters, power outages or a pandemic – all these events can lead to business interruptions and production shutdowns without causing any property damage. This is a difficult risk management starting point, especially for insurance companies. 

A major fire. Parts of the buildings and production facilities are damaged or even destroyed. There is a business interruption. Sales cannot be generated, revenues cannot be earned, and the ongoing costs cannot be financed. Damage of this kind can quickly run into the two to three-digit millions. Traditional property and business interruption insurance offers suitable cover in such cases. It provides compensation for the property damage as well as for the ongoing costs and loss of earnings.
 
However, established insurance concepts are unsuitable if a production stoppage or business interruption occurs without prior property damage, for example, due to the ash cloud over Europe in March 2010 or due to a widespread power outage, i.e. a blackout.
 
Currently, the best-known event that has led to shutdowns and outages in many industries is Covid-19. This event is derived from a single cause and occurred almost simultaneously worldwide. From an actuarial point of view, a risk transfer via insurance solutions is currently not possible without government involvement.

Alternative coverage concepts

For other failure scenarios, so-called non-damage business interruption policies, or NDBI for short, offer insurance coverage. Examples include natural events such as extreme cold, which causes river routes to freeze over, or regional flooding, which impedes access to and departure from operating sites and thus interrupts necessary raw material deliveries.

Limits to risk transfer and risk management

Many companies want to insure themselves against all the uncertainties that can occur in their value or supply chain, including market risk and price fluctuations. However, this is where the insurance industry reaches its limits. As in traditional insurance, innovative risk transfer solutions such as NDBI must meet criteria such as randomness, uniqueness, estimability and independence.

Here is a brief insight into the small 1 x 1 of insurability:

 Randomness means that the risk is uncertain and uncontrollable when the contract is concluded. To eliminate moral hazards, uncertainty must be present in both contracting parties. Besides moral hazard, information asymmetry is one of the biggest challenges for the insurance market. Often, the insurer does not have the same level of knowledge about the circumstances that may lead to a loss and may impose limitations on the scope of coverage. Customised solutions based on weather events as triggers, offer the advantage of objective risk assessment here, as the data is often provided by an independent third-party provider, such as NASA, satellites or weather stations.
 
Uniqueness requires that all essential characteristics of the event as well as the obligation to perform must be definable. Any residual risks must be borne by the policyholder. For example, the values from a weather station may have to be extrapolated to cover a larger area or region. In this case, the damage presented may deviate from reality.
 
Estimability is the ability to determine the expected value and spread of the loss distribution to be insured (loss amount and probability of occurrence). Estimability is not sufficiently ensured if there is not enough meaningful data to be able to create an appropriate risk model. Otherwise, subjective risk assessments – but with an increased risk of error – can also be considered.
 
Independence ensures that the risk can be diversified for the insurer. This means that many risks that do not materialise in the same event must be insured in the risk community of the insured. The aim is to avoid accumulation risk, i.e. the probability of a simultaneous or staged occurrence of loss for many insured risks. In a global value chain where just-in-time delivery is required, a strong correlation of various events can be assumed. A disruption at a manufacturer of certain components in Asia can cause massive damage and interruptions in Europe and vice versa.
 
These basic principles essentially define the limits in risk transfer. The criteria for insurability do not necessarily have to be met in full; a level at which risk equalisation is sufficiently ensured is adequate.

4 Findings for the Insurance and Risk Management Industry

The key findings of various studies on the development of global insurance markets by Deloitte, Ernst & Young, A.M. Best Rating Agency and Swiss Re show that:
 
1. The pandemic has highlighted the relevance of the insurance industry as a financial relief for households, companies and governments in times of crisis.
2. Supply chain disruptions require better protection to make businesses and society more resilient.
3. Insurers must adapt to widespread change, become more agile, and develop new solutions and even more specific services.
4. Digitalisation accelerated by the pandemic will enable improved risk assessment through Big Data & Co as well as more transparent pricing in the future. Optimised processes will lead to efficiency gains and favour the development of new, more attractive products based on AI and Big Data.
 
Risk managers are also challenged to evaluate alternative solutions for risk transfer (e.g. in the form of an NDBI) to make decisions for targeted deployment. There are no standardised products or parameters for such solutions. Each contract is tailor-made and individual. Here, too, integrative networking of risk and insurance management is a recipe for success in supporting the company’s success in the long term.

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Rudolf Schiel

Practice Leader Property & Engineering

T +43 664 822 27 58

Zviadi Vardosanidze

Group Practice Leader Energy, Power and Mining

T +43 664 962 39 04

Disrupted supply chains and their consequences

Since the outbreak of the Corona pandemic two years ago, global supply chains congestion has threatened the existence of many companies.

Since the outbreak of the Corona pandemic two years ago, global supply chains congestion has threatened the existence of many companies. The supply bottlenecks extend across industries and products – from A for aluminium to Z for zippers.

Supply Chains Interruptions

Almost daily we read about interrupted supply chains, backlogs of orders, price increases for energy and raw materials, payment defaults and economic difficulties of companies. Many of these are pandemic-related after-effects and the war in Ukraine is fuelling the tense situation even further.

Since the outbreak of the Corona pandemic two years ago, global supply chain congestion has threatened the existence of many companies. The supply bottlenecks extend across industries and products – from A for aluminium to Z for zippers. Electronic parts and metals in particular, but also wood and packaging, are in short supply and more expensive due to the change in demand, and limited transport capacities are driving up prices even further.

„Supply Chain Risk” force field

What is striking about individual risks in the supply chain is that a general assessment is very difficult to estimate due to their possible “spillover effect” on other areas of the company.

Risks in the supply chain can be quite diverse. They can range from minor disruptions to the destruction of the entire chain. Minor problems – especially due to close business dependencies of the individual companies in the supply chain – can already cause considerable difficulties and trigger the well-known domino effect.

When financial strength is in short supply

What is striking about individual risks in the supply chain is that a general assessment is very difficult to estimate The current pandemic also shows that companies can get into a financial crisis or even become insolvent despite full order books. This predicament is caused by several special effects that – considered individually – could have been managed. These include delays in processing and invoicing orders, significant price increases in the procurement markets and longer delivery times. In addition, transport and logistics are sometimes subject to massive price increases and delays.

Sales activities, project processing and service business (especially in the project business) also suffer from the travel and quarantine regulations of the individual countries and further aggravating the situation. If price increases cannot be passed on to customers, or only partially, due to existing long-term contracts with buyers, the economic situation becomes even more acute.   

Full order books and yet insolvent

If the flow of goods falters or even comes to a standstill because missing materials or product parts interrupt the production, the spiral turns further downwards.

There is a lot of talk about back shoring or nearshoring production, but finding and implementing alternative sources of supply is difficult in the short term and usually expensive, plus many inputs cannot be sourced in the EU either. A supply chain disruption can be responsible for a massive loss of revenue if goods do not reach the customer on time or at all. Negative effects can include penalties, a possible loss of follow-up orders or the loss of key customers. In short, long-term disruption of supply chains can put a company under severe pressure and ultimately even lead to insolvency – both on the supplier side and the customer side.

Risk management through creditworthiness information

The risk management process of credit risks on the customer side can of course also be applied to the supplier side, although with increasingly long and complicated supply chains it is not always easy to know all risks sufficiently and to keep up to date.
 
Many companies use credit insurance to cover the debtor risk, whose core service is to check and monitor the creditworthiness of their buyers. But up-to-date information on financial stability is important not only on the debtor side but also on the supplier side.

Conclusion

In the face of pandemic supply difficulties, creditworthiness checks and monitoring should not be forgotten, from the supplier’s upstream supplier to the customer’s customer. All the more so when the supply chain encompasses all services – from creation to delivery of the finished product. So it’s not just the production process and the flow of trade that needs to be ensured, rather one of the key questions is: “How are my key suppliers doing financially?” The credit check provides the answer.

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Lisbeth Lorenz

Group Practice Leader Credit & Political Risk

T +43 5 04 04 280

A world loss event – EVER GIVEN

EVER GIVEN - A world loss event and its far-reaching consequences

The EVER GIVEN shipping disaster at the Suez Canal has affected the entire world economy. An analysis by Prof. Sebastian Kummer illustrates the damage in its entirety, sheds light on the effects on the supply chains and spans the arc to the war in Ukraine.

On 23 March 2021, the container ship EVER GIVEN rammed its bow into the eastern bank of the Suez Canal, blocking it until 29 March 2021. At 20,000 TEU (Twenty-foot Equivalent), the EVER GIVEN, which sails for the Taiwanese shipping company Evergreen, is almost as large as the largest container ships currently in service (24,000 TEU).

There were contradictory statements about the rescue for a long time. Egypt said that the ship would be freed quickly, other sources indicated that it could take longer. This contradiction is caused because one passage costs about 300,000 USD. The uncertain duration of the rescue led to more and more shipping companies diverting ships from Asia towards the Cape of Good Hope from 25 March 2021

How high are the losses caused by the blockade?

Allianz estimated the losses triggered by the blockade of the Suez Canal at up to 10 billion USD per week. This value seems too high, due to the relatively short blockage. The Suez Canal Authority, on the other hand, has estimated the direct costs for the parties involved at just over 1 billion USD. This amount seems too low, as it does not take into account the follow-up costs of the supply chains.
 
It is almost impossible to put an exact figure on the costs. However, a rough estimate shows the dimension of the problem as well as the diversity of costs.
 
The Suez Canal, and subsequently Egypt, have suffered high revenue losses due to the ships diverted because of the accident. In addition, the salvage of the EVER GIVEN also caused damage to the canal. The shipping company declared a general average in April 2021. The amount of compensation was not published but is estimated at around 500 million USD.
 
The delay also meant that intermediate products for production were missing, and other products could no longer be sold or could only be sold at a discount. These costs amount to between 250 and 400 million EUR. In total, the direct costs amount to at least 1 billion EUR.

The Direct Costs – 1 billion EUR

All shipping companies whose ships had to wait due to the disaster have incurred considerable additional costs. The charter costs of the largest container ships are currently around 100,000 USD per day – and even if the shipping companies own the ships, there are immense costs like bunker costs as well as loss of income. Furthermore, for a ship with 20,000 TEU, the rental costs of the containers per day amount to approx. 100,000 USD.
 
Roughly estimated, about 400 ships were affected by the accident, so the total costs per day due to waiting for time or diversions costs were about 50 to 100 million EUR. Furthermore, the traffic jams caused additional waiting times in the handling ports as well as delayed onward transport, for example, due to limited rail capacities in Europe. The costs listed above roughly add up to around 1 billion EUR

Major damage occurred mainly in the supply chains

Considering that 30% of the world’s container traffic was delayed, one can imagine the enormous economic impact. The International Chamber of Shipping (ICS) estimates that freight worth 3 billion USD passes through the waterways every day; other sources even speak of 9 billion USD. In seven days, that would be 21 to 63 billion USD.
 
Due to the wide variety of goods transported, it is difficult to estimate the actual damage. Delays for items such as wastepaper from Europe to Asia are rather unproblematic. It is a different story for electrical goods or even seasonal items that arrive late in shops or online sales. If individual supplier parts are missing, bicycles, washing machines or other consumer goods cannot be assembled. The automotive industry has stopped the production because of the chip shortage.
 
In a National Bureau of Economic Research working paper (2012), economists David Hummels and Georg Schaur estimated that each day of delay costs between 0.6% and 2.3% of the value of goods on board a given ship. Assuming this estimate for the EVER GIVEN, the cost is 18 to 69 million USD per day, which would be 126 to 483 million USD for seven days.
 
The 6.5-day blockade of the Suez Canal caused damages to the entire global economy of 2 to 2.5 billion EUR.

What environmental damage was caused by the blockade?

Maritime transport accounts for about 3% of global greenhouse gas emissions, and this figure is rising. The blockade of the Suez Canal and the resulting circumnavigation of the African Cape resulted in a much longer route with higher speed and consumption. In addition, the shipping companies tried to make up for the backlog in the following weeks and months by increasing the speed of their ships.
 
A 20,000 TEU container ship consumes 250 to 300 tonnes of heavy fuel oil, i. e. 200,000 litres per day. With seven additional days of sailing time and about 160 (of the 400 affected) ships that decided to take the diversions, a total of about 224 million litres of additional heavy fuel oil were consumed. Taking into account the additional consumption for increased speeds in the following months, this resulted in an additional consumption of 550 million litres of heavy fuel oil. The formula 3.16/litre heavy fuel oil thus results in additional emissions amounting to 1,738 million kg CO2.

Shipping alternatives?

Unfortunately, the accident hit maritime transport at a time of strained transport chains. In the short term, one could have tried to switch to container trains traveling from China to Europe via the Eurasian Land Bridge. But their capacities were limited.
 
In the course of the war in Ukraine, oil and gas deliveries from Russia are often discussed. It is forgotten that the existing railway connections of the Eurasian land bridge run through Russia. The Chinese have recognised the strategic dependence and are trying to develop a route south of Russia via Iran and Turkey as part of the Belt and Road Initiative.
 
Air freight – certainly an alternative for high-value goods – is also very busy. Even before the EVER GIVEN disaster, there were significant delays. Due to the current sanctions against Russia, the country has closed its airspace to airlines from the EU and many other countries. This shows how vulnerable individual modes of transport are and how important it is for international supply chains to have alternatives.
 
Shortage of delivery capacities with high delivery costs at the same time. Why?
International supply chains were already strained before the Suez Canal disaster due to the lack of containers and air freight capacity. If the closure had lasted longer than seven days, the effects would have been truly catastrophic. After all, around 12% of global trade or 30% of international containers pass through the Suez Canal.
 
The impact on freight costs was particularly great. Even before the accident, international container rates were at an unprecedented high. The succession of crisis lockdowns and/or production cuts – first in China and then in Europe and the USA – has led to a shortage of containers. Combined with unexpectedly high demand in the US and Europe, freight rates were three times higher than in normal times, and in the aftermath of the disaster, they even rose to 6 times the pre-Covid-19 level.
 
The price drivers continue to be a persistent container shortage, rising demand, Chinese terminal closures due to Covid-19, lower capacity at US ports, delayed handling at these ports and waiting times at US West Coast ports and Singapore, as well as problems in US hinterland traffic.

Outlook

One of the “lessons learned” from the Covid-19 crisis is that we need to strengthen the supply chain resilience and reduce the dependence on global suppliers. Even before EVER GIVEN, regionalisation of supply chains or at least “nearshoring”, i.e. sourcing from nearby countries, was discussed.
 
A huge problem is a shortage of and dependence on microchips from Asia, especially from Taiwan. In this context, the EU’s promotion of new chip factories in Europe is very welcome. Austria can consider itself lucky to have a lighthouse project with the Infineon factory in Villach, even though many chips are also flown here to Asia for final production.
 
Due to the short distance, the good skilled labour and the low wages, Ukraine was/is an excellent nearshoring country. There are some automotive suppliers there. But here too, the war is causing supply chains to break down. BMW in Steyr and Volkswagen already had to stop their production at the beginning of March 2022 due to a lack of cables from Ukraine.
 
In shipping, bottlenecks like the Suez and Panama Canal will not be eliminated so easily. In the case of the Panama Canal, the second set of locks has already been built to allow larger ships to pass through. Furthermore, there are various considerations to building parallel routes (e.g. through Nicaragua). However, the costs and the negative environmental impact are gigantic. Therefore, one is not aware of any consideration of parallel canals for the Suez Canal.

PHOTO: © S.J. de Waard / CC-BY-SA-4.0 (via Wikimedia Commons)

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Prof.-Dr.-Sebastian-Kummer

Prof. Dr. Sebastian Kummer

Director of the Institute of Transport Economics and Logistics, WU Vienna and Endowed Chair Professor, Jilin University, Changchun since 2001. Previously he worked at the TU Dresden (1996-2001) and WHU, Vallendar (1987-1996). Together with his team, he has carried out numerous successful research and practical projects for industrial and trading companies as well as for transport and logistics service providers. He has supported numerous transport and logistics tenders. His publication list comprises more than 200 publications, including leading textbooks. He became known to a wider public when he was stranded with his sailboat in the Aegean Sea due to Covid 19 restrictions.

Sell my clothes I’m going to heaven!

There are still companies that are apparently based on the famous saying of the poet K.W.J. Ferdinand Sauter (*1804, + 1854). Although they take care of their business properly, they do not take care of the contracts on which it is based. Apparently, Sauter had already had experience with customers in this regard, having worked for an insurance company for a number of years.

Sauter’s words were finally set to music for a well-known wine tavern song. And while we’re on the subject of songs, let’s add one more thing, a children’s song – modified to fit the topic: “Vallerie and vallera – contracts are there to be checked!”

But now specifically: The author of this article was recently shown by a south-east European freight forwarder – it could of course also have been an Austrian one – very proudly of the framework agreement he had created himself for orders from customers, with which the freight forwarder wanted to limit his liability as much as possible. But more on that later!

Freight forwarder or carrier: a small difference with a big impact

In most countries with a developed legal culture there is a clear terminological distinction between freight forwarder and carrier. To put it very simply: freight forwarders organise transports, carriers carry them out.

Freight forwarders usually have quite limited liability, while carriers have stricter liability with higher amounts. However, as far as liability is concerned, there are exceptions to this rule in some countries, e.g. Austria, whose UGB is quoted below:

  • Self-admission: § 412 reads: (1) Unless otherwise specified, the freight forwarder is authorised to carry out the transport of the goods himself. (2) If he makes use of this authority, he also has the rights and obligations of a carrier or shipper; he can demand the commission, the costs that otherwise regularly occur in forwarding transactions and the usual freight.
  • Fixed-cost forwarding: this is regulated in § 413 (1): If the forwarder has agreed with the consignor on a certain rate of transport costs, he exclusively has the rights and obligations of a freight forwarder. In such a case, he can only demand commissions if this has been specifically agreed.
  • Groupage forwarding: § 413 (2) determines: If the freight forwarder effects the shipment of the goods together with the goods of other consignors on the basis of a freight contract concluded for his account for a groupage, the provisions of paragraph 1 apply, even if an agreement on a certain rate of transport costs has not taken place. In this case, the freight forwarder can demand freight that is reasonable under the circumstances, but no more than the freight that is customary for the transport of the individual goods.

“Having the duties of a carrier” means, among other things: also, to be liable like a carrier in this case. To show the difference: A freight forwarder is generally liable – without going into details such as maximum amounts, waiver of liability in certain cases etc. – according to the General Austrian Forwarder Conditions with 1.09 EUR per lost kilogram of gross weight, but a freight forwarder according to Art 23 of the CMR usually with 8.33 SDR per kilogram gross weight, converted with about 10 EURO/kg. Being burdened with only about a tenth of the standard liability in the event of damage naturally makes it attractive for freight forwarders not to have to be treated like a freight forwarder in terms of liability.

Forwarder or carrier: a question of liability

What are the reasons why freight forwarders have the duties of a carrier in the aforementioned cases? In the case of § 412 UGB it is obvious: why should a forwarder who concludes a forwarding contract – but is not just a so-called “sofa forwarder” with a desk, laptop and telephone, but does not have his own vehicle fleet – but then himself carries out transport with its own vehicles, be treated differently than any other carrier?

In the case of so-called fixed-cost forwarding, the explanation is that a freight forwarder could be tempted to choose a good, inexpensive carrier, but not the best, who might also have higher freight rates. In the case of freight forwarding at fixed costs, the freight forwarder generally does not disclose his commission and is therefore tempted to focus on maximizing profits at the expense of the carrier’s quality. They may not have the latest equipment, not the best drivers, not the most modern technical equipment, not the best know-how about transport routes, guarded parking lots, etc., which means that damage can occur more easily. And because this increases the risk for the customer of the freight forwarder, he is also subject to stricter liability. Similar considerations apply to groupage shipping. In the case of consolidated loads, goods are also more likely to be damaged or lost, as experience has shown.

Back to the introductory remarks! The supposedly resourceful freight forwarder had created an “order document” which was entitled “transport order” and with which clients were to place orders with him. In the form itself it was pointed out that the contractor acts as a freight forwarder – also under commercial law – and acts on the basis of the general freight forwarder conditions of his association, but the text then referred to “freight payment”, “due date of freight” etc. Due to the text in the document, the conclusion of an “original freight contract” can be assumed. In this case, there is no need for a “detour” via self-employment, fixed-cost or groupage freight forwarding, since the CMR (“Convention on the Contract for the International Carriage of Goods by Road”) as an international treaty is mandatory for international road haulage. Article 1 of the same states: “This Convention applies to every contract for the carriage of goods by road for reward by means of vehicles…”. And Art. 41 CMR stipulates that an agreement may not be used to deviate directly or indirectly from this convention, otherwise it will be void and have no legal effect. It follows that in this case anyone who concludes a contract of carriage (also known as a transport contract or contract of carriage) by accepting a “transport order” (or similar) is liable under freight law. This also applies to freight forwarders.

The “resourceful” freight forwarder should have had his “order document” checked by a lawyer, or e.g. by a knowledgeable employee of GrECo. An insurance broker like GrECo, who runs “Transport” as a group practice, is of course able to advise customers on how to minimize liability risks and ultimately save on insurance premiums due to dealing with a large number of claims. It goes without saying that GrECo, if a claim does occur, supports the policyholder with expertise and accompanies him through the settlement of the claim in the best possible way. Experience is one of the most important assets that GrECo can offer, especially with internationality in transport , apart from excellent contacts to lawyers, average adjusters and experts whose involvement is often a necessity in the event of major claims.

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Otmar Tuma

Instructor Transportation & Logistics

Unfreezing the confidence in the future

Unfreezing the confidence in the future GrECo Group Specialist Risk Management Insurance

Over the past 20 years, spring frost events have become increasingly destructive to the fruit and berry production in the CEE region. We decided to take a closer look at this risk and briefly describe the current situation with insurance solutions for this risk for horticulture.

Frost can be different

Low temperatures below the critical frost tolerance level are among the most important causes of yield loss in fruit orchards. There are several phenomena of low temperatures, such as frost and freeze.

These terms are often used interchangeably but refer to two different weather events. The term freeze is normally used to describe an invasion of a large, very cold air mass. This event is commonly called an advective or wind-borne freeze. Wind speeds during an advective freeze are usually more than 8 km/h (5 mph) and an additional wind speed of 5 km/h results in an additional temperature drop of 1 degree. Clouds are commonly present during the event and the air is usually quite dry (low dew points). Freeze protection systems are usually of limited value during this type of severe freeze.

A radiational frost, also called a radiational freeze, typically occurs when winds are calm (usually 0 to 5 km/h) and skies are clear. Under such conditions, an inversion (i.e. deviation of temperatures in ground and upper height) may form because of rapid radiational cooling at the surface.

Most people think of frosts as frozen moisture on plant surfaces. However, there are two types of frosts: a hoar or black frost and a white frost. Visible frost (forms small crystals) occurs when atmospheric moisture freezes on plants and other surfaces. Dew (free water) forms when air temperature drops below the dew point temperature. If temperatures continue dropping on cold nights, this dew may freeze (forms frost) by sunrise. When the air temperature is below the freezing point of water, ice crystals rather than dew forms and the frost is called white frost.

The temperature at which this occurs is called the frost point. When the dew point temperature is below the freezing temperature of the air, neither frost nor dew forms. Such a condition is called black frost. The development of frost depends on the dew point or frost point of the air. And the drier the air, the lower the dew point.

Temperature distributions are uneven even on farm level

When it comes to temperatures, not all farming sites are equal, even when located in the same general area. There are numerous factors that can affect minimum temperatures during freeze events.

Chart. Example of different temperature distribution on vineyard. Data source

For example, temperature differences in hilly terrain are quite common on cold nights. As air near the surface is cooled on radiational frost nights, it becomes denser and flows downhill to lower areas where it collects.

Within a given area of a farming region, the most elevated sites tend to be the warmest during freeze events. The trees on northern slopes are much more and severely damaged by the extremely cold and dry winds during advective winter/spring freeze events. Soil characteristics can exert a microclimate effect.

Moreover, the experience has clearly shown that orchards may become active a little earlier in late winter on heavier, clay type soils and/or darker coloured soils (such as reds and blacks) than on lighter coloured, sandy soils. Although the latter tends to warm up faster, but they reflect more heat during the day (trap less heat) and lose it faster during the night.

Human-induced impacts can also be significant. For example, large areas of paved roads, such as interstate highways release substantial heat on cold nights, and this combined with heat released by vehicles and air currents created by traffic, can sometimes provide a beneficial effect to several rows of trees located close to such highways.

Damage to fruit & berry yields, caused by low temperatures

Damage to floral structures may take many forms. Frost on flowers or fruit does not kill the tissue, but it can scar the skin of the fruit and possibly damage the flesh. The internal freezing of tissue of buds, flowers and fruits is what causes serious damage or death of the floral parts. When small floral structures such as flowers or fruits freeze, they may take on several forms of damage. Severe temperatures usually destroy the entire buds, flowers or ovules (immature seed) and ovaries comprising small fruits resulting in rapid abscission of the structure.

Damages from freezes depend on the development stage of the fruit crop. For example, apple trees, during the dormancy period, partial damage of flower buds may be possible, if the air temperature drops to -25 ⁰C, complete damage, if the air temperature drops to -35 ⁰C. The warm December phenomena keeping trees still vegetating creates big trouble for further winter frost tolerance for some types of berries and fruit trees.

Chart. Trend, that witnesses the second half of December is getting warmer and warmer in the South-Eastern part of Poland. Data source: GrECo Group analysis

After resumption of the vegetation temperature at which ground frosts lead to partial damage to apple trees is much higher, e.g. at full blossom stage is -2.9 ⁰C leading to partial loss and -4.7 leading to full loss.

Generally, the crop sensitivity to freezing temperature increases from first bloom to small-fruit stages, and this is when a crop is most likely to be damaged. Sensitivity is also higher when warm weather has preceded a freeze night than if the cold temperatures preceded the freeze.

Insurance against spring frost

Risk prevention measures that lead to the heating of the orchard or vineyard environment (propane heaters, wind machines, irrigation above and below trees, smoke, helicopters, etc.) are sometimes not accessible to farmers in time or do not function properly or fully under certain weather conditions. Therefore, the insurance policy still remains the final frontier to compensate financial outcomes, when frost impact mitigation measures do not work in full.

On the other hand, despite the fact that the government subsidizes crop insurance, such protection tools for fruit and berry crops are not accessible for farmers in many CEE countries. It is explained merely by two main reasons. Firstly, insurers are very cautious about such types of farming, as underwriters and loss adjusters are not well experienced in this area, hence, more focused on more understandable and basic field crops. Secondly, historical big losses and several bad years in a row have made insurance companies to reconsider crop insurance conditions by imposing higher deductibles, increasing insurance rates and bringing stricter underwriting and loss adjustment criterion (e.g. covering only late spring frosts in May).

In our view, stronger public-private partnership in agriculture should be needed, such as, educational horticulture programmes for insurance companies, participation of the government in reinsurance schemes, creating greater product awareness in the market through rural associations, linking with other types of financial support, etc., to regain insurers’ confidence in underwriting this type of risk as a sustainable and profitable business in the long term. In its turn, it will make insurance products more accessible and affordable to the segment of horticulture.

Parametric insurance as an alternative frost risk transfer

The parametric (index) spring frost insurance is an innovative way to financially protect owners of orchards, vineyards and fruit/berry processors against the consequences of bad frost years. In most cases, the parametric policy is offered as the only possible way to cover the risk, which is non-insured by a standard crop insurance policy.

With parametric insurance against frost, the event is insured if the minimum temperature within the risk period is below a certain temperature.

As long as such a minimal temperature condition occurs, the farmer gets the specified amount of insurance indemnity depending on the value of the actual temperature.

Despite advantages of parametric solutions, such as transparency, less paperwork and simplicity of insurance compensations, the insurance market faces the big challenges of basis risk and availability of suitable weather data to insure frosts.

Basis risk in parametric (index) insurance means when the index measurements do not match an individual insured’s actual losses. There are two major sources of basis risk in index insurance. One source of basis risk stems from a poorly designed model and the other from geographical elements.

The good frost parametric model should be based on accurate on-site weather data and consider at least, the fruit/berry development stage and the right frost tolerance parameters for specific types and varieties of crops. Additional factors like windspeed, temperature dewpoint and warm preceding days can be also considered in order to enforce the model. However, regardless of the final perfect model, the basis risk cannot be eliminated.

Conclusion

Frost is a big challenge to the resilience of the horticulture supply chain. There are ways to mitigate partially its impact on yields and compensate financial losses thanks to crop and parametric insurance. On the other hand, a lot of work should be done by professional agricultural insurance experts to design the robust insurance scheme, suitable to the farmer’s and fruit/berry processor’s needs.

Used data sources:
Frzweather
Fao.org
Fao.org
Index Insurance Forum

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Maksym Shylov

Group Practice Leader
Food & Agriculture

T +48 22 39 33 211

GrECo Group sets course for the future

GrECo Group Specialist Insurance and Risk Management
  • Friedrich Neubrand retires from the Supervisory Board
  • Friedrich Neubrand jun. moves from the Executive Board to the Supervisory Board
  • Ante Banovac becomes new member of the Executive Board

The market leader in risk and insurance management in Austria and Eastern Europe is preparing a reorganisation in the Executive Board and Supervisory Board of GrECo International Holding AG.

Friedrich Neubrand, company founder and long-standing Chairman of the Supervisory Board, will retire from the Supervisory Board in mid-2023, to be succeeded by his son Friedrich Neubrand jun. Friedrich Neubrand is convinced “that with the strategic realignment we have set the course for a successful and independent future in full agreement with all stakeholders.”

Friedrich Neubrand jun. joined the family business in 1987 and has been a member of the Executive Board since 2005. He has been instrumental in driving the company’s international expansion into Central and Eastern Europe over the past decades. The GrECo Group is currently present in 18 markets in Eastern Europe. “My move to the Supervisory Board ensures that we as a family are represented on the Supervisory Board as well as on the Executive Board by my brother Georg.” emphasises Friedrich Neubrand jun.

Georg Winter, who has been a member of the Executive Board of GrECo International Holding AG for almost 10 years, will take over his responsibility for Sales & Account Management.

Ante Banovac joins the Board as the third member, alongside the long-standing Board members Georg Neubrand and Georg Winter. “I am pleased that with Ante Banovac we were able to fill a strategically important position from within our own ranks; he is an ideal addition to the Executive Board,” says KR Friedrich Neubrand. After several years in leading positions in the insurance industry, Ante Banovac joined GrECo in 2014. As a member of the Executive Committee in the area of Sales and Market Coordination, he has in particular shaped the establishment and further development of the markets internationally.

Friedrich Neubrand sums up: “I would like to thank all colleagues, clients and partners, as well as the Supervisory Board of GrECo for the great cooperation over the past decades. The time has now come for me to retire from the Supervisory Board. At almost 82 years of age and after an intense professional career, I will now focus on family matters and my hobbies.”

The necessary resolutions will be passed at the Annual General Meeting and the Supervisory Board meeting in June and subsequently implemented.

About GrECo

The GrECo Group offers its clients individual solutions in risk and insurance management and is the leading insurance broker & consultant for corporations, associations and authorities in CEE. GrECo was founded in 1925 and is an independent, family-owned company, with the family Neubrand holding 86.67% of the shares. The GrECo Group is headquartered in Vienna, Austria and employs more than 1,000 people in 60 offices. In 2020 the Group placed a premium volume of 871 million EUR and generated total consolidated revenues of 101 million EUR.

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Petra Steininger

Head of Group Communications

T +43 5 04 04 – 175

War in Ukraine and Cyber Insurance

Since the start of the war in Ukraine, fears of cyber-attacks due to parallel hybrid war are increasing. In this article we explain how the insurance industry is reacting and how the war clause affects conditions.

Is there an increased cyber threat from the war in Ukraine?

Officials like the German BSI are currently assuming an “increased threat level”. However, there is currently no immediate threat to information security in connection with the situation. However, there are already suspicions of individual cyber-attacks in connection with the war. The German wind turbine manufacturer Enercon, for example, was no longer able to carry out remote maintenance on its own systems. The reason for this was a disruption in the satellite network.

How are cyber insurers reacting?

Immediately after the outbreak of the war, our cyber specialists contacted cyber insurers in order to know their reaction. The general feedback was that the situation was being assessed and, especially in the area of critical infrastructure, that decisions will be taken with even more restrictions.

Does the war exclusion clause apply?

Cyber insurances usually have so-called war exclusion clauses, according to which damage caused by war or war-like events are not insured. The classic exclusion of war means that there is generally no coverage in the case of a targeted action by an attacking state using physical force.

If the cyber-attack is originated by so-called state sponsored hacker groups, there is no direct-targeted action by an attacking state, and therefore no war in the sense of the definition. In addition, Russia is at war with Ukraine and not with other countries, a point to be considered when insurance wordings are interpreted. Even if a cyber-attack on a company is directed by a state, this is still no official war action. It is the insurer who must provide evidence that the cyber-attack is originating from a state if he thinks that the exclusion is applicable. It will be very difficult for the insurer, however, to prove such a fact, because hackers usually do not announce that they are acting for a government.

How about the ransom payment?

Ransomware cases are currently the No. 1 cyber threat. Access to data or services is blocked and a ransom is demanded for activation. The ransom payment is generally insurable. If the blackmailers are Russian hacker groups, policyholders must expect that the insurers will not make any payment without a positive sanctions and compliance check. Due to the extensive sanctions against Russia, ransom payments to Russian hacker groups are usually subject to sanctions and insurance payments are therefore contractually and legally prohibited.

Summary

We are currently not observing cyber-attacks in connection with the war in Ukraine that would occur in Austria and Central and Eastern Europe. Cyber insurers still take responsibility for protecting this number one corporate risk. In our opinion, the traditional war exclusion would not apply in the event of an untargeted attack. Ransom payments might be subject to the sanctions and therefore forbidden.

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War in Ukraine and Cyber Insurance

Since the start of the war in Ukraine, fears of cyber-attacks due to parallel hybrid war are increasing. In this article we explain how the insurance industry is reacting and how the war clause affects conditions.

Read More …

Stephan Eberlein

Group Practice Leader Financial Lines

T +43 664 962 40 60

Terrorism and Political Violence Insurance

For many insurance buyers in Europe Terrorism and Political Violence Insurance remains a niche coverage, although it is often required by financing banks or investors.

A terrorist attack, strike, riot, civil commotion and other types of politically motivated unrest can directly and indirectly affect businesses and human lives. Modern day terrorism is multifaceted and constantly evolving in its nature. An insurance policy cannot save lives, but it can provide for financial remedy to business owners to help them restore damaged property and recover quickly, to minimize financial losses resulting from business interruption or loss of rent or loss of attraction.

For many insurance buyers in Europe Terrorism and Political Violence Insurance remains a niche coverage, although it is often required by financing banks or investors. Despite major events such as 9/11 or Paris attacks, markets have not really seen a significant uplift in demand or price. The approach has changed only a few days after the invasion of Ukraine. Many businesses are looking to buy the coverage and are prepared to purchase it at higher costs. Active war in Ukraine has forced the market to shrink, but it remains largely intact.

Insured interests and perils

Critical infrastructure assets, such as energy and communication, are typically considered high risk. But also, other industrial objects and commercial real estate are often targets of terrorist attacks. Needless to say, that the nature of the risk itself has evolved over the past few decades. Due to high interconnectivity of modern economies, significant financial losses can occur even without a physical damage.

Whilst terrorist attacks, including active assailant or “active shooter” events, are becoming less frequent in certain regions, politically motivated violence or unrest and war is currently on the rise. Such events can cause enormous damage to property and interruption to businesses. Strikes, riots, civil commotions and malicious damage caused by individuals or groups often result in destruction of property and looting. Business owners may even become liable to third parties if they fail or neglect to implement safety and protective measures to safeguard life and property of others which is an exposure insurable under terrorism liability, a line of insurance not widely known.

The policies are written on “named perils” basis, which means that specifically named perils or events are insured. The coverage is granted to specifically scheduled and named property and gross profit. It is recommended to purchase policies on “new for old” basis. Underwriters will require a policy limit, which acts as a Combined Single Limit for property damage and business interruption.

The following coverages are available either separately or as a package:

Critical infrastructure assets, such as energy and communication, are typically considered high risk. But also, other industrial objects and commercial real estate are often targets of terrorist attacks. Needless to say, that the nature of the risk itself has evolved over the past few decades. Due to high interconnectivity of modern economies, significant financial losses can occur even without a physical damage.

There are specific exclusions of course. The aim is to draw clear lines with other, conventional property damage and business interruption coverages and avoid overlaps. Herewith, few key exclusions:

Loss or damage arising from:

  • Nuclear, Chemical, Biological or Radiation contamination or release
  • Seizure, legal or illegal occupation of property, Confiscation, Nationalization, Requisition
  • Electronic attacks – Cyber Terrorism
  • War between any two or more of the following countries: China, France, the Russian Federation, the United Kingdom and the United States of America (“World War Exclusion”)
  • Direct or indirect threat or hoax.

Standard Coverage does not cover:

  • Land or Land Values
  • Power, transmission or feeder lines not on the Insured’s premises
  • Any building, structure, or property vacant or unoccupied or inoperative for more than thirty days
  • Aircraft or any other aerial device, or watercraft
  • Any land conveyance. including vehicles, locomotives or rolling stock, unless declared and solely located at the property insured herein at the time of its damage
  • Animals, plants and living things of all types
  • Property in transit

Extensions of coverage

In addition to the above-mentioned coverages, there are a number of coverage extensions available, such as:

  • Terrorism liability: covers financial costs incurred by an insured following claim made against them for the damages suffered by third parties or employees who are injured in a terrorist attack at an insured location;
  • Non-physical damage business interruption: unique solution, which addresses the resultant financial burden of terrorism attacks occurring within the surrounding areas of an insured property which do not result in actual physical damage at an insured location;
  • Active assailant / malicious attack: coverage developed to address violent attacks which do not meet the coverage trigger requirements under traditional Terrorism polices, i.e. political, religious or ideological motivation. Initially created to respond to the shooting events which occur within the United States but interest in the coverage has seen an increase in other parts of the world including Europe.

For risk analysis and policy check please contact GrECo Specialty

Risk analysis is very important to understand all possible scenarios in order to create a tailor-made solution. The aim is to minimize the impact of a loss event. We can help you to analyze what might happen after a terrorist attack, political unrest or war. Typically, Terrorism and Political Violence risks are excluded from Property & Construction policies although SRCC (Strike, Riots and Civil Commotion) coverage may be offered by insurers with a sub-limit. But those covers are often subject to a special right of contract termination by the insurer at any time.

We recommend conducting a policy check in order to identify and avoid coverage gaps.

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Zviadi Vardosanidze

Group Practice Leader Energy, Power and Mining

T +43 664 962 39 04

War in Ukraine – impact on insurance

In the event of war, insurance contracts generally continue to run until their natural expiry date, but coverage must be considered to be very limited, as losses directly or indirectly related to war events are excluded in almost all lines of business.

The war in Ukraine, which has been raging since February 24th, and the response of the Western world in the form of economic sanctions against Russia have so far had a drastic impact on the insurance industry. Insurance brokers who deal with risks located in Ukraine and Russia and whose clients include Russian legal entities or natural persons are therefore obliged to deal with these effects.

Insurance of risks in Ukraine

According to the insurance definition, the entire territory of Ukraine is to be classified as a war zone, and strict sanctions also apply to the territories of Crimea, Luhansk and Donetsk.

In the event of war, insurance contracts generally continue to run until their natural expiry date, but coverage must be considered to be very limited, as losses directly or indirectly related to war events are excluded in almost all lines of business. A grey area also arises in the case of losses that remain still covered, as obligations as a prerequisite for payment by the insurer cannot possibly be met. This will have to be assessed on a case-by-case basis.

Insurance companies outside Ukraine are not prepared to renew insurance contracts or write new business in view of the war situation and the associated imponderables for contract performance. Insurance companies based in Ukraine are currently operating in emergency mode and can only provide a very limited service. It must therefore be assumed that there will be great difficulties in providing proper insurance cover in Ukraine.

Insurance of risks in Russia

Russia itself is not a war zone, existing coverages and contracts are therefore in principle fully valid. However, Russia is affected by sanctions imposed by the UN, the EU, the USA and Great Britain, which include a ban on insurance services for certain persons, companies and entities as well as certain goods and productions (sectoral sanctions). These sanctions must be complied with by all citizens of the respective issuing states or communities of states under personal threat of punishment.

While it cannot be the task of the insurance broker to advise his clients on the sanctions associated with the delivery of goods or financial transactions, it is part of his service commitment to provide information on possibilities for insuring risks, insofar as these are legally permissible in the light of the sanctions, and to take appropriate measures to obtain insurance cover.

In addition to the sanctions briefly mentioned here, all Western insurers and reinsurers have now decided not to offer any new capacity to Russian insurers. The Russian Federation reacted to this at the beginning of this week and, for its part, has banned Russian insurers from cooperating with foreign partners – i.e. insurers and insurance brokers – from “unfriendly countries”, including all EU members, until the end of this year. Thus, Russia is isolated from the international insurance market. The major international insurance brokers have subsequently withdrawn from Russia, and insurers with subsidiaries in Russia will most likely follow.

If the interests of EU-domiciled clients in Russia now require insurance cover, the only recommended course of action is for the respective company representatives to contact a Russian insurance broker on site, who can then obtain the required cover. This is because from an EU perspective, insurance brokers, as well as other companies, are not allowed to contact most Russian insurers because they are on the sanctions list as described above. On the other hand, the Russian insurance market consists of several professional insurers, which are now backed by the Russian state reinsurance company, so that common insurance coverage seems to be available. However, it should be borne in mind that insurance is only possible in rubles, lower sums insured than those needed could only be obtained and the financial strength of these insurers will also suffer in the future as a result of the sanctions.

It is currently still being examined whether capacities for Austrian interests in Ukraine and Russia are available from Austrian or Western insurers within the concept of balance sheet protection (so-called FINC clause); expectations must be classified, however, as rather limited for the time being.

Insurance of Russian interests within the European Union, the UK and the US

The sanction regime outlined above also requires the verification of Russian interests in Western states. The media have already reported confiscations of the property of oligarchs on the Mediterranean or in Great Britain. In this sense, the provision of insurance in the EU, the United Kingdom and the United States to sanctioned persons or entities is also prohibited. If sanctioned persons are found in an existing portfolio, the insurance broker must also withdraw from these persons or entities and terminate the business relationship, preferably in consultation with the insurance companies concerned. In case of doubt, institutions such as the Chambers of Commerce or the Ministry dealing with the sanction regime provide information on whether a person or company or entity is subject to sanctions. However, it is expected that a preliminary check will be made by the broker using the published sanctions lists.

Belarus

Although the scope of economic ties with Belarus may be significantly smaller than that of relations with Russia, it can be assumed that, on the one hand, the sanctions will increasingly be applied to this country as well and, on the other hand, the Western insurance industry will completely withdraw from cooperation with local insurers.

Please note that all information is based on the current state of developments in this military conflict and changes may occur at any time.

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Andreas Krebs

Andreas Krebs

Head of Insurance Mediation Services

T +43 5 0404 229