Change Is the Only Constant for Worldwide Shipping

Change is the only constant for worldwide shipping

Companies working to rectify shipping supply chain issues that began during the COVID-19 pandemic face continuing challenges as problems have been amplified by recent events, including slowdowns at US West Coast ports related to labor negotiations, the Shanghai pandemic shutdown, and the Russian-Ukrainian war.

Whether it’s the changing of market rates, the situation in Ukraine (and elsewhere), the widespread acceptance of data and analytics, or the emergence of ESG as a market priority, it’s clear that the only constant for the foreseeable future is going to be changed.

The growing climate emergency, the war in Europe, the rise of protectionism affecting international trade and the emergence of data and technology as a driver of huge change in all sectors have different ramifications for the world, international trade and by extension for the marine insurance sector as a whole and in particular for cargo risks and associated insurances.

Russia-Ukraine conflict increasing shipping risks

The Lloyd’s Wording Repository lists around 900 versions of war (exclusions) clauses. From an insurance point of view, there are various definitions of war across the property, marine, cargo and cyber etc insurance lines, covering the UK, mainland Europe or the US.

Considering the nature of many political and military conflicts, the boundaries are often blurred ie is this war or not yet? However, the current conflict would indeed be considered as ‘war’ by the insurance industry and therefore, absent any specific policy definitions, falls within policy language referencing ‘war’ in each relevant jurisdiction, regardless of any statements to the contrary made by President Putin or the lack of a formal declaration of war by Russia.

The International Monetary Fund has warned that the war in Ukraine will exacerbate already high shipping costs and could keep them – and their inflationary effects – higher for longer. The conflict is also having a knock-on effect on shipping outside the conflict zone. US and EU sanctions, in particular, pose a significant compliance challenge for shipping companies and the insurance industry. Anyone involved in international trade should regularly review the lists of parties to whom sanctions apply in light of the 2020 BIMCO Sanction Clause provisions. 

Marine

Ukrainian – Russian war is creating an added burden on a shipping industry already dealing with ongoing supply chain disruption, port congestion and a crew crisis caused by the pandemic.

The war has further ramifications for a global maritime workforce already facing shortages. Russian seafarers account for just over 10% of the world’s 1.89 million, while around 4% come from Ukraine. Seafarers from these countries may struggle to return home or rejoin ships.

Marine insurance losses are currently limited. Insurers are likely to see several claims under special marine war policies from vessels damaged or lost to sea mines, rocket attacks and bombings in the Black Sea and the Sea of Azov. Insurers may also receive claims under marine war policies from vessels and cargo blocked or trapped in Ukrainian ports and coastal waters.

Various security agencies have also warned of heightened cyber risk due to the Ukraine conflict, warning vessels in the Black Sea of threats from GPS jamming, automatic identification system spoofing, communications jamming and electronic interference.

Cargo

The impacts of Russia’s War in Ukraine have been significant in the cargo market, and for affected cargo clients, starting with the inevitable cancellation and write-back were available of War/SRCC cover under cargo contracts for immediately affected areas in the Black Sea / Sea of Azov and to/from or within Ukraine and Russia themselves, through to sanction implications, supply chain disruption and consequential major changes to insured global trade and the consequential macro-economic factors, including global inflation considerations (driven in part by higher global commodity prices) and a slowdown in global economic growth.

With no immediate end to the conflict in sight and escalations on the Russian side, it is expected that the sanctions picture will continue to expand and become ever more complex into 2023 and beyond.
Whilst over 200 shipments of grain have now left Ukrainian ports since 01 Aug 2022 to transit the Black Sea Corridor to the Mediterranean. the latest data from the Joint Coordination Centre (JCC) in Istanbul, which oversees the current export deal, shows that this equates to only approx. 2 million tonnes versus the approx. 6m tonnes of grain per month shipped before the war began on February 24th, which continues to demonstrate the issues affecting global food supply chains.

The current focus is understandably on grain exports, but cargo interests and their insurers remain in the dark on the significant volumes of other commodities that remain at ports and in-store in Ukraine i.e. part of the continued block.

At the outbreak of the war, Ukrainian President Zelensky granted unprecedented levels of power to the military and government agencies, including the ability to seize or expropriate property as well as prohibit or restrain exports of designated commodities, including agricultural products, oil and gas.

It is commonplace for the peril of seizure by foreign governments/militaries to be excluded from cover by the Institute Cargo Clauses (A) wording which is prevalent in the London Market/mainland Europe. However, those cargo interests which may have bespoke covers responding to the seizure of goods, or the threat of the same, are an enduring concern in the London Market/mainland Europe. Plus, there are rumours that the safe grain shipping corridor from Odessa will be closed starting in November 2022.

Supply chain woes alter risk profiles, add exposures

Companies working to rectify supply chain issues that began during the COVID-19 pandemic face continuing challenges as problems have been amplified by recent events, including slowdowns at US West Coast ports related to labour negotiations, the Shanghai pandemic shutdown, and the Russian-Ukrainian war.

Strategies such as holding extra inventory or sourcing alternate suppliers create resilience in a company’s operations and are good risk management. They may have unintended consequences and increase risks, however, if you increase your surface area and there are more things to go wrong. Companies should look to find the right balance – to work out where you need to be redundant and where it’s not so important.

Inflation is compounding supply chain risks. The cost of shipping one container from China to the U.S. has increased 4-5 times during the last few years, which pushes up costs for everything. Higher freight rates and a shortage of container ship capacity are tempting some operators to use non-container vessels to transport containers, which will create new risks around stability, firefighting capabilities and securing cargo.

Russian-Ukrainian war or port slowdown in Shanghai, is causing a global impact that is effectively rewiring the way trade flows. Any further supply chain shocks will continue to push up prices and slow down economic recovery, but real-time data, AI and other new software solutions may and can help clients and insurers understand and manage their risks better.

Kristo Ristikivi

Group Practice Leader Cargo

T+372 506 9809

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Delivered Duty Paid for a Green Future

Delivered Duty Paid for a Green Future

Insurers have shifted their focus from topline premium and growth towards rate adequacy. New modelling and technical tools are being utilised more than ever as insurers want to understand the complex technicalities of cargo risks.

The major international cargo insurers are reconsidering the insurability of cargo of concern (for example thermal coal) in relation to zero emissions targets as companies dealing with such cargo, such as miners, traders or major users may have difficulties to secure the insurance they need in the future.

With regard to thermal coal it still seems that cargo insurers who do underwrite the commodity business tend to focus on those accounts where the volume of thermal coal provided is within a certain tolerance limit, i.e. below or about 20% of the total turnover or revenues. Discussions are rife, especially in the lead-up to the UN Climate Change Conference (COP26) being held in November 2021 in Glasgow, UK, and with the IEA Report on net-zero emissions by 2050 and the latest UN Report having recently been issued.

In December 2020, Lloyds issued their Environmental, Social and Governance Report which included various undertakings, the two most prominent being:

  • Lloyds managing agents will be asked to provide no new insurance cover in respect of thermal coal-fired power plants, thermal coal mines, oil sands or new Arctic energy exploration activities from 1 January 2022.
  • To support Lloyds customers through this transition, Lloyds managing agents will be asked not to renew insurance coverages for thermal coal-fired power plants, thermal coal mines, oil sands or new Arctic energy exploration activities after 1 January 2030. This also applies to companies with business models which derive at least 30% of their revenues from either thermal coal-fired power plants, thermal coal mines, oil sands or new Arctic energy exploration activities from 1 January 2030.

Furthermore, eight of the world’s leading insurers and reinsurers, working together with the UN Envi- ronment Programme Finance Initiative, are currently in the process of establishing a pioneering Net-Zero Insurance Alliance (NZIA).

Overview & Expectations

We expect the London and mainland European cargo markets to be pressing for some continued base rate increases where business warrants it and where they are able to do so. However, through the first half of 2021 we have begun to see some softening of general increases and with some insurers beginning to look quite aggressively for new business opportunities available to them. If this trend develops, we expect the renewal business with little or no adverse claims histories and the right profiles to be considered “as before” renewals as we reach the end of 2021 and the beginning of 2022.
 
Marine Cargo renewals have been subject to price increases of between 15% to 40%. Automotive, pharmaceutical, commodities and retail stock throughput accounts will continue to be the most affected.
 
Specific changes to the underwriters’ appetite include:

  • Excess stock – insurers have reduced the capacity in many market sectors, no longer willing to underwrite excess stock.
  • Many marine insurers are no longer underwrite distilleries or wineries.

Insurers have shifted their focus from topline premium and growth towards rate adequacy. New modelling and technical tools are being utilised more than ever as insurers want to understand the complex technicalities of cargo risks. As natural perils remain a key focal point globally, we expect longer turnaround times for quotes as well as significant rate changes for most exposures in the region. Good data quality, including surveys, COPE, risk management forms, and so on, will help us to provide our clients with more favourably rated insurance contracts.

Lead lines are expected to remain conservative, and the expected reduced capacities will come with the added difficulty of some insurers not wishing to reinsure their competitors.

We will continue to see a disconnection between the local Eastern European markets and international markets in terms of rates. However, this gap is slowly closing as most local insurers face an increase of reinsurance costs and are thus unable to sustain reduction demands

Kristo Ristikivi

Group Practice Leader Cargo

T+372 506 9809

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