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.


This article is a part of our latest Spotlight publication focusing on supply chain issues. Read the publication and learn more about how you can protect your business from changes and unpredictable supply chain disruptions.

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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.

Be aware: Macron law in transport & logistics!

Independently from new regulations Transport & Logistics companies are liable for the cargo

After a long-lasting debate in EU the so-called Macron law was put in force after several local implementations were applied on national level. Firstly, Belgium and France followed by other countries banned the opportunity for truck drivers to sleep in the truck cabin, although all manufacturers applied all necessary conditions for a comfortable rest in the vehicle.

The law is seen in the majority of CEE countries as a discriminating enforcement by Western European governments who made their best to decrease the aggressive competition of Eastern European transport companies dominating the transport and logistics market in the last decades especially after the EU expansion in Poland, Baltics, Romania and Bulgaria. Besides it brings many problems for the insurance industry, due to compulsory absence of drivers out of the vehicles in certain cases especially when regulating their resting slots.

This article focuses on the special hot topic directly or indirectly connected with the new regulations on the market – robbery of cargoes or total theft of vehicles increased in numbers as a logical tendency to above legislation changes!

From theoretically good intentions to chaos in practice

A problem with many unforeseeable aspects as a ticking time bomb was initiated on May 31, 2017, when the EU Commission published a large “Mobility Package” that aims, among other things, to make a number of changes to Regulation (EC) 561/2006 with regard to travel and rest times. For example, a change was proposed to the effect that the weekly 45-hour rest period or any other longer rest period must be spent in appropriate accommodation with adequate sleeping and sanitary facilities. So, sleeping in driver’s cabs should therefore be impossible across the EU for the longer compulsory resting time.

After many months of discussions, disputes, strikes by transport and logistics business also directly in Brussels regarding the above changes and other restrictions mainly on more frequent trips back to and from homeland, the law was practically put in force. One of the major consequence of this is that drivers will either spend their weekly rest periods in accommodation provided by or paid for by the employer or – if it can be arranged – at home and the trucks will therefore have to be left alone. And here it comes to the major point for the insurance industry: What if a truck and its goods are stolen from a trailer during this period?

But let us firstly look at the major insurance problem: It is not a secret that theft and robbery have been major risks in the transport and logistics industry for many years already (more than 15.000 theft/robbery cases p.a. in Europe!). In addition, the illegal immigrants are also an issue! Based on data from Transported Asset Protection Association (TAPA) we see a significant increase of cases within last years – a special focus is given on the fact that more than 65% of cases of theft happen on unsecured parking (TAPA latest report December 2020).

Source: TAPA website, latest report 01.2021 Tapa Global

We should also not forget that nevertheless of EU efforts to work on providing more and more secure parking lots their number is still insufficient to the increased traffic and the demand on industry side to use such facilities especially after new regulations are being implemented. A critical issue is that even if a transport company makes its best to plan, choose and try to use secured/guarded parking lot, the number of all fully compliant to the insurer`s requirements locations is very limited and often fully booked and impossible to make use of. And who does and how actually define what a secured/guarded parking lot means? There is no exact and common definition for this!

Source: LUTZ presentation

A Pandora box opened for unforeseeable increased risk cases!

The above then clearly describes the challenging development of the industry on one side and the dilemma of how to protect against the theft/robbery risk while at the same time a transport/logistics company is liable (also unlimited in case of gross negligence equal to willful misconduct of its drivers – Art. 29 CMR!) for damages and theft of the cargo and when at the same time drivers are not allowed to stay with their vehicles in certain cases for a longer period of time. However, an important question arises out of above: Where is the role of the respective insurance cover – a carrier`s and freight forwarder`s liability insurance should be enough, shouldn`t it?!

The answer is very tricky from Insurance industry’s point of view as in many of the cases, especially in CEE insurers simply apply restrictive coverages for keeping up the loss ratios low without taking into consideration that long term relationships with customers cannot be built by only increasing exclusions in wordings. Many CMR insurance policies contain provisions that can be extremely sensitive for carriers; the conditions vary from insurer to insurer and can include, for example, the following clauses:

  • Theft is generally excluded;
  • The theft of goods that are transported with a truck that is not parked in a guarded parking lot and / or does not have two independently functioning anti-theft devices is excluded;
  • The theft of vehicles including their loads or loads from vehicles that are manned by only one driver, although a crew of two would have been appropriate / necessary;
  • Thefts due to poor route planning are excluded;
  • The theft of high-quality goods that are not transported by trucks with box bodies fitted with security locks is excluded;
  • Theft from parked vehicles that are not guarded by certified personnel is exclude10

As you can see, there is no limit to the imagination of insurers when it comes to exclusions. Some policies also provide for deductibles, sometimes in the event of theft of up to 25% of the total value of the goods. Of course, a Cargo policy could partially solve the problem, but the general practice shows that normally transport and freight forwarding companies do not have as prerogative the responsibility for insuring the cargoes on first party principle as they are simply not owner of the good.

Check your policies – we can help!

Thus, having above situation, a professional transport and logistics company should make its choice for appropriate provider of insurance solution with broadest possible covers incl. coverage of Willful misconduct (in regards to the critical Art. 29 of CMR) as well as highest possible sums insured depending on the types of cargoes. But not only the wording is critical! The customers must choose out of the several insurance service providers, if possible, a respective so called Assekuradeur like W DROEGE or LUTZ, who are well known for their extensive and profound specialization in Transport & Logistics LoI.

These organisations do not only underwrite the business up to certain limits authorised by risk carriers, they also manage risks and claims to the benefit of the client by involving their loss adjusting partners, lawyer networks and other specialists. A risk carrier is only involved in very high claim and critical cases. They provide trainings and instructions for a better and optimized planning of transport schemes and advise on most critical potential risks.

Be aware and rely on your Transport & Logistics Specialty team!

The tendency of implementing steadily critical regulations is by far not yet over and for this, the industry is rather to be concentrated on actively fitting to new legislation and not passively waiting for insurers to protect them. The transport and logistics companies will further be “squeezed” between new and harder legislation on one side and the creativity of thieves and fraudulent acts within continuous market openness. Together with increased pressure of the ordering parties on our customers this means that we as broker must also act more energetic and steadily improve our offering finding the right insurance and risk solution.

The text is prepared with the special support of former General Manager Otmar Tuma from LUTZ Assekuranz team with excerpts from the Article in „blickpunkt lkw + bus“ Edition 51.

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Hristo Charkov

Practice Leader Transportation & Logistics

T +359 888 810 100