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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The Price Cap on Russian Oil – Implications on Insurance

The Price Cap on Russian Oil – Implications on Insurance

Many insurers including insurance brokers will now be able to provide insurance services for Russian crude oil shipments to countries which are not part of the Price Cap Coalition provided that the price of the Russian crude oil cargo from the time it is loaded until it has cleared customs at the port of destination is at or below $60 per barrel.

The EU, G7 and Australia (the “Price Cap Coalition”) have recently introduced legislation and guidance effective 5 December 2022 intended to maintain the supply of Russian oil to world markets whilst at the same time reducing Russia’s earnings from its oil exports (the “Price Cap Scheme”).

Under the Price Cap Scheme, various insurers including insurance brokers will now be able to provide insurance services for Russian crude oil shipments to countries which are not part of the Price Cap Coalition provided that the price of the Russian crude oil cargo from the time it is loaded until it has cleared customs at the port of destination is at or below $60 per barrel (the “Price Cap”). A separate price cap will be introduced on 5 February 2023 for Russian petroleum products.

Ships with Russian crude oil on board on the 5 December commencement date may continue to lawfully perform the voyage even if the cargo has been sold at a price above the Price Cap if the voyage will be completed and the cargo offloaded by 19 January 2023.

Rules for insurance of Russian oil shipments

Insurers, insurance brokers, shipowners and charterers will now be required to check the price of Russian oil cargoes on board ships they own, charter or insure. These checks will take the form of contractual attestations provided by their contractual counterparties stating that for the relevant period the price will not exceed the Price Cap.

A Cargo owner or shipowner or Charterer that intends to transport Russian crude oil cargoes after 5 December will now need to provide its insurance service providers with an attestation that it will not for the duration of the period of insurance carry Russian oil cargoes which have been sold at a price that for the period during the voyage has exceeded the Price Cap. This attestation will be required for all types of Marine insurance.

Insurance cover for the carriage of Russian crude oil loaded after 5 December 2022 and petroleum products loaded after 5 February 2023 is dependent on various insurers complying in full with the requirements of the price cap schemes, including the provision of appropriate attestations. Insurers will be required to withdraw cover where there are reasonable grounds to suspect that the carried cargo was purchased at a price greater than the price cap..

Price Cap is part of the sanction regime

Under the Price Cap scheme, those persons that are subject to the jurisdiction of the EU, G7 and other coalition partners such as Australia will be prohibited from transporting and/or providing services (including insurance services) that enable the transportation of Russian origin crude oil and oil/petroleum products unless it has been sold at or below the Price Cap. The prohibition on services provided by a service provider based in an EU, G7 or other coalition partner jurisdiction extends to shipments by or to third countries that are not part of the EU / G7 coalition and to that extent will have an extra-territorial effect.

Please note that various price cap schemes largely mirror each other but there are significant differences between them. For example, the period during which the Price Cap must apply to benefit from the EU Price Cap scheme is longer than under the equivalent UK and US legislation. Under the EU scheme even where the oil has cleared customs at the third country destination in circumstances where it then “…becomes seaborne again without being substantially transformed into a different good in line with non-preferential rules of origin. (i.e. without being refined) … the price cap will still apply.”

Again, parties are expected to obtain appropriate attestations of cargo price the nature of which will depend on which Tier they fall into. The definition of the Tiers by the EU is the same as that adopted by the UK and US with shipowners and various insurance service providers identified as Tier 3 Actors. Parties are required to keep records of Price Cap transactions for five years.

For example, shipowners are considered Tier 3 Actors by all three jurisdictions. As such, a Shipowner must obtain a contractual commitment from its contractual counterparty – usually the charterer – that its counterparty has committed not to purchase Crude Oil or Petroleum Products above the Price Cap. Such an Attestation may be a stand-alone document or included within a wide contract.

Validity of cover as long as Price Cap is respected

Various stakeholders should note that from 05:01 GMT 5 December 2022, insurance cover for Russian Crude Oil Price Cap cargoes is conditional upon the unit price of the Russian Crude Oil supplied or delivered, or being supplied or delivered, being at or below the Price Cap. To comply with the Price Cap scheme insurers are required to withdraw cover in circumstances where there are reasonable grounds to suspect that the Price Cap attestations provided are false and/or where the cargo is sold after the voyage has commenced at a price greater than the Price Cap. Where a breach is identified after loading vessels may be left uninsured and without access to normal banking services for an extended period whilst the authorities determine how best to dispose of the cargo.

First reactions concerning insurance

According to Business Insurance online of December 12th, 2022, Russian insurer Ingosstrakh declined to insure oil cargoes not compliant with the price cap. Insurance will only be available on the same requirements as for the “Western” insurers.

Turkey’s maritime authority said it would continue to block the passage of oil tankers without appropriate insurance letters, adding that the insurance checks on ships in its waters was a routine procedure, with a focus on transit through the Bosporus Strait or calls at Turkish ports.

Andreas Krebs

Andreas Krebs

Head of Insurance Mediation Services

T +43 5 0404 229

Kristo Ristikivi

Group Practice Leader Cargo

T+372 506 9809

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War in Ukraine: Cargo insurance and political risks

The dangers of war and strike are excluded in the “all risks” coverage, but they are usually included in the individual policies with additional clauses.

Trading companies and manufacturers of goods have their deliveries insured in a global transport insurance policy based on turnover. The scope of coverage is usually “all risks” according to the Institute Cargo Clauses or similar wordings.

The current situation in Ukraine is classified as war since Russia has occupied Ukrainian territory with a regular army.

Insurance in case of war and strike

Basically, the dangers of war and strike are excluded in the “all risks” coverage, but they are usually included in the individual policies with additional clauses. This extension of cover for these political risks follows the definitions from the insurance conditions of the English insurance market, like the general conditions.

The insured risks of “war” include for instance war, civil war, revolution, rebellion, insurrection, civil strife and confiscation resulting therefrom. The insured perils “strike” include damage to the transported goods caused by strikers, locked-out workers or persons taking part in industrial disturbances, riots or civil commotion, terrorists or persons acting with political motives. Material damage to the goods that occurs directly as a result of the above-mentioned risks is insured.

The additional clauses mentioned can be used to cover the risks of “war” in sea transport and international air freight (“airborne” and “seaborne”), but never in the case of land transport, due to the accumulation risk for the insurer.

The risks of strikes are insured by the relevant clause for carriage by any means of transport, including land.

Termination by insurer possible

However, insurers have a special right of termination in zthe policies for political risks. According to this, the insurer can terminate the contract with a notice period of 48 hours or 7 days depending on the applicable clause in the current contract. However, for deliveries that began prior to the effective date of termination, political risk coverage will remain in place for the entire shipment.

To date, cancellations of political risks have been declared as follows:

  • Transportation within Ukraine, Russia, Belarus as well as land and sea areas bordering Ukraine within a range of 200 km from the land/sea border with Ukraine or;
  • For all transports worldwide, but, after the notice period, with the re-inclusion of worldwide transports, excluding, however, the Ukraine region and the area less than 200 km from the country border with Ukraine and the whole of Russia.

Due to the current situation, insurers are canceling the additional clauses for war and strike both for international contracts and for policies existing in Ukraine and Russia itself.

If the insurer terminates the risks of war and strike, GrECo will, if required, negotiate with the insurer of the policy or try to find a solution for the re-inclusion of maritime and airborne transport (e.g. for sea journeys in the Black Sea and the Sea of Azov) on the international insurance market. Depending on the war situation in the respective transport relation, coverage will be possible, as things stand at present, with additional premiums determined by reinsurers.

If the political risks are terminated, does the coverage from the insurance contract remain in effect for the remaining insured risks?

Yes. If the goods are damaged e.g. in a normal traffic accident of the means of transport, there is cover. However, the policyholder must provide the insurer with proof that the damage was caused by the accident and not by a war event.

In the current situation, are rail transports from Asia to Europe – via the Silk Road – still insured?

Yes, they are insured; but without cover for “war risk on land”; if the insurer terminates the risk of strike, the protection for these losses also ceases.

We recommend that the policyholder immediately informs GrECo if his forwarding agent reports an out-of-hours stopover during transport. We bring this to the attention of the insurer and thus fulfill the contractual obligation.

Damage or additional costs that occur due to delays in the journey as consequence of war events (e.g. the truck is not allowed to cross the border and therefore cannot continue the journey) are not insured.

The sanction clauses of the insurers for deliveries apply unchanged, according to which there is no cover in the event of a violation of sanctions and embargoes; due to the tightening or expansion of sanctions (EU, USA, UK) as consequence of the Ukraine war, this circumstance must be given special consideration.

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Herbert Mayerhofer

Competence Center Manager Transport

T +43 664 440 28 71

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