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.
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.
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.
Group Practice Leader Cargo
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