In a constantly changing world, the maritime industry has always stood as a symbol of resilience, adaptability, and progress. Key to this, however, has always been the role of insurance, and in particular, third party liability within the context of global marine mutual insurers. As we look to analyze the future of marine insurance and the maritime industry generally for the rest of 2023 and beyond, a new landscape of risk challenges and opportunities emerges.
Globally, the International Group of P&I Clubs, a collective of 12 independent third party marine liability mutual insurers, together insure over 90% of the world’s ocean-going fleet for third party liabilities, such as ocean pollution, crew and passenger illness and injury, damage to cargo and other third party property such as resulting from collision, to name a few. For the average person, this may not mean something, but when you consider that 90% of the world’s goods are transported by sea, this translates to an insurance mechanism that essentially enables global trade.
The pool provides a mechanism for sharing all claims in excess of US$10 million. Through this pooling reinsurance mechanism, the group clubs arrange a common market reinsurance contract to provide reinsurance for claims which exceed the upper limit of the pool (US$100 million) up to an amount of US$2.1 billion any one claim (US$1 billion for oil pollution claims). There is, on top of this, an overspill mechanism, which could potentially even exceed this. It is said to be the largest single marine reinsurance contract in the market.
From the perspective of marine insurance, where liabilities can reach and have reached levels in excess of a billion, risk assessment and mitigation are paramount, and developments over the last decade make it evident that the sector is in the midst of a transformational journey. Over the past 10 years, the maritime world has witnessed a steady evolution in the risk environment, punctuated by significant trends that demand attention.
It is essential to examine the driving forces behind this evolving risk landscape. Each trend presents its own unique challenges and insights, offering a roadmap to adapt new risk models to ensure sustainability of the system, while also creating enhanced approaches to manage and proactively mitigate future risks. Let’s delve into these emerging developments and their implications for the maritime insurance sector.
Challenges of Skill Shortages
A prominent challenge arises from the shortage of skilled crew members, underscoring a need for focused attention. According to the BIMCO/ICS Seafarer Workforce Report of 2021, the global fleet will require nearly 90,000 officers by 2026 to operate effectively. This demand is particularly pronounced for officers with technical expertise. The COVID pandemic further exacerbated this issue, disrupting training programs and leaving seafarers unequipped to handle the rapid technological advancements reshaping the maritime landscape.
The advancement of technology appears to continue to outpace training efforts, resulting in a widening gap between the skills required and those available. This is compounded by the need for new skill sets and practices to meet the safety challenges of the energy transition and the development of use of alternative fuels in transportation generally.
Leading Cause of Marine Insurance Losses
One spotlight to focus on here is the challenge of fires onboard vessels, which has emerged as a leading cause of marine insurance losses by value. In this context, the development and usage of lithium batteries present significant challenges for shipping crews, similar to those faced by shore-side firefighters. Of course, a major difference being that shore-side firefighters’ core purpose is to fight fires, unlike seafarers.
Lithium batteries have become widely popular due to their high energy density and application in various devices, from consumer electronics to electric vehicles. However, they also pose certain risks, such as thermal runaway, overheating, and the potential for fires or explosions. These risks are compounded in a maritime environment, where access to external help and resources may be limited. Indeed, we have seen the results in tragic sinkings of car carriers.
Lithium battery fires can be difficult to control and put out due to their ability to reignite, even after apparent extinguishment. If the use of lithium batteries as an alternative car propulsion is to continue and sea carriage the method of transport for the trade, then it can be suggested that seafarers, on top of the already heavy lift of training, will need to also be trained in advanced firefighting techniques specific to lithium battery fires. This may include using specialized fire-suppression agents or methods designed to handle battery fires effectively, as well as identifying signs of battery malfunction and taking appropriate actions.
Ships will have to be equipped with specialized fire-fighting equipment and resources that are tailored to lithium battery incidents. This might include fire-resistant suits, breathing apparatus, and tools designed to handle battery-related emergencies. As battery technology evolves, shipping crews need to stay updated with the latest safety guidelines, handling techniques, and emerging risks associated with new types of lithium batteries.
This is just one issue that highlights the crew competency challenge. Furthermore, the pressure of the maritime industry to facilitate the energy transition away from fossil fuels, driving investment in the use of alternative fuels for propulsion such as ammonia and hydrogen, as well as the growing reliance on automation, increases safety risks and amplifies the demand for proficient seafarers who can navigate these intricate systems. Human error has always been the major contributor to maritime casualties and the fast pace of new technologies will not only create new types of risk to manage but will exacerbate the already high probability of accidents as a result of it.
The insurance industry, within this context, plays the key role of supporting technological advancement and the green transition; we function as the safety net for all involved. This, however, must be done with a logical and measured approach. Attracting talent to the profession, which has unique obstacles due to the nature of transport by sea, and then addressing this competency gap, necessitates a collective commitment from all stakeholders, not only operators, who ultimately bear the risk through their mutual insurers. Further, commitment must also come from manufacturers of technology, training institutions, industry bodies, and regulatory authorities.
Navigating Geopolitical Tensions, Sanctions Regulations
The complex interplay of rising geopolitical tensions and shifting sanctions regulations presents a multifaceted challenge for the maritime insurance sector. Navigating these intricacies requires a nuanced understanding of global politics and proactive compliance measures.
The convergence of diverse sanctions regimes across jurisdictions introduces layers of complexity to insurance policies and the concept of managing risk, necessitating meticulous attention to detail and teams of specialists dedicated to this very specific purpose. From a risk management perspective, it is not only an issue of evaluating risk appetite, or even that of issues of cover, but impacts on matters of morality, policy, and legality at levels not seen before in recent history.
Evolving Reinsurance Environment
The transformation of the reinsurance landscape presents a distinctive challenge, characterized not only by gradual narrowing but also by sudden reactive narrowing in appetite, in traditionally covered sectors. While 2020 may have been the year of the pandemic, the impact for claims was not seen until 2021, when trade returned to normal. However, 2021 was also a year which saw the reinsurance market suddenly retreat from infectious disease outbreak cover, leaving primary insurers such as marine mutuals exposed to what was a part of the traditional array of illness related covers.
Unlike commercial insurers and reinsurers, mutual insurers do not possess the same luxury of retreating from specific traditional risks embedded in rules of cover. The pandemic, geopolitics, and the impending regulatory impact of the energy transition and climate risks have further highlighted the constraints faced by primary insurers by a narrowing reinsurance environment. This trend demands innovative solutions and a strategic reimagining of reinsurance practices to ensure financial stability and security amid evolving risks.
Rising Regulatory Costs
The maritime insurance sector is, like many other sectors, facing rising regulatory compliance costs, along with the growing impact of sustainability and ESG considerations. Regulatory bodies impose stringent reporting requirements, and the assessment of risks related to sustainability introduces an additional layer of complexity.
Factoring in principles that traditionally simply formed part of all function processes, embedded in the risk evaluation overall, have now become an individual force of their own. The demand for specialized expertise, both internal and external, contributes to the mounting costs associated with regulatory compliance.
Economic inflation, once relegated to the sidelines in a slowly developing benign claims environment, has surged to the forefront. The escalation of costs, driven by the rising tide of general economic inflation, and the impact of the increasing costs of commodities, translates directly to higher claimant losses.
From a marine insurance impact, the American Club statistics since 2019 now show a steady rise of cargo claims year on year with 2020 bringing double the value of 2019 while 2021 saw 50% higher values than in 2020. Further, 2022 has shown to be on the same track, evidencing a new claims environment that is not a temporary trend.
Social Inflation in Maritime Insurance
Compounding all of the above, the last 10 years has seen a steady yet significantly rising impact on people claims, or social inflation as it is often dubbed — the rising cost of claims over and above economic inflation and it is particularly evident with personal injury claims.
It is having a direct and significant impact on liability insurance results. It is a multifaceted issue with roots in the public’s changing views and opinions about a myriad of issues including changing expectations on the amount of appropriate compensation (nuclear and thermonuclear verdicts) affected by emotional decisions of juries, greater plaintiff attorney advertising, the role of social media, and third party litigation funding.
American Club data shows a significant impact of social inflation, mainly on people claims in all countries including crew, stevedore and passenger claims, with an especially high impact in the United States, where 2011-2018 our cost per personal injury claim in the United States rose 143% above the cumulative rate of inflation.
However, we have seen this impact overall, with about a 50% increase across the board for all nationalities. It is important to note that the phenomenon is one that does not only affect marine insurance but is a growing challenge for insurers of people claims, generally with a higher impact in the United States.
This steady bombardment of disruption over the past decade was then compounded by the greatest disruption ever seen in recent history – the global COVID-19 pandemic – an event that nearly shut the world down, and the impact of which was only fully manifested from a marine insurance claims perspective in 2021.
In 2022, the marine insurance sector had one of the most difficult years in P&I, both from a retained claims as well as pool claims performance perspective. While the American Club had no pool claims from 2017 to 2021 (claims in excess of $10 million), that period was marked by extraordinarily higher frequency of large casualties within the industry in general, as well as values that doubled the values of the previous similar period.
As such, the American Club’s contribution to other clubs’ pool claims as part of the International Group of P&I Clubs had a significant negative impact on those policy years’ performance, with 2021 suffering with extraordinarily high COVID-related claims which suddenly did not have the benefit of reinsurance as a result of the reinsurance market’s sudden withdrawal from infectious diseases cover.
Adjusting to New Risk Landscape
The interplay of economic and social factors calls for collaboration and knowledge-sharing and proactive risk mitigation as we look to the risk horizon. Addressing the crew competency challenge demands investments in training and education to bridge the skills gap. Geopolitical tensions and sanctions regimes necessitate unwavering compliance efforts and a comprehensive grasp of global politics.
The rising tide of cargo claims prompts innovative solutions to enhance supply chain resilience and mitigate losses. The evolution of the reinsurance environment calls for strategic recalibrations, while grappling with regulatory costs and sustainability considerations requires a multifaceted approach.
As we face 2023 and plan for 2024, the American Club is dedicated to continuously examining and evaluating all these driving forces which have created this new risk landscape, as a world of constant disruption is here to stay. We will continue to analyze the data and dive deep into the factors affecting risk so that we can manage and adapt to the new landscape and ensure a balanced approach of rating to risk. And we will do so with confidence as the maritime industry has proven itself resilient to facing change, able to adapt and thrive – and the insurance sector, especially that of P&I, right along with it.
After all, without products such as P&I, which stand as the safety net for operators, communities, and ocean environments, there could be no pioneering innovation in sea commerce.
Top photo: Smoke is seen from a freight ship in the North Sea, about 27 kilometers (17 miles) north of the Dutch island of Ameland, Wednesday, July 26, 2023. A fire on the freight ship Fremantle Highway, carrying nearly 3,000 cars, was burning out of control Wednesday in the North Sea, and the Dutch coast guard said it was working to save the vessel from sinking close to an important habitat for migratory birds. (Kustwacht Nederland/Coast Guard Netherlands via AP)
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