The growing risk of super-sizing ships
The introduction of containers brought about a revolution in shipping. Up to then, the old labour intensive process of shipping cargoes hadn’t changed in over 100 years. Today, ships are being built that can carry over 20,000 containers – 20 times the capacity of the first ships of their kind. They are as long as the Shard building is tall, weigh a little less than 200,000 dead weight tonnes and can cost up to $200m to build.
These ships are so large that ports on their main Asia to Europe route need to be extended to accommodate them. They are too big even to go through the Panama Canal.
The logic of building such huge vessels is simple: they can carry twice the amount of cargo but can be operated by the same number of crew as smaller vessels, and fewer ships means lower fuel and running costs. Even larger ships, capable of carrying up to 24,000 containers, are likely soon to be on the drawing board.
Although this is great news for the shipping industry, and for global trade as a whole, it is a major concern for the marine insurance market. The bill for recovering one of these mega-vessels could easily run into billions of dollars, far in excess of the operations to salvage the Costa Concordia and the Rena – two of the costliest recovery operations in history.
Today, ships are being built that can carry over 20,000 containers and are as long as the Shard building is tall.
Mega-vessels will mean a mega-loss
With an average insured value of $30,000 for each container, the cost to insurers of the cargo alone if one of these vessels sank could be over $500 million. The ship’s hull and machinery is likely to come to another $150 million-$200 million. But this bill could easily double once the cost of recovering the ship and its cargo and paying for any clean-up costs are taken into account, putting it near to the $1.5 billion current estimated cost of recovering the Costa Concordia.
It isn’t just the cargo ships that are getting bigger either. Cruise liners are also being now built on a mind-boggling scale. The new breed of these ships are floating cities, costing around $1.5 billion to build, have up to 16 decks, are longer than three football pitches, and carry over 8,000 passengers and crew.
Although marine insurers will receive more premium for these larger vessels, if one of these new mega-cruise ships was to suffer a similar fate to that of the Costa Concordia then insurers could be looking at a bill of as much as $3 billion — a catastrophic loss for the market.
If one of these new mega-cruise ships sank then insurers could be looking at a bill of as much as $3 billion.
Rosy image hides recessionary worries
Despite the new super-size trend, the trend for the construction of ever-bigger container and cruise ships masks a hidden reality. The global recession hit shipping companies hard, with too many vessels chasing fewer cargoes as a result of the slump in world trade. Competition caused prices to plummet – the Baltic Dry Index fell 95% from its pre-recession peak – and the big shipping lines struggled to survive. The top 20 operators posted combined net losses of $5 billion in 2016, and several have been forced to merge or enter alliances to stay afloat.
Hanjin Shipping, the world’s seventh-largest container carrier filed for receivership in August 2016. Over 60 of its ships, loaded with over $14 billion of goods were left stranded at sea. Amazingly, most of the estimated 500,000 containers aboard these vessels eventually reached their destination, resulting in few insurance claims. But the shipping industry’s woes could mean an increase in the number of insurance claims as companies have been forced to slash costs, mothballing ships, laying off crew and cutting back on their maintenance programmes, which could compromise safety standards.
There’s also been an increase in fraudulent claims – a common coincidence when an industry is in crisis. In October 2016, a UK court agreed with cargo insurers that the bulk carrier Atlantik Confidence had been deliberately sunk by her crew in 2013 on the instruction of the ship’s owner.
Hiscox is one of the insurers that turned down a $77 million claim from the owners of the Brillante Virtuoso.
But another recent court case went against insurers. The Supreme Court found that insurers were wrong to deny a claim from the owners of the DC Merwestone, whose engine room was flooded beyond repair, because they lied to the insurers. If a lie was told to embellish or strengthen a valid claim then the lie shouldn’t be used as grounds to deny the claim, the court ruled.
Hiscox is one of the Lloyd’s insurers that turned down a $77 million claim from the owners of the Brillante Virtuoso, an oil tanker gutted by fire after an alleged hijacking off the coast of Aden in 2011, believing the claim was a result of wilful misconduct. The insurers’ view was supported by the court, which struck out the owner’s claim. Expect further legal tussles ahead over the circumstances of how some ships sank, with a number of other claims in the market currently being investigated.
Problems on the horizon
Looking ahead, technology could transform the shipping industry just as containerisation did. The Yara Birkeland, the world’s first fully autonomous cargo ship is already under construction and is expected to operate unmanned from 2020. Meanwhile, the International Maritime Organisation has begun talks that could result in unmanned ships sailing the oceans in future.
Unmanned ships could be safer, research suggests. Most marine accidents that occur, especially groundings and collisions, are the result of human error, studies show. But when accidents happen, the researchers said, the damage could be more severe if a crew isn’t there to act, such as by fighting fires.
Ships already rely on computers and the rising cyber threat cannot be ignored. Maersk said a ransomware attack in June this year could cost it up to $300 million, while hackers and criminal gangs are reportedly working together to steal the contents of particular containers on board ships. The introduction of a mandatory new navigational system in 2018 is also set to greatly increase the cyber risks facing shipping lines, says Control Risks.
The future is unlikely to be plain sailing for shipping companies, or their insurers.