Re-evaluating the risk of mega ships

Ultra Large Vessels
As marine cargo operators use ever bigger vessels to increase efficiency and economies of scale, the consequent change in risk exposure is proving challenging to insurers.

The average capacity of vessels grew 25% between 2014 and 2018. The number of large containerships ships whose capacity exceeds 10,000 twenty-foot equivalent unit (TEU), a measure for a ship's cargo carrying capacity, accounted for 31% of the total capacity deployed in the second quarter of 2018, according to MDS Transmodal, a transport and logistics research firm. And the trend towards even larger vessels is continuing.

Ships capable of handling more than 14,500 TEU are becoming more common; their length often exceeding 1,200 ft (366 m). So-called Triple-E class container ships are even larger with capacity of more than 18,400 TEUs.

“A consolidation process in the shipping transport market has contributed to a trend towards fewer but bigger ships,” says Robert Waterson, Senior Vice President - Marine Hull and Liability at Lockton.

“Fleet operators have ordered larger ships and because they are newer this tends to have a positive effect on all costs including insurance premium levels. However, this does not necessarily mean claims volumes will be lower,” Waterson notes.

With larger and more sophisticated vessels entering the sector – and more hazardous areas such as polar waters being explored – this is aggravating the risk of ever larger single losses, insurer AGCS warned in its “Marine claims trends 2018” report.

“A major incident involving a fully loaded ultra-large container ship will easily result in a $1bn to $2bn insurance claim including damage to cargo, hull, salvage and wreck removal costs,” the report added.

A number of container ship casualties recently fuelled a discussion about the growing risks associated with fires on mega-containerships. Ship fires are one of the major loss drivers in the shipping industry: In March 2018 a fatal fire on the new 15,252 TEU Maersk Honam. The incident is believed to have been triggered by mis-declared chemical cargoes causing a blast and fire which resulted in 130 people being taken to hospital.

“The cargo description is often not clear and containers may contain chemicals and hazardous goods that were not supposed to be there or that were incorrectly described and thus loaded in the wrong part of the vessel,” says Waterson.

Insurers’ apprehension focuses not only on large container ships but also on large passenger vessels, especially after Costa Concordia off the Tuscan holiday island of Giglio in Italy set off a chaotic evacuation of 4,229 passengers and crew, and 32 people died, according to the May 7, 2019 presentation “Megaship Challenges: The P&I Perspective” by Joe Hughes from the The American Club.  

Large vessels are more difficult to navigate, and grounding and/or collisions are harder to deal with as there is more cargo and fuel to salvage. Where salvage/wreck removal is required, the costs are vastly influenced by the type of cargo that has to be removed and how hazardous this cargo is. Very often this has to be accomplished in remote and difficult environmental conditions, and always within the requirements of both the local and international law. As environmental regulations tighten globally, these costs will only rise further and more cover will be required.

A discussion in the insurance industry about whether large container ships might require a specific insurance rating, previously under consideration but not implemented, may now re-open as more data is available. As some underwriters withdraw from underwriting large container fleets this may affect renewals pricing and available capacity in the short term.

“In hull and cargo, the specific risks attached to large ships are not being addressed. Ratings do not take this into account,” Waterson says.

“Mega-ships carry higher risks and are not necessarily safer. While the claims frequency may fall, the size of a loss is likely to be much higher,” he notes.

Ships are generally sinking less often than in the past, not least because technology is increasing the safety of vessels in the form of electronic navigation. This does, however, come at a cost.

“Repair costs have increased significantly, all the technology on board means that claims trend higher,” Waterson says.

Insurance buyers can improve insurance terms and conditions of their marine fleets at renewals by showing evidence of high operating standards with frequently checked and well managed fleets and crews receiving the required training and support.

For further information please contact: 
Robert Waterson 
Senior Vice President - Marine Hull and Liability
E-mail: robert.waterson@uk.lockton.com
Direct Tel: +44 (0)20 7933 2491

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