Arctic Shipping – A H&M Underwriter’s View · PDF fileH&M insurance of a vessel is...

Dr. Sven GerhardGlobal Product Leader Hull & Marine LiabilitiesBMUSF May 1, 2014

Allianz Global Corporate & Specialty

Arctic Shipping – A H&M Underwriter’s View

2© Copyright Allianz SE

Shipping in Arctic waters – An academic exercise for H&M insurers?

http://www.arkgis.org

Saving time and fuel on trading routes between Asia and EuropeLiner trade

Offshore supply vessel operations and tanker trade Offshore Oil and Gas Exploration

Supply of indigenous people or mining operationsCargo Supply

Moving further North and SouthFishery

Traveling off the beaten trackTourism

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Arctic Shipping Trends ( Allianz Safety & Shipping Review 2014)

© Copyright Allianz SE

Tenfold Increase of Vessel Traffic

Rise in Casualties

43 in 2012, 34 in 2011 and only 4 in 2010 71 large ships, mostly Russian ice-breakers, navigated the route in 2013

Average number of casualties in arctic has risen 600% according to AGCS study 45 per year between 2009 and 2013 compared to seven between 2002 and 2007

Machinery Damage

Damage to machinery caused a third

of these incidents, reflecting the harsher

operating environment in arctic waters

Future Trends

Polar research institute of China suggests that by 2020, 5-15% of China’s trade volume(about $500 bn) could pass arctic waters Russia expects a 30 fold increase by 2020


Insurance coverage is at risk• Breach of warranty according to AITW• Breach of provisions according to INC

Broker and insurer have to deal with planned trip prior sailing

Worldwide sailing areas but within the agreed trading limits American Institute Trading Warranties July 1, 1972 International Navigation Conditions Nov 1, 2003

Standard trading limits do not cover Polar zones

H&M insurance of a vessel is based on standard insurance terms • American Institute Hull Clauses June 2 1977• ITC Hull 1983• Nordic Plan 2013

Insurance Basics

Insurance Cover

Arctic Shipping requires amendments of the standard H&M insurance cover

Insurance Challenges & Requirements


Availability of significant statistical data is limited• Relatively few claims due to limited loss experience• Lack of claims data prohibits stochastic modeling

Limited if any basis at all for solid technical pricing

Arctic shipping challenges Underwriting and Underwriters

Limited Claims Experience

Assessment of hard facts seems manageable, e.g. weather conditions, ice Limited assessment possibilities of soft facts, e.g. crew experience Limited scope of surveys focused often on vessel rather than crew and

experience

Limited Individual Risk Assessment

Increased costs for salvage and repair due to remote locations and limited infrastructure

Unpredictable nature and acceleration factors Existing experience outlines high severity potential Validity of existing salvage rules (“No cure, no pay”)

Potential for Increased Claims Severity

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Arctic shipping outlines additional specific risks

Controversial political/ public topic, especially with regards to potential negative influence on environment• Multiple risks for environmental damage, e.g. bilge water, oil spills, cargo overboard• Increase in traffic may harm Marine mammal population

High media and NGO sensitivity , see e.g. Greenpeace on Arctic Sunrise or MV Akademik Shokalskiy in 2013

Balance risk between anticipated public responsibility and entrepreneurial support • Managing public interest in case of claim/ accident • Understanding public and environmental concerns• Support entrepreneurial efforts and public resource supply

Reputational Risk

Extreme weather conditions Remote locations and limited time slots for access, limited infrastructure (salvage, port of refuge) Chart coverage incomplete and not always up-to-date Operational experience of parties, e.g. oil companies, ship-owners, crews, salvage operators

General Operational Risk

Vessels prepared for operating in low temperature conditions (“Winterization”)• Proactive approach• Crew training and experience• Vessels built for purpose or adequately equipped – hull, machinery, pumps, valves, piping and

electrical systems

Vessel Winterization Risk

Increased loss amounts Increased claims severity Elevated reputational risk of operations also affects insurers

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The Regulatory and geopolitical framework of Arctic shipping operationscan make things complex

No institution that administers Arctic legal topics unilateral UN Convention on the Law of the Sea Cl. 234 (not ratified by the US)

Coastal States have the right to adopt and enforce non-discriminatory laws and regulations for the prevention, reduction and control of marine pollution from vessels in ice-covered areas within the limits of the exclusive economic zone, where particularly severe climatic conditions and the presence of ice covering such areas for most of the year create obstructions or exceptional hazards to navigation, and pollution of the marine environment could cause major harm to or irreversible disturbance of the ecological balance. Such laws and regulations shall have due regard to navigation and the protection and preservation of the marine environment based on the best available scientific evidence

IMO Polar Code - not ready IMO Guidelines for Ships Operation in Polar Waters (2009) – non-binding IMO Voyage planning for passenger ships in remote areas – not for all vessels Local regulations such as Arctic Ice Regime Shipping System (Canada) -

probably very good but unilateral IACS Requirements concerning Polar class – not addressed to operators Non-binding recommendations, e.g. Arctic Marine Best Practice Declaration

Legal & Governance

Boundary conflict e.g. between the US and Canada on the Beaufort Sea maritime boundary

Geopolitical


Severity claims do happen …

2007 – MS Explorer sinks in the Antarctic Ocean after striking an iceberg



2011 - Russian fishing boat cruising around the Antarctic struck iceberg. Crew waited nearly two weeks for rescue



2012 - MS Plancius detained at South Georgia due to machinery damageDG30

DG30 MV rather than MSDobie, Greg (AGCS UK), 4/8/2014



2013 – MV Akademik Shokalskiy stuck in ice with 74 passengers


Winterization of vessels is required ...


The IMO Polar Code – A safety net for H&M underwriters?

Ready by 2015 Implemented through amendment of SOLAS and MARPOL Will come into force probably in 2017

The IMO Polar Code

Applicable for shipping in Arctic and Antarctic Waters Integrated approach addressing vessels, crew and operation Use of “goal-based/risk-based” standards

Principles

Polar Water Operation manual (PWOM) for vessel By operator Compliance enforced through flag state (& Port state control)

Targets

The Polar code itself doesn’t set any safety standards Enforcement is only as good as PWOM for vessel PWOM for vessel is only as good as flag state enforcement “Warranted vessel compliant with Polar code” doesn’t work!

Implications for H&M underwriters


Risk Assessment through H&M Underwriters is crucial

H&M Insurance Policy

Polar Zones excluded from standard coverage

Insurer is aware that the insured wants to operate in Arctic (Antarctic) waters

Policy amendment required

Risk Assessment

Thorough due diligence of trading plans prior risk inception incl.:

Capability assessment of vessel Vessel built for purpose Ice-class as requested Breaking sheets of ice? Appropriate Winterization of vessel

Trading Plan Made by whom Strategic voyage planning Owner performance analysis and monitoring

against defined KPI Follow-up process on suggested improvements

prior and during trade Additional equipment required Options in case of emergency

Overall Pilotage requirements Permanent weather routing Port(s) of refuge Classification sign-off if required Icebreakers – capacity and availability (where,

when) Average weather experience in area Client loss and claims experience

Policy Adjustment

Based on the risk assessment the UW

can work on• Warranties• Deductibles• Premium

can decline coverage

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Legal and Regulatory environment Are vessel and trade compliant with applicable

rules and regulations?

Crew Crew experience – experienced personnel on

board Crew training and preparedness


Sources of information – a subjective selection

See: http://www.agcs.allianz.com/insights/white-papers-and-case-studies/shipping-review-2014/


…. the 138 meter long, 6403 dwt tanker "N" was struck by ice while sailing in the Matisen Strait to the north of the Taimyr Peninsula on September 4 [2013]. The tanker soon started taking in water in one of its ballast tanks. According to Russian authorities, the “N” tanker acted in violation of the permit given by the NSR administration by entering waters with medium ice conditions without being escorted by an icebreaker. …. “ [The] accident was a direct threat to the lives of sailors and the ecology of the Arctic … Vessels like that should not be sailing on NSR, simply because they are not capable of withstanding the ice conditions.” The Seafarer’s Union underlines that the system for search and rescue is not yet fully developed in the area where the incident happened, and that a serious accident could have been crucial for the crew, … not to forget the ecology – a large amount of diesel fuel could have leaked out into the sea, and who would be there to clean it up, is quite unclear

Why H&M insurers shouldn’t take things for grantedDG33

DG33 shouldn'tDobie, Greg (AGCS UK), 4/8/2014


Disclaimer

These assessments are, as always, subject to the disclaimer provided below.

Cautionary Note Regarding Forward-Looking Statements

The statements contained herein may include statements of future

expectations and other forward-looking statements that are based

on management’s current views and assumptions and involve known

and unknown risks and uncertainties that could cause actual results,

performance or events to differ materially from those expressed or

implied in such statements. In addition to statements which are forward-

looking by reason of context, the words “may”, “will”, “should”, “expects”,

“plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”,

“potential”, or “continue” and similar expressions identify forward-looking

statements. Actual results, performance or events may differ materially

from those in such statements due to, without limitation, (i) general economic

conditions, including in particular economic conditions in the Allianz Group’s

core business and core markets, (ii) performance of financial markets,

including emerging markets, and including market volatility, liquidity and

credit events (iii) the frequency and severity of insured loss events,

including from natural catastrophes and including the development of loss

expenses, (iv) mortality and morbidity levels and trends, (v) persistency

levels, (vi) the extent of credit defaults, (vii) interest rate levels, (viii) currency

exchange rates including the Euro/U.S. Dollar exchange rate, (ix) changing

levels of competition, (x) changes in laws and regulations, including monetary

convergence and the European Monetary Union, (xi) changes in the policies

of central banks and/or foreign governments, (xii) the impact of acquisitions,

including related integration issues, (xiii) reorganization measures, and (xiv)

general competitive factors, in each case on a local, regional, national and/or

global basis. Many of these factors may be more likely to occur, or more

pronounced, as a result of terrorist activities and their consequences.

No duty to update.

The company assumes no obligation to update any

information contained herein.

www.agcs.allianz.com

Arctic Shipping – A H&M Underwriter’s View · PDF fileH&M insurance of a vessel is...

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