Larger vessels bring bigger losses : AGCS

In the recent AGCS annual review of marine losses, the insurer noted that insurers had been warning for years that the increasing size of vessels was leading to a higher accumulation of risk. “These fears are now being realized, potentially offsetting improvements in safety and risk management”, AGCS said.

The article noted that over the past 50 years container ships had increased in capacity by almost 1,500%.

Many of the risk concerns with them were also applicable to cruise ships, car carriers and other large vessels.

In many respects, such vessels are safer and the frequency of shipping losses overall has steadily declined over the past decade. However, the cost of incidents has been increasing, driven in large part by the cost of claims involving large vessels.

AGCS cited data from the Nordic Association of Marine Insurers (Cefor) showing that the most costly 1% of all claims accounted for at least 30% of the value of total claims in any given year. Larger vessels meant far greater accumulations of risks and therefore larger values and exposures, both on board vessels and in ports. Dealing with incidents involving large ships, such as fires, groundings and collisions, was also becoming more complex and expensive. Ultra large container ships (ULCS) were of particular concern following a number of fire and explosion incidents, and also groundings and collisions. Such vessels, the largest of which can carry 20,000+ teu (20-foot equivalent unit) containers, necessitated the use of ports with appropriate specialist infrastructure to unload cargo or carry out repairs.

Captain Rahul Khanna, Global Head of Marine Risk Consulting at AGCS, said that “insurers such as AGCS have been warning for years that the increasing size of vessels is leading to a higher accumulation of risk. These fears are now being realized, as demonstrated by the growing number, and cost, of incidents with ULCS. While we have seen total losses reduce over the past decade, the benefits are being largely offset by the increased cost of losses for large vessels. The cost of casualties or incidents is rising, with an increase in severity, and this is down to the increasing size of vessels. Such ships generate economies of scale for ship owners but also increased risk, and a disproportionately greater cost when things go wrong.”

AGCS noted that fires on board large container vessels were now a regular occurrence – there were two in January 2019 alone. In addition, the car carrier Sincerity Ace caught fire in the North Pacific on December 31st 2018, the latest large vessel of this type so do, and Ro-ro cargo ship, the Grande America sank on March 12th this year after its cargo of vehicles and containers caught fire.

On average, insurers were seeing around two major losses involving car carriers each year, and AGCS said that such incidents could easily result in claims in the hundreds of millions of dollars, if not more.

A hypothetical worse-case loss scenario involving the collision and grounding of two large container vessels, or a container vessel and a cruise ship, could result in a $4bn loss when the costs of salvage, wreck removal and environmental claims were included, according to AGCS.

Potentially, one insurer could find they have insured more than one vessel involved in the same incident, with exposure to hull, machinery breakdown and cargo losses. “The size of a vessel can significantly increase salvage and general average costs. ULCS require specialist tugs and finding a port of refuge with capacity to handle such a large ship can be difficult, which increases the salvage operation costs,” said Régis Broudin, Global Head of Marine, noting that “for example, in the case of the Maersk Honam container ship which caught fire at sea in March 2018, salvage and general average represented close to 60% of the cargo value. A high contribution has also been requested for the Yantian Express, container vessel which suffered a fire on board in January 2019.”

Captain Andrew Kinsey, Senior Marine Risk Consultant at AGCS, said that the shipping industry should question whether it was running acceptable levels of risk for large vessels. “There is a push for efficiency and scale in the shipping industry, but this should not be allowed to give rise to unacceptable levels of risk,” he said, noting that, while there had been “welcome technical advances in shipping” we were not yet seeing a commensurate safer environment. “There is now much talk of automation and autonomous vessels and how this will be safer. But in truth, innovation will be driven by the bottom line,” Captain Kinsey said.

“It is very clear that in some shipping segments, loss prevention measures have not kept pace with the upscaling of vessels,” said Chris Turberville, Head of Marine Hull & Liabilities, UK, AGCS. “This is something that needs to be addressed from the design stage onwards.”