Lessons learned from Suez Canal blockage; AGCS

Allianz Global Corporate & Specialty (AGCS) has published an article on the lessons learnt as a result of six-day blockage of the Suez Canal caused by the hard grounding of ultra-large container vessel Ever Given.

Rahul Khanna, Global Head of Marine Risk Consulting at AGCS, noted that insurers had been warning for years that the increasing size of vessels was leading to a higher accumulation of risk when something went wrong. The Ever Given incident was a realization of those fears.

Although the vessel was refloated and freed relatively quickly, global shipping logistics and supply chains were still likely to feel the impact for weeks to come.

Is there more clarity on what has caused the grounding of the MS Ever Given in the Suez Canal?

Khanna said that this was still to be investigated. Most reports noted that the vessel ran aground after being caught in strong winds and a sandstorm that caused poor visibility and made it difficult to navigate, although human error or machinery breakdown could not at this stage be ruled out.

He said that wind could cause problems for fully-loaded ultra large container ships, given the height of the container stacks. This created an extensive so-called ‘windage area’ compared to other ship types. Cross winds could easily cause small deviations in a vessel’s course, which could generate problems in a relatively narrow waterway. The bigger the vessel, the smaller the margin for error.

Khanna said that the known phenomenon of the “bank effect” could have also played a role in the grounding. Here a vessel experiences a suction effect towards the banks of a narrow canal. The larger the vessel, the larger the effect. “However, we have to wait for the findings of the official investigation to determine the root cause of this incident”, said Khanna, noting that most modern merchant vessels carried a Voyage Data Recorder. He said that “the download of this will be critical so that we understand what factors resulted in a serious marine casualty and what we can do in the future to prevent a recurrence”. However, he said that at this stage it was important not to speculate as to the cause of this particular incident.

What are the some of the risks that accompany increasing ship sizes?

Khanna said that larger ships generated economies of scale for ship owners, but the flip side was that there was a disproportionately greater cost when things went wrong. Dealing with incidents involving large ships, such as fires, groundings and collisions, was becoming more complex and expensive.

Stacking containers higher on these ships made them more susceptible to strong winds, which might have been a factor in recent incidents when cargo has been lost during bad weather, Khanna said.

Fires on board large container vessels were now a regular occurrence. Such incidents could easily result in claims in the hundreds of millions of dollars, if not more, Khanna said.

While it took salvage teams almost a week to dislodge the Ever Given, other salvage operations involving large vessels had taken much longer than this to resolve. “The size of the vessel significantly increases salvage and general average costs. Mega ships require specialist tugs to be refloated and finding a port of refuge with capacity to handle such a large ship can be difficult. For some time now, many in the salvage industry have warned that container ships are getting too big for situations like this to be resolved efficiently and economically”, Khanna said.

Is the MS Ever Given incident a wake-up call for the industry? How can risk management and safety be improved?

Khanna emphasized that the Suez Canal had a good safety record overall. Around 19,000 ships transited the waterway every year and over the past decade there had only been an average of eight incidents a year.

It was also important to note that the shipping industry had seen a long-term safety improvement, driven by improved ship design and technology, stepped-up regulation and risk management advances such as more robust safety management systems and procedures on vessels, he added.

That said, Khanna warned that there was no doubt that this incident would encourage future learnings. Building ships for just economies of scale was not enough.

There were 75 reported incidents in total in the Suez Canal between 2010 and the end of 2019. More than a third (28) involved container ships and groundings (such as the Ever Given incident) were the most common cause of shipping incidents in the canal – 25 in the past 10 years or a third of all shipping incidents in the canal.

Together, grounding, collision and contact incidents accounted for half of all shipping incidents in the Suez Canal over the past decade.

Khanna said that “we need to look more closely at how we can minimize the risks of mega-ships, especially in ports or in bottleneck passages like the Suez Canal or the Panama Canal, given the disruption we have seen that grounding incidents can cause”.

He said that the port and canals should have access to adequate resources, such as specialized tugs, in relatively short time. Khanna also felt that there might be valuable lessons to be learned around pilotage in such waterways, especially when it involved mega ships. “It might be best to put additional restrictions on mega ships entering very narrow stretches of canals based on certain weather conditions”, said Khanna, adding that this was why it was so important the VDR of the Ever Given was studied so we could establish the root cause of this incident and therefore establish how best to prevent it happening in future.

Will it become more expensive or even impossible to insure mega ships?

Khanna said that AGCS, as a shipping insurer, wanted to support the industry and its growth. “We have nothing against ships getting bigger, but all the additional aspects that come with this increase in size need to be considered from a risk management perspective”, Khanna said.

He concluded that “for many years regulations have not kept pace with the growth of vessels and regulatory modernization is urgently needed to ensure container vessels are sustainable and safe”.

Khanna noted that the shipping industry was expected to comply with the rules for safe operations on board and to continuously work on improving safety. “The coronavirus pandemic is putting further pressure on maintenance cycles and margins are under strain, but we shouldn’t compromise on safety standards. We all need to think in more innovative ways.”

In another, earlier,  article, Régis Broudin, Global Head of Marine Claims at AGCS, reported on potential implications for marine insurance claims as a result of the Suez Canal blockage.

What kind of claims activity is the marine insurance market likely to see from the blockage of the Suez Canal caused by the Ever Given container ship?

Broudin said that although the current situation was still uncertain, potential claims scenarios were likely from a number of different areas. Any damage caused to the vessel during the incident, such as to the bottom of the vessel or its propeller, would be covered by hull and machinery (H&M) insurance. H&M insurers would also be responsible for the costs of the salvage operation, including the freeing, refloating and towing of the vessel.

What about third-party claims?

Broudin said that there were many scenarios for third party liabilities that might arise from this incident, including any damage caused to infrastructure or claims for obstruction. These were typically covered by one of the 13 International Group clubs and in this case UK P&I Club was the P&I insurer. Liability claims could come from organizations such as the Suez Canal Authority for loss of revenues (and also potential damage to the canal), as well as from other vessels blocked in the area (business interruption/loss of hire, or claims for compensation of cargo delays).

Do you also expect to see cargo-related claims?

The cargo on the vessel would be insured separately. The initial reports were optimistic that there had not been significant physical damage to the cargo on board the Ever Given. The vessel appeared to have maintained its power supply, so any refrigerated cargo was expected still to be in good condition. However, there was the potential for cargo claims resulting from damage caused to perishable goods from delays.

On the matter of General Average, Broudin said that the only way for cargo interests to contest GA would be to prove the unseaworthiness of the vessel or the wilful misconduct of the owner. If they succeeded in that then they would have a recovery action against the vessel owners and their P&I insurer(s).

Broudin noted that the settlement of a General Average case could be a lengthy process. “It can take years to settle the final claim and the increase in the size of container vessels is ensuring this process is taking longer. Hence if the ship-owner considers the expense to be manageable they typically prefer not to declare it”.  However, once expected costs look likely to exceed any General Average threshold in any insurance policy, it was more likely to be declared.