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What are the (re)insurance implications of Baltimore disaster?

An early report on the incident claimed that the Dali had caught fire and sunk, which fortunately turned out not to be true. Had that been the case, this would have been an incident that would have impacted insurers and reinsurers significantly in the hull, cargo and liability categories.

WK Webster said that there was likely to be significant cargo loss and damage as a result of the ‘very serious’ incident, including to a number of containers which were reported to be hanging from the bridge. ‘It also seems almost certain that the vessel will not be proceeding with the voyage in the near future resulting in serious delays to all cargo on board.’, WK Webster said. However, this is far less bad than would have been a sinking, with the loss of many thousands of containers.

Later pictures showed the vessel intact, perhaps listing slightly, wedged under the bridge.

If general average is declared here (which must be considered a distinct possibility), the complexities of such a cargo claim will take a long time to settle. There will also be fears among the insurers that another set of legal cases could result, which would increase costs and delay final settlements.

On the hull side of things there did not appear to be huge structural damage. It certainly does not look as if there is any threat of either a total loss or a constructive total loss, which would have led to a big hit for the hull market, even for a container ship that would be considered mid-size at best (just shy of 10,000 teu). As it is, perhaps tens of millions. What would have been the greatest fear would have been a repeat of the Costa Concordia grounding, where salvage took twice as long and cost more than three times as much as would have been expected if the event had happened 30 years earlier – a result of far tougher environmental and safety rules than had been the norm in the 1980s.

But it is on the liability side that the losses look likely to be greatest. President Biden said on Tuesday that the federal government would pay for the reconstruction of the bridge, but those words were almost certainly uttered with the knowledge in Washington that it would probably be insurers that would be on the hook in the end. Last night Pete Buttigieg, US Secretary of Transportation, said that the reconstruction of the bridge “will not be quick, and will not be inexpensive”.

Chubb leads the Baltimore Bridge property cover, but subrogation to the International Group looks very likely.

The Dali is entered for P&I with International Group Club Britannia, but when the loss is of this scale that is something of a minor matter. Once it goes above $10m it becomes a Pool claim, with the cost between $10m and $100m shared among the Group Clubs relative to their size. Part of this tranche is also ‘reinsured’ (see below).

However, the loss here is almost certain to go way over $100m, which means that the IG’s larger reinsurance arrangements have to be considered.

The Pool is structured in three layers from $10m to $100m. Excess of $30m, the Pool is reinsured by the Group captive reinsurance vehicle, Hydra, (a Bermuda incorporated Segregated Accounts company in which each of the 12 Group Clubs has its own segregated account, ring fencing its assets and liabilities from those of the company or any of the other Club cells).

Hydra reinsures each Club in respect of that Club’s liabilities within the Pool and reinsurance layers in which it participates.

Once one goes over $100m, the GXL reinsurance programme attaches. This provides up to $2bn of reinsurance cover in a three-layer structure.

Layer 1 is $650m excess of $100m.

Layer 2 is $750m excess of $750m

Layer 3 is $600m excess of $1.5bn.

Hydra retains a $107.1m AAD within the 75% Market Share in Layer 1

There are three multi-year private placements in Layer 1, two of which are 10% and one of which is 5%. These are

A further $1bn of reinsurance cover – known as the Collective Overspill – is purchased by the Group to provide protection in respect of claims exceeding the upper GXL cover limit of $2.1bn.

There is no evidence that this incident was the result of a cyber attack, which would change slightly the reinsurance arrangements.

There is potential for claims spreading far wider than the cost of rebuilding of the bridge. The Deepwater Horizon disaster ran on in the courts for well over a decade, and it would be naïve to assume that this event will be litigation-free.

While reinsurers are reasonably accustomed to multi-billion dollar loss events, these are rarely single incidents, and tend to be linked to natural catastrophes. (Coincidentally, Swiss Re yesterday morning reported that 2023 saw $108bn in insured losses form 142 natural catastrophes. The most destructive natural catastrophe of the year was the earthquake in Turkiye and Syria in February, with estimated insured losses of $6.2bn). Eight-digit losses from non-natcat events are, thankfully, very rare. The marine liability reinsurance divisions of the global reinsurance sector will be taking a hit.