Arctic Shipping - A H&M Underwriter's View - Dr. Sven Gerhard Global Product Leader Hull & Marine Liabilities BMUSF May 1, 2014
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Allianz Global Corporate & Specialty Arctic Shipping – A H&M Underwriter’s View Dr. Sven Gerhard Global Product Leader Hull & Marine Liabilities BMUSF May 1, 2014
Shipping in Arctic waters – An academic exercise for H&M insurers?
http://www.arkgis.org
Liner trade Saving time and fuel on trading routes between Asia and Europe
Offshore Oil and
Gas Exploration
Offshore supply vessel operations and tanker trade
Cargo Supply Supply of indigenous people or mining operations
Fishery Moving further North and South
Tourism Traveling off the beaten track
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Arctic Shipping Trends ( Allianz Safety & Shipping Review 2014)
Tenfold 43 in 2012, 34 in 2011 and only 4 in 2010
Increase 71 large ships, mostly Russian ice-
of Vessel
Traffic breakers, navigated the route in 2013
Average number of casualties in arctic
Rise in has risen 600% according to AGCS study
Casualties 45 per year between 2009 and 2013
compared to seven between 2002 and 2007
Damage to machinery caused a third
Machinery
Damage of these incidents, reflecting the harsher
operating environment in arctic waters
Polar research institute of China suggests
Future that by 2020, 5-15% of China’s trade volume
Trends
(about $500 bn) could pass arctic waters
Russia expects a 30 fold increase by 2020
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Arctic Shipping requires amendments of the standard H&M
insurance cover
H&M insurance of a vessel is based on standard insurance terms
Insurance • American Institute Hull Clauses June 2 1977
Basics • ITC Hull 1983
• Nordic Plan 2013
Worldwide sailing areas but within the agreed trading limits
Insurance American Institute Trading Warranties July 1, 1972
Cover International Navigation Conditions Nov 1, 2003
Standard trading limits do not cover Polar zones
Insurance coverage is at risk
Insurance • Breach of warranty according to AITW
Challenges &
Requirements • Breach of provisions according to INC
Broker and insurer have to deal with planned trip prior sailing
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Arctic shipping challenges Underwriting and Underwriters
Availability of significant statistical data is limited
Limited • Relatively few claims due to limited loss experience
! Claims
Experience • Lack of claims data prohibits stochastic modeling
Limited if any basis at all for solid technical pricing
Limited Assessment of hard facts seems manageable, e.g. weather conditions, ice
Individual Limited assessment possibilities of soft facts, e.g. crew experience
! Risk
Assessment
Limited scope of surveys focused often on vessel rather than crew and
experience
Increased costs for salvage and repair due to remote locations and limited
Potential for infrastructure
Increased Unpredictable nature and acceleration factors
! Claims
Severity Existing experience outlines high severity potential
Validity of existing salvage rules (“No cure, no pay”)
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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
Reputational High media and NGO sensitivity , see e.g. Greenpeace on Arctic Sunrise or MV Akademik Shokalskiy in 2013
Risk
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
Extreme weather conditions
General Remote locations and limited time slots for access, limited infrastructure (salvage, port of refuge)
Operational
Risk Chart coverage incomplete and not always up-to-date
Operational experience of parties, e.g. oil companies, ship-owners, crews, salvage operators
Vessels prepared for operating in low temperature conditions (“Winterization”)
Vessel • Proactive approach
Winterizatio • Crew training and experience
n Risk
• Vessels built for purpose or adequately equipped – hull, machinery, pumps, valves, piping and
electrical systems
Increased loss amounts
! Increased claims severity
Elevated reputational risk of operations also affects insurers
6
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The Regulatory and geopolitical framework of Arctic shipping operations
can 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
Legal & regulations shall have due regard to navigation and the protection and preservation of the marine
environment based on the best available scientific evidence
Governan
ce 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
Geopolitic Boundary conflict e.g. between the US and Canada on the Beaufort Sea maritime
al boundary
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Severity claims do happen …
2007 – MS Explorer sinks in the Antarctic Ocean after striking an iceberg
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Severity claims do happen …
2011 - Russian fishing boat cruising around the Antarctic struck iceberg.
Crew waited nearly two weeks for rescue
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Severity claims do happen …
2012 - MSDG30
Plancius detained at South Georgia due to machinery damage
© Copyright Allianz SE 10Slide 10
DG30 MV rather than MS
Dobie, Greg (AGCS UK), 4/8/2014Severity claims do happen …
2013 – MV Akademik Shokalskiy stuck in ice with 74 passengers
© Copyright Allianz SE 11Winterization of vessels is required ... © Copyright Allianz SE 12
The IMO Polar Code – A safety net for H&M underwriters?
Ready by 2015
The IMO Polar
Implemented through amendment of SOLAS and MARPOL
Code
Will come into force probably in 2017
Applicable for shipping in Arctic and Antarctic Waters
Principles Integrated approach addressing vessels, crew and operation
Use of “goal-based/risk-based” standards
Polar Water Operation manual (PWOM) for vessel
Targets By operator
Compliance enforced through flag state (& Port state control)
The Polar code itself doesn’t set any safety standards
Implications Enforcement is only as good as PWOM for vessel
for H&M
underwriters PWOM for vessel is only as good as flag state enforcement
“Warranted vessel compliant with Polar code” doesn’t work!
© Copyright Allianz SE 13Risk Assessment through H&M Underwriters is crucial
1 2
H&M Insurance Policy Risk Assessment
Polar Zones excluded from Thorough due diligence of trading plans prior risk inception incl.:
standard coverage
Overall Trading Plan
Insurer is aware that the
insured wants to operate in Pilotage requirements Made by whom
Arctic (Antarctic) waters Permanent weather routing Strategic voyage planning
Policy amendment required Port(s) of refuge Owner performance analysis and monitoring
Classification sign-off if required against defined KPI
Icebreakers – capacity and availability (where, Follow-up process on suggested improvements
when) prior and during trade
Average weather experience in area Additional equipment required
Client loss and claims experience Options in case of emergency
3
Policy Adjustment
Crew Capability assessment of vessel
Crew experience – experienced personnel on Vessel built for purpose
Based on the risk assessment
board Ice-class as requested
the UW
Crew training and preparedness Breaking sheets of ice?
can work on
• Warranties Appropriate Winterization of vessel
• Deductibles Legal and Regulatory environment
• Premium Are vessel and trade compliant with applicable
rules and regulations?
can decline coverage
© Copyright Allianz SE 14Sources of information – a subjective selection
See: http://www.agcs.allianz.com/insights/white-papers-and-case-studies/shipping-review-2014/ 15
© Copyright Allianz SEWhy H&M insurers shouldn’t take things for granted
DG33
…. 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
© Copyright Allianz SE 16Slide 16
DG33 shouldn't
Dobie, Greg (AGCS UK), 4/8/2014Disclaimer
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 levels, (vi) the extent of credit defaults, (vii) interest rate levels, (viii) currency
expectations and other forward-looking statements that are based exchange rates including the Euro/U.S. Dollar exchange rate, (ix) changing
on management’s current views and assumptions and involve known levels of competition, (x) changes in laws and regulations, including monetary
and unknown risks and uncertainties that could cause actual results, convergence and the European Monetary Union, (xi) changes in the policies
performance or events to differ materially from those expressed or of central banks and/or foreign governments, (xii) the impact of acquisitions,
implied in such statements. In addition to statements which are forward- including related integration issues, (xiii) reorganization measures, and (xiv)
looking by reason of context, the words “may”, “will”, “should”, “expects”, general competitive factors, in each case on a local, regional, national and/or
“plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, global basis. Many of these factors may be more likely to occur, or more
“potential”, or “continue” and similar expressions identify forward-looking pronounced, as a result of terrorist activities and their consequences.
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, No duty to update.
including from natural catastrophes and including the development of loss The company assumes no obligation to update any
expenses, (iv) mortality and morbidity levels and trends, (v) persistency information contained herein.
© Copyright Allianz SE 17www.agcs.allianz.com
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