Mitigating increasing risks in shipping

The shipping industry, a cornerstone of global commerce, stands at a critical crossroads, facing an unprecedented array of challenges that test its resilience and adaptability. In an era marked by rapid environmental shifts, geopolitical tensions and technological advancements, the maritime sector finds itself navigating turbulent waters, literally and figuratively.

At the forefront of these challenges is the spectre of climate change, which casts a long shadow over maritime operations. Rising sea levels, increasingly severe weather patterns and shifting ocean currents pose significant risks to vessels travelling the world’s waterways. The threat of ships running aground because of unforeseen hazards emphasises the urgent need for enhanced safety measures and navigational protocols. Moreover, the environmental impact of shipping emissions looms large, prompting calls for greener, more sustainable practices across the industry.

In addition to environmental concerns, piracy remains a persistent threat, particularly in regions notorious for maritime crime. Armed attacks, hijackings and cargo thefts continue to disrupt trade routes, endangering the lives of seafarers and inflating insurance premiums for shipowners. Efforts to combat piracy through international cooperation and enhanced security measures have yielded some success, but remain an ongoing challenge for the maritime community. 

In the Red Sea, Houthi rebels have begun an increasingly serious campaign of attacks against shipping vessels to protest against the war in Gaza and disrupt economic activity. To avoid this danger, shipping lines have rerouted around the Horn of Africa and the Cape of Good Hope, causing major delays and increased costs. 

All of this has thrown up challenges to the insurance industry in trying to ensure the best cover possible for shippers looking to deliver for their customers.  

The advent of the COVID-19 pandemic in 2020 sent shockwaves through the global economy, with far-reaching implications for the shipping industry. Nationwide lockdowns, travel restrictions and supply chain disruptions brought about a domino effect, leading to container shortages, port congestion and skyrocketing freight rates. The resulting strain on logistics networks laid bare the industry’s vulnerabilities, prompting calls for greater resilience and contingency planning in the face of future crises. The after-effects of the pandemic are still visible, as the global demand for containers increases, and supply struggles to keep pace.  

The world-changing events of the pandemic coincided with a hardening insurance market characterised by reduced capacity and increasing rates. As the world grapples with the fallout, geopolitical tensions further complicate matters for the shipping and insurance industries. 

Strategic chokepoints, such as the Suez Canal and the Gulf of Aden, serve as vital arteries for global trade, making them prime targets for geopolitical manoeuvring and potential conflicts. Escalating tensions relating to territorial disputes, and regional conflicts all contribute to an atmosphere of uncertainty, prompting shipping companies and insurers to reassess their risk exposure and contingency plans. As a result, companies are seeing their freight costs increasing exponentially, In the past six months alone, prices for freight containers from Asia to the US have doubled. Alongside these challenges, insurance and re-insurance costs have risen significantly, affecting premiums for firms across the globe.

Infrastructure strains add another layer of complexity to the maritime landscape, with ageing ports, congested waterways and inadequate facilities impeding the flow of goods and hampering efficiency. The Panama Canal, a linchpin of international trade, has faced challenges in recent years because of low water levels caused by drought and climate change, leading to operational disruptions and delays. Similarly, ports around the world struggle to keep pace with the ever-growing size of container ships and the escalating volume of global trade, exacerbating congestion and logistical bottlenecks. 

Cyber attacks

Amid these challenges, cyber risks loom large as the industry becomes increasingly reliant on digital technologies and interconnected systems. Cyberattacks targeting maritime infrastructure, such as port facilities and shipping networks, pose a significant threat to operational continuity and data security. The need for robust cybersecurity measures and incident-response protocols is paramount to safeguarding the integrity of maritime operations in an increasingly digitalised world. 

Despite these risks, a recent report – by law firm HFW and maritime cybersecurity specialist CyberOwl – states that a large percentage of the shipping industry does not have cyber insurance, with the average cost of an attack upwards of $150,000. While there has been an increase in the number of companies looking for cyber insurance cover, it is still a small percentage of the industry, in what is a relatively young risk market.

General average

Continuing with the theme of insurance that responds to modern-day risks, there is a rise in ‘general average’ claims. While the declaration of general average was previously rare, it has been more common since the turn of the century.

The costs that are redistributed following a declaration can be significant and could, potentially, affect cargo owners, including the refusal to release goods until the owner accepts responsibility and any associated costs. Marine insurance provided by shippers should include cover for where general average is declared.

For general average to be declared properly by the ship’s owners/master there must be: an event, beyond the ship owner’s control, that imperils the entire venture; a voluntary sacrifice; and something saved. The ‘sacrifice’ might be the jettison of certain cargo, the use of tugs or salvors, or damage to the ship.

General average requires all parties concerned in the maritime venture (hull/cargo/freight/bunckers) to contribute to make good the ‘sacrifice’; they share the expense in proportion to the value at risk in the venture. The incident involving the Ever Given getting stuck in the Suez Canal serves as a prime example of such an event. Resolving these general average claims spans years, potentially, and may impose significant financial burdens on the parties involved.

Another recent example that made the headlines was the Baltimore Bridge disaster, when the Dali lost control and collided with the bridge, resulting in its collapse and up to $4bn in damage. The process to declare general average has been announced recently and all cargo owners with goods on board will, potentially, share in the financial repercussions of the incident. It is paramount that shippers understand how marine insurance policies they have in place respond to these events.

In light of these challenges, the shipping industry stands at a pivotal moment in its evolution, poised to embrace innovation and transformative change. From autonomous vessels and blockchain technology to green propulsion systems and alternative fuels, the sector is ripe for reinvention. 

The shipping and insurance industries face a multitude of challenges on increasing fronts, from environmental pressures and geopolitical uncertainties to infrastructure strains and cyber risks. As the shipping industry charts its course forward, embracing innovation, collaboration and responsible stewardship will be key to overcoming these challenges and realising its full potential in the 21st-century global economy. The insurance industries must do the same, ensuring appropriate cover exists at competitive rates for the shipping industry wherever possible.

These challenges will be conquered, but doing so requires constant innovation and planning from all involved.