Recent events have highlighted the accumulation risks for shippers of goods, and their marine cargo insurers, before, during and after, goods have been transported by sea. James Amos, Head of Marine, France, discusses how these risks have changed and how the use of data can help insurers to better underwrite them.
Marine insurance traces its origins back hundreds of years to Edward Lloyd’s coffee house in the City of London. But while the broad principles of insuring ships getting from a to b with cargo safely on board remain, marine cargo insurance has changed a lot during that time. The size of container ships has increased exponentially, and the complexities of supply chains mean that the risks associated with cargo, and the intricacies of underwriting them, are evolving all the time.
Today’s container ships are now often enormous in size. The two largest currently in operation, MSC “Irina” and “Loreto”, can hold up to 24,346 Twenty Equipment Units (TEUs), which are containers of 20-feet-long each. These gigantic vessels are like skyscrapers on the sea. And while there are obvious efficiencies for shippers in vessels of such magnitude, events, such as the running aground of the “Ever Given” in the Suez Canal in 2021 and the subsequent blockage of the canal for 6 days, highlight all too clearly the potential cargo loss and supply-chain risks that can occur.
And while 90% of the goods shipped around the world are shipped via the sea, marine cargo has expanded to mean much more than covering goods while they are sea-borne.
Cargo coverage can apply to goods while they are in transit but also pre-shipment and while they are being stored in ports, including those in long-term storage – that is for 60 days or more. These so-called static risks also are covered by many cargo policies which is an area that we are working hard with clients to assess, manage and transfer.
Accumulation risks in transit: the challenge of getting more visibility
One of the biggest risk areas for our cargo clients is the accumulation of goods– whether that be pre-shipment, on board a vessel or in storage after shipment. There is here a double-sided issue.
Firstly, while goods are being transported, there is often a lack of transparency when it comes to cargo accumulation on board vessels. The freight-forwarding process, whereby ship operators may opt to put goods on different vessels depending on factors such as weight, mean that often our clients – and ourselves – do not always have visibility of where goods are at a given time, until there’s a declaration of claim.
Another potential risk issue here, especially where sensitive goods are concerned, is the fact that sensitive goods may be placed near other flammable goods, for example, in a shipment, again without the explicit knowledge of our clients and potentially increasing the risk of loss in case of fire, for example. Frequently, heavier containers are stacked at the bottom of a ship’s hold to reduce the risk of loss, but if this is not the case, there can be a risk of containers lost at sea in case of bad weather conditions.
For underwriters, these factors can make it difficult to define, with clients and brokers, the risk of what is being shipped. It’s not always strait forward to determine policy limits when one doesn’t know exactly what is being shipped and when.
Some clients are addressing this challenge by using sensors placed in containers giving them better visibility of what is being shipped and where it is at any given time. This is powerful information to help clients to better understand the realistic policy limits that they require and manage their risks. But these sensors remain relatively expensive and so far, their use is not yet universal.
The International Maritime Organization (IMO) and the International Union of Marine Underwriters (IUMI) have worked together to agree to tackle some of these issues by, for example, amending codes in order to lash containers depending on the predicted wave heights of a voyage or to foster a better and systematic declaration of weight. This goes some way to reducing the risk of loss of certain cargoes during adverse weather conditions, for example.
Storage risks: a closer monitoring for a better risk management
While marine cargo insurance was born to cover the risks of goods while they were being transported, for many clients the bigger risk now is potentially the risk of damage or loss of goods during storage.
Of the five largest cargo claims we have seen in the past 10 years, all were storage related claims. It’s important to remember here that marine cargo underwriters are not property underwriters – we have to adapt to cover static risks as well as those in transit.
The risk of natural and made catastrophe losses for goods in storage is a reality. Recent years have seen losses due to wildfires in South America and Australia, and flooding in South Africa, for example. As a matter of fact, NAT CAT insured events have strongly increased in number and in intensity those past five years with an average of $99 billion of covered losses (source NOVA) compared to an average of $45 billion from 2012 to 2016. The explosion at the Port of Tianjin, China, in 2015 caused insurance losses of more than $3 billion, while the explosion at the Port of Beirut in 2020 caused about $2 billion in insured losses. While by no means of all of these claims fell into the marine cargo market, many did and these events act as a salutary reminder of what can happen when things go wrong when goods are accumulated in storage.
We have been exploring a number of ways to address this risk. Firstly, our policy wordings cover events such as explosion and natural catastrophe, but rather than giving limits per location – which could result in multiple claims if an event affects many warehouses or storage facilities at a port, we now provide limits per event.
Claims experience is obviously crucial, but quality data is clearly of vital importance today. We have thorough discussions with our clients to understand the mapping of their risks, to appreciate, for example, what the maximum exposure would be on a given warehouse. This enables us not only to price the risk more accurately, but also to help our clients get better visibility of their own risk.
We also take proactive measures to deliver risk prevention – reducing the threat to our client and ourselves. For example, increased monitoring of these static exposures, of what is stored in a given location and what the risks are at that specific location helps everyone to better manage the risks.
Our Risk Scanning capabilities, for example, enable us to use the data we have about a particular location or warehouse – such as flood losses experience – to guide our clients when deciding which locations or warehouses to use. We also can use our tools to monitor natural catastrophes, for example, and notify clients if weather events are likely to affect a location or locations where they have static risks.
These tools also enable us to better allocate premium and fine-tune our reinsurance needs.
We also believe that marine cargo underwriters need to have dedicated trade-sector analysis capabilities. We have an enormous volumes of risk data, claims history, which help us, for example, to understand the occurrence period of thefts for clients that ship luxury goods, or the occurrence period of fire losses for removal companies, and so on.
This sector-specific data enables us not only to better help our clients to assess their risks, it increases the predictiveness within our own underwriting.
Data is a powerful tool, and we work to use it in our mission to move from payer to partner with our marine cargo clients. As their risks evolve and change, whether those be pre, during or post transit, we can use this data to help them to better understand their own risk profiles and to better underwrite their cargo exposures.
