Edward X. McNamara, President & CEO of Armada Risk Partners, a Cleveland-based insurance broker, notes that, in the post-covid era, the insurance industry is more complex and risk averse than ever. Armada insures ports worldwide from an increasing number of risks such as extreme weather, ship collisions with port infrastructure and cyber attack.
Mr. McNamara explains how these factors affect ports, highlighting that some coverages such as port blockages are critical. ‘’Every port is different and requires tailored insurance. You have to cover your port for the specific issues that could impact your operations and infrastructure. ‘ he noted.
SAFETY4EA: What are the key challenges of maritime ports and terminal insurance industry?
Edward McNamara: One of the biggest challenges post-covid is that the insurance industry is more complex and risk averse. Ports and terminals, as a result, are at greater risk of being overcharged and underinsured by brokers who do not have the desire or knowledge to source the appropriate policies.
To compound this challenge ports are on the front line of risk. Extreme weather is becoming more common and can expose ports’ people, assets and operations to damage, disruption and third party claims. Estimates show insured losses from natural catastrophes continue to be above the 10-year average of $81bn, at $115bn. Hurricane Ian, which struck Florida in September, was last year’s costliest natural catastrophe event, with an estimated insured loss of $50-$65bn, which would rank as the second costliest hurricane of all-time.
Ports, as global businesses, are further at risk of being dragged into economic turbulence as a result of disrupted supply chains, economic sanctions, and situations like the Ukraine war. In this volatile climate we have a very clear message to ports to challenge their risk partners (brokers and carriers) when sourcing insurance policies. The way insurance companies are now evaluating policies is changing. Policies were usually assessed on NLE (Normal Loss Expectancy): This is the loss estimate expected under normal conditions. But we are seeing policy quotes moving to the more expensive risk criteria of PML (Probable Maximum Loss) or MFL (Maximum Foreseeable Loss). In this context unless your insurance broker understands the port very well and spends time sourcing a wide variety of quotes from insurance companies the port can be hit with far higher premiums than necessary. And even then that coverage, despite its expense, may not fully protect the port from the risks it faces.
S4S: What are the key priorities in your agenda for the next five years?
E.Mc.: Our priorities are raising awareness of the complexities of insurance. If you do not insure your port and terminals properly you could be faced with massive costs and disruption. We therefore want to encourage port CEOs, as well as CFOs, to examine the fine print of their insurance policy working with risk partners who truly understand them. Our business priority is built on our knowledge and strengths from working with ports and terminals globally with a focus on North America and Europe.
S4S: What is the feedback from the market with regards to maritime risks of ports and terminals? Are there any alarming trends to consider?
E.Mc.: A worrying trend we are seeing is lack of cover for port blockage. If a hurricane or ship wreck blocks access to a port, who will get it opened, how fast and who will pay? With the constant increase in rates and premiums, the feedback we receive is that some ports are looking at cutting coverages and costs. However, they are not realising that some coverages such as port blockages are critical. Many port operators believe the government will unblock their port because of the urgency of bringing in ships with essential supplies. But this could be a higher risk strategy as Government’s can be wrestling with bureaucracy and other emergency priorities. This can result in potentially massive delays and a huge loss of income if port operations are paralysed.
S4S: What are the lessons learned/ best practices from your experience so far with the insurance of ports and terminals?
E.Mc.: Best practice is to rigorously check your coverages. Often your coverage is not as extensive as you think. For example, if a ship damages the port infrastructure. How long do you want to wait for the ship operator to pay for repairs if port operations are being disrupted? It is best practice to put yourself in control of the insurance coverage so the port can take action repairs immediately. You will always prioritise your port operations better than a third party, who may not be reliable or have good insurance in place.
S4S: What are some of the key actions you are taking to address the critical issue of climate change and its impact on ports?
E.Mc.: To recognise that every port is different and requires tailored insurance. We are making ports and terminals aware that the area of unexpected losses is key in the case of extreme weather, flooding or drought caused by climate change. You have to cover your port for the specific issues that could impact your operations and infrastructure.
S4S: How can industry stakeholders best collaborate to enhance resilience as risks for ports and terminals are increasing?
E.Mc.: It is very important for ports stakeholders to come together to understand risk. There are a multitude of parties operating in a port from security contractors, shipping lines, truck and rail operators, tenant businesses and so on. The port needs to work with these parties to make sure the insurance element of their contracts is watertight and clearly understood. Too often the insurance wording in contracts is simplistic, vague and open to legal interpretation. Ports and terminals should work with their insurance brokers and port partners to review their agreements to clarify liability. This would greatly enhance the resilience of ports and terminals and their partners preventing unexpected and contentious claims.
S4S: If you could change one thing from your perspective, what would this one thing would it be and why?
E.Mc.: For CEOs to take more time understanding their insurance policies rather than leaving it to the finance department who tend to review on cost rather than best solutions and coverage. It is vital ports and terminals understand what is, and is not, covered in a policy renewal and tailor their policy accordingly.
S4S: What is your wishlist for the industry and/or regulators and all parties involved towards enhanced maritime security and due diligence?
E.Mc.: Our wishlist would include ports and terminals being more aware of the threats posed by cyber and what they should protect and why. Is it data, people, cranes, ships, infrastructure or a mix? Our experience is that most regulators are not up to speed with understanding cyber threats and a great many ports and terminals are not fully insured for attacks, but think they are. There can be a range of cyber incidents, including IT outages, ransomware attacks or data breaches. According to the Allianz Cyber Center of Competence, the frequency of ransomware attacks remains elevated in 2023, while the average cost of a data breach is at an all-time high at $4.35mn and expected to surpass $5mn in 2023.
It is certainly the case that rising tensions with China and Russia is increasing the risk of a rogue state attack. In addition, according to Allianz, a data breach is the exposure which concerns companies most (53%), given data privacy and protection is one of the key cyber risks and related legislation has toughened globally in recent years. Such incidents can result in significant notification costs, fines and penalties, and also lead to litigation or demands for compensation from affected customers, suppliers and data breach victims, as well as reputational damage to the impacted company. So there is a need for more comprehensive understanding of the cyber threat and what insurance is required depending on your port’s risk profile.
S4S: What is your key message to industry stakeholders to face the emerging threats and challenges?
E.Mc.: Understand what your challenges could be and cover your port and terminals accordingly. Consider that more Black Swan events are happening and understand potential risks. For example, if you have a big name tenant on site responsible for 40% of income. What if that business leaves and you lose all that revenue because you cannot open your port? We have seen instances like this occur and found the port and terminal is not protected by interruption coverage. The key message is: you must thoroughly horizon scan the risk you are exposed to. A port and terminal will almost always continue trade but the business running it can go bust and be replaced. Having the right insurance can not only protect you, and help you sleep easier, but keep you in business.
The views presented are only those of the author and do not necessarily reflect those of SAFETY4SEA and are for information sharing and discussion purposes only.
