The shipping industry has largely proved resilient to the COVID-19 outbreak, says Allianz. However, a sharp economic downturn and difficult operating conditions present a unique set of challenges.
Operationally, the sector appears to have responded well to the initial impact of the pandemic, including disruption
to crew changes, shore-side services and the risk of outbreaks on board vessels.
The shipping industry has largely continued to operate around the world, despite disruptions at ports and to crew
changes, facilitating the movement of essential supplies and medicines that are needed to keep a country running and to deal with the global public health crisis, notes Baptiste Ossena, Global Product Leader Hull Insurance at AGCS.
The sector also faces the task of operating in a very different world, with the uncertain public health and economic implications of the pandemic. While risks from perils of the sea are reduced for vessels waiting at anchorage or in lay-up, new challenges have evolved which were not present in historical situations involving global economic slowdowns
1. Crew welfare could lead to increase in human error
One of the biggest immediate issues for shipping companies during the pandemic has been the inability to change crews, which is essential to ensure safety, crew health and welfare, according to Captain Andrew Kinsey, Senior Marine Risk Consultant at AGCS.
Port, border and travel restrictions have led crew members to extend their service on board ships, unable to return to homes and family. Most major ports have imposed restrictions on vessels and crew — some 120 countries implemented restrictions, while 92 prohibited crew changes entirely, according to data from Inchcape Shipping Services.
Extended periods of working on board a vessel can lead to crew fatigue, which is known to be one of the underlying causes of human error, estimated to be a contributing factor in 75% to 96% of marine incidents, says Kinsey.
2. Impact for marine insurance claims
While it is too early to estimate the final total of insured losses, it is thought the biggest impact of pandemic-related insurance claims for marine will be felt by the cruise ship and protection and indemnity sectors, through ship-owners’ liability to passengers and crew and disruption to operations. Cruise ship operators may hold specialist business interruption policies, although such cover will typically exclude pandemics and infectious diseases, unless specific extensions have been intentionally purchased.
The cargo insurance sector is also likely to see claims as lockdown measures cause delays to goods held in storage or in transit. High-value, perishable or temperature-sensitive cargo is particularly at risk of damage or reduced value, as the outbreak disrupts supply chains.
Lockdown measures and reduced staffing levels at warehouses and facilities may also increase the risk of theft and fire and damage due to extended storage.
Initially, hull insurance has been largely unaffected by the pandemic, although there is the potential for some loss of hire claims.
3. Economic fallout threatens to unwind years of safety gains
As the world emerged from the first wave of coronavirus, the future for trade looked bleak. The International Monetary Fund says global GDP growth will fall to -3% in 2020, while the World Trade Organization (WTO) expects world trade to fall by between 13% and 32% in 2020. A partial recovery is expected in 2021, although this is dependent on the duration of the outbreak and the effectiveness of policy responses.
The pandemic has already started to affect maritime trade, which had already been slowing, weighed down by trade tensions and weakening economic growth. The WTO Goods Trade Barometer showed a sharp contraction in the
second quarter of 2020, falling to its lowest value on record. The biggest falls were in automotive products and container shipping, reflecting weak demand for goods as well as supply-side constraints.
The first half of 2020 could see a 25% fall in shipping traffic, with a 10% drop for the year overall, according to maritime analyst, SeaIntelligence. Many of the world’s largest ports have reported reductions in volumes while AP
Moller – Maersk, the world’s largest container shipping company, says container volumes are expected to be as much as 25% lower in the second quarter of 2020.
4. Cargo damage and delay likely as supply chains come under strain
The coronavirus pandemic has brought about sudden changes for cargo transportation, impacting shippers, air freight and transport companies around the world. Although cargo transportation is widely recognized as an essential activity, a number of cargo handling companies shut down operations during the outbreak while ports have been operating under restrictions.
Cargo stored in high-risk areas without appropriate security controls or protective safeguards runs the risk of large losses from fire or extreme weather events, while delays may also result in cargo damage to perishable or
temperature-sensitive goods. Damaged goods and containers is one of the most frequent causes of insurance industry claims in the shipping industry, accounting for more than one in five claims, according to AGCS analysis.
The pandemic has heightened the risk environment around high-value and temperature-sensitive goods in particular, according to Khanna.
5. Disruption to maintenance raises machinery damage concerns
Ship-owners run the risk of delays and machinery breakdown as the pandemic hinders essential maintenance and servicing. Disruption in supply of spare parts and essential consumables like lube-oil and hydraulic oils can delay scheduled maintenance or result in crews using alternative grades or brands. At the same time, travel restrictions may affect the ability of specialist engineers to access ships to make repairs.
Machinery damage or breakdown is already the most common cause of shipping incidents over the past decade, accounting for more than a third (9,081) out of 26,071 incidents analyzed between January 2010 and December 2019.
6. Bunker analysis delays increase risk of engine damage
With the introduction of the cap on sulphur emissions under IMO 2020, many vessels have switched to using blended low-sulphur fuels, which require analysis prior to use in order to avoid engine damage and machinery breakdown. However, with coronavirus restrictions it may not be possible to dispatch fuel oil samples for analysis by shore-based laboratories.
Procedures laid out in the technical manager’s manuals provide detailed methodology for dealing with this situation and a comprehensive risk assessment will help mitigate the hazards and consequences arising from use of bunkers
without analysis. Onboard testing kits are useful for carrying out preliminary checks while prebunker analysis reports can help to address concerns regarding bunker specifications meeting the International Organization for Standardization quality criteria. Where feasible, supply and use of distillate fuels can also be considered.
7. Disruption to surveys, port inspections and emergency response could endanger safety
Classification societies may not be able to carry out statutory surveys and inspections at some ports while ship yards could experience delays due to a shortage of workers or the implementation of social distancing measures.
Incident response services could also be affected by coronavirus measures, with worrying consequences for a major incident, such as a fire, collision or grounding, especially in an environmentally-sensitive area.
8. Cruise ship industry faces new reality with increased liability
The cruise industry, which generates more than $150bn in global economic activity and supports over one million jobs worldwide, effectively went into hibernation as a result of the pandemic. Before the outbreak, the industry had enjoyed impressive growth, with some 32 million passengers forecast to sail on cruise ships worldwide in 2020, up from 30 million in 2019. However, large coronavirus outbreaks on board a number of cruise ships, travel restrictions, port closures and a ‘no-sail order’ from the US Centers for Disease Control (CDC) in March 14 put the industry on hold.
Cruise operators face an uncertain future with vessels laid-up and questions over how they can operate during the pandemic. However many cruise lines are reporting strong demand for cruises in late 2020 and into next year and some are hoping to resume operations this summer, albeit with new safety measures and new routes.
In this new environment, cruise operators will face uncertain liabilities. A number of cruise lines face coronavirus-related legal action from crew, passengers and investors, while the owners of the Ruby Princess faced a criminal investigation after disembarked passengers were linked to an outbreak in Sydney, Australia.
9. Laid-up cruise liners present sizable risk accumulation
With the biggest cruise ships worth in excess of a billion dollars, accumulations of risk are a potential issue while coronavirus restrictions are still in place. As of April 2020, some 95% of the global cruise fleet was in lay-up, with almost half in and around the Americas, according to Lloyd’s List Intelligence. Satellite imagery shows large
clusters of vessels in the seas around Florida and the Caribbean, raising concerns about accumulations of risk for ship-owners and insurers alike, given the arrival of the Atlantic hurricane season. Similarly, at the end of May 2020, more than 20 cruise ships, including those from the biggest operators, were at anchor in Manila Bay in the Philippines, ahead of the start of what is typically the most active period of the Pacific typhoon season.
Emerging from lay-up poses another challenge for cruise operators. The monthly cost of cruise ship lay-up can be between $1mn and $3mn, but the extent of upkeep and crewing will affect the speed with which a vessel can be brought back into service.
10. Floating oil storage boom brings potential exposures
As the price of oil plummeted amid growing concerns for the coronavirus economy, demand for floating storage hit record levels, causing tanker rates to hit new highs. In mid-May, 2020, there was more than 200 million barrels of oil and products on floating storage in tankers, around 5% of global-carrying capacity, according to data from S&P Global Platts. Many tankers are idling around major oil ports and terminals in the US, Europe and Africa, with
potential exposures to extreme weather, piracy and political risks. Tankers are also being chartered for use as floating storage, which will need to be subject to certain maintenance and contractual requirements.
Oil products stored for long periods are also at risk of degradation and cargo loss. The quality of refined products can degrade over time or spoil with bacterial contamination, while some products are known to evaporate, resulting in
cargo shortfalls.
