During the 2019 Hellenic American maritime Forum in Athens, Mrs. Elina Souli, Regional Business Development Director, V.P. – FD&D Manager, The American P&I Club, talked about the cost and exposure of P&I incidents, which has increased substantially. She highlighted that insurers’ concerns have been impelled by major casualties over recent years, as well as international and local regulation and limitation regimes. Responding to the ever-changing risk landscape, insures have used trading surcharges; differential reinsurance rating; and limits placed on quantum of claims recoverability. However, she questioned whether the shipping industry has the capability to prevent disasters.
By Eline Souli
I would like to briefly take you through the challenges that mega ships have created with reference to the P&I perspective. The truth is that the growth of megaships has been seen as one of the main drivers of growth in shipping industry and has triggered global alliances and synergies.
What we have usually seen when dealing with mega ships are issues not of a different nature but indeed of a different scale. The P&I risks are larger in comparison with the ones raised by ordinary vessels. Nevertheless, the fact is that the overall cost and the exposure related to P&I incidents have increased substantially.
Hence, the concerns that have been raised in the insurance industry over the years- when we are talking about megaships- are very much related to the larger tankers and the concerns mainly evolved back in the 60s, starting from the supertanker ‘Torrey Canyon’ in 1967. This was one of the biggest incidents back then, involving a grounding of the vessel South-West coast of UK. There was a huge spillage, between 25-36 million gallons of crude oil and as a result hundreds of miles of coastline in Britain, France and Spain have been affected. The industry’s response to the incident was the CLC 1969, which actually imposed a strict liability regime on the shipowners. As a result, claimants did not no need to prove negligence in order to successfully pursue their action against the vessel.
The next one was in 1978 when the Amoco Cadiz split in three and sank off Brittany coast. That was a serious spillage involving 1.6 million barrels and an extensive damage to fisheries and tourist amenities. The claim that was initially raised by the French government was at level of USD 1.6 billion. This is just to give you a perspective of how megaships have affected the exposure and the figures. Back in 1989, we had the Exxon Valdez, again a big spillage. What came out of that was the OPA 1990. In this situation, we had the spillage and cleaning cost in excess of USD 2 billion. When it comes to the tanker segment, you can understand how megaships have severely affected the risk and exposure as seen from the P&I perspective.
Another segment is the large passenger ships. I am sure you all recall the Costa Concordia. The estimated total cost arising from this incident was in excess of 2 billion. Just to remind you, that this figure is actually three times the cost of construction of the vessel which was at the range of 600 million. This incident involved more than 3,000 passengers onboard and more than 1,000 crew personnel.
Last but not least, we have the container vessels. There is a continuous trend of economies of scale by shipping lines and that has evolved in container carriers increasingly ordering mega ships container vessels. The industry has adapted to that. For example, we have an expansion of the Panama Canal, which has given more freedom to the megaship container vessels to trade.
Equally, there have been some concerns raised. Recently there was legislation introduced in Texas, which provides that only one megaship container vessel with the ability to carry more than 9,500 boxes will be able to enter into the port on a weekly basis.
This was the result of an argument that these container vessels are bound to disrupt the ability of other vessels to use the port in an efficient and safe manner. The opposition has argued that by having this regulation in force there will be disruption of the supply chain and slow cargo operations. From an insurance perspective, there have been a lot of concerns rising out of these incidents vis- a- vis the international and local regulations and limitation regimes. To put things in perspective, when we are talking about passenger claims for example, we have the 2002 protocol to the Athens Convention which came into force in April 2004, and again there is a strict liability imposed there and special limits which have been increased:
- For incidents involving purely passengers to 2 billion and
- For “combined” incidents involving both passengers and seamen onboard, to 3 billion.
So you can all realize what the exposure of the insurance market currently is.
The fear right now within the context of the International Group of Clubs is mainly in relation to passenger vessels, after the Costa Concordia which also got political dimensions, and last container vessels, following the incident of MSC Napoli, back in 2007 and many others thereafter.
There is extensive discussion about potential but realistic casualty scenarios. For example, when we are talking about a big passenger vessel, you can imagine what the exposure and the risk will be in case such a vessel comes into a collision with an LNG carrier. Obviously, we are going to have massive loss of life, salvage, wreck removal, oil pollution, to name a few.
When it comes to container vessels, there is potential concern when considering a scenario involving a big fire onboard or salvage and wreck removal. We are all aware of M/V ‘Rena’ which went aground in a very remote place in New Zealand and the cost and the efforts involved for its wreck removal. Those concerns are raised when one considers the hazardous cargo that a lot of containers appear to be carrying, not having been properly declared.
In a nutshell, the question we are called to face and deal with is whether the industry has the capabilities to handle these major catastrophes. In general, the insurance industry is a reactive industry. We are trying to be proactive and discuss among us the various scenarios in order to be ready and ensure that we maintain the ability to settle such claims. From the claims’ perspective, it is not the different nature that concerns us… it is the scale of things that we have to handle.
There is a platform within the International Group of knowledge sharing. Also, we have the IG Clubs sub-committees which deal with the very issues and scenarios when it comes to big casualties. And when we are talking about the financial security, bear in mind that international group actually insures more than 90% of the worldwide commercial vessels. You understand that we have the strength to go out in the market and negotiate insurance terms. So that is a big advantage and there is also reinsurance discussions: On the dirty tankers, there are different rates. There is also the discussion about the huge container vessels, where different insurance terms have to be applied. So far, no decision has been taken.
Overall and looking at the future, we are following the loss patterns and the insurance market has indeed been adaptable to the new situations. We have adopted a hands-on approach and we aim to respond to new challenges aiming to contribute to a sustainable future.
About Elina Souli
Ms. Elina Souli is an Experienced Lawyer with a demonstrated history of working in the insurance industry. Strong professional skills in Litigation Management, Arbitration, Claims Handling, Dispute Resolution and International Shipping. Elina Souli is currently working as a Regional Business Development Director, V.P-FD&D Manager at The American P&I Club.