This month, marine insurers come together in Berlin for the 150th annual conference of the International Union of Marine Insurance (IUMI). Hot topics and focuses will likely include moving to a net-zero future, the steps needed to deliver resilience, the safe navigation of shipping routes, and how to protect marine transport's role as the distribution channel of choice.
We have partnered with Emerging Risks to explore how the posing and imminent risks of climate change are impacting how we take action against current and future challenges. The industry can't afford to sit back - it needs to act now.
Act now or pay later
A study by RTI International, a not-for-profit research institute, for the Environmental Defence Fund (EDF) warns the global shipping and port industry is susceptible to billions of dollars in infrastructure damage and trade disruption from climate change impacts.
RTI have concluded that without ambitious action to reduce emissions, climate change impacts could cost the shipping industry up to $25 billion every year by the end of 2030.
Disruption to supply chain
Economies heavily reliant on manufacturing could be severely hit by supply chain disruption caused by climate impacts. There are growing concerns that as climate change accelerates, these effects will account for an ever-greater proportion of economic losses.
The current and ongoing supply chain disruption and congestion at ports across the world caused by lack of access to the Panama and Suez Canals, is concerning both shipping companies and cargo owners, with the situation showing little signs of improvement. Many vessels have given up on using the canal in favour of travelling around the Cape of Good Hope, increasing the cost of dry bulk shipping by approximately 14% compared to the previous year.
A study by a team led by University College London said the best-case-scenario would see global temperatures rise by 1.5 degrees Celsius over pre-industrial levels by 2060, compared to the middle course - most experts believe this is the likely outcome - of a 3 degrees Celsius rise. A worst-case scenario was modelled on a global temperature rise of a staggering 7 degrees Celsius.
Rising temperatures
Natural catastrophe events are happening at higher frequencies across the globe, each presenting dangers and challenges. Rising sea levels risk displacement and water shortages, along with the threat of lower depths in some of the world's most important waterways.
Calvin Gray, RSA’s London Market Marine Director, UK Specialty, says the threats have already materialised, including the impact on the ability of the maritime sector to trade. “The current problems with the Panama Canal - the reduced water levels and the resultant requirements to change the size of vessels and the number of transits that are able to be accommodated - highlight that climate change in the maritime sector is already being felt,” he explains. “It tasks us to track the challenges for businesses; to identify how they are evolving and how, in turn, we see that changing the plans and operations of our clients.”
Reduced water levels create new navigational challenges for vessels. There are plans being put in place to build more lakes, which will provide more waters for lock systems.
Arctic transit risks
The reduction in polar ice caps has brought the possibility for marine transits across the Arctic and the potential for marine tourism. However, it brings with it real risks for vessel owners and insurers alike.
Michael Gregory, RSA’s Director of Underwriting Strategy for UK & International, explains: “The greater intensity of weather events is impacting the ability to travel, it is having an impact on shipping routes. The melting of Arctic ice may well open up new routes, but those routes will come with new risks.
“We are likely to see new ocean regulations and shipping safety rules and these will need to be understood. Environmental regulations will impact shipping operations and associated costs. Our challenge is how do we as insurers help clients manage those risks."
The polar regions can be considered the most challenging environments to navigate by sea due to risks presented by unpredictable weather and climate factors. Extreme weather events and the effects of climate change, such as precipitation in Arctic deserts (causing icing), unexpectedly high ocean waves in the Drake passage (causing damage to ship windows), and rapid Arctic sea ice drift, may increase uncertainties in forecasts and make navigation unsafe.
The future of fuel
While the world knows the path it wishes to navigate in terms of the transition to a sustainable maritime industry, it has yet to decide on some of the fundamental issues that will power the journey.
Calvin Gray says there needs to be decisions made about the fuels that will power the vessels of tomorrow - and the decisions need to be taken in time for the right infrastructure to be implemented. “We have to look at the future of shipping and particularly around the future of how vessels will be powered,” he explains. “There is talk of hydrogen and nuclear-powered vessels. Both will come with significant risks and will require new vessel and engine design, new technology and risks which will need to be assessed and accurately priced.
“We are currently seeing two or three new fuel types being discussed and feasibility assessed. These key questions will be what will the technology look like and what will the timescale be, and what will it mean for the risks?
“We have to also look at the impact on shipyards with the new vessel designs. We need to consider the technology that will be needed and the additional facilities that yards will need to put into place.”
Ports and infrastructure
Over 80% of global trade goes through the world’s ports, and while vessels can move in order to avoid particular climate events, ports do not have the luxury.
Ports and connecting coastal transport infrastructure form complex systems that can already be heavily impacted by rising sea levels. Additionally, potential increases in the frequency and intensity of extreme sea levels due to storm surges and extreme waves, can cause permanent or temporary inundation.
Michael Gregory adds: “There are likely to be challenges around access to ports. There may be national regulations that will impact the ability of ships to use ports, and we are already seeing some shipping companies relocating to ports and jurisdictions that have less onerous environmental regulations and requirements.
“Ports remain a live risk. For instance, if a severe weather event sees a port close in China, that can have a significant impact on the ability of vessels to load and unload.
“There are likely to be financial risks. With increased losses the reinsurance market may well look to coverage and pricing and that will likely affect primary rates.”
Long-term solutions
It's key to not stand still and to think of the here and now - a long-term, proactive approach to the risks presented now and in the future is critical for insurers.
Calvin Gray says: “Across the spectrum of risks, insurance has to be part of the conversation. The client needs to understand why we are making the decisions we are required to make. It is all about creating long-term solutions for the clients.” Gray continues: “As an industry we need to lead by example. At RSA, we recognise the threats that climate change can pose to our business and we are taking action. We have a committed aim to achieve net zero emissions overall by 2050, to align with the Paris Agreement, and to halve our operations emissions by 2030.
“We’re doubling down on helping people adapt to climate change. The Intact Centre on Climate Adaptation at the University of Waterloo in Canada is our signature partnership on climate adaptation and, through applied research, it provides practical guidance to help people to adapt to floods, wildfires and extreme heat. In the UK we will initiate new partnerships to support community based climate adaptation and resilience programmes.
“We recognise the opportunity that exists for us to shape climate-friendly behaviours through our products and pricing and by raising climate change awareness.
“We are and want to continue to play an active role in de-risking existing and new industries that can make a difference in building a sustainable future. That means we need to create and adapt products to help industries transition.”
Peter Verhesen, RSA’s Head of Marine Europe, says “There is a recognition that risk management has to be at the heart of the maritime market’s efforts to mitigate the threats ahead. We all know that climate change is real and if insurers do not step up when it comes to climate change then natural catastrophes will impact insurers’ portfolios and consequently insured’s premium spend.
“Mitigation of the exposures will be difficult though, given the nature of some of the impacts such as natural perils and insurers may well look to control those risks through more careful underwriting. Where we can and should add value is through strong risk management for our clients so as to improve decision making (around storage location selection for instance) enabling insurers to continue taking some of those exposures off of the insured’s balance sheet.
“That’s why we need to continue raising awareness and articulate to our clients the issues around exposures to natural catastrophes.
“Clients with a stronger climate strategy and risk management will have a better loss experience which they will ultimately benefit from through wider coverages and better premium rates than their competitors that aren’t prepared.”
Insurance must take its rightful place at the centre of discussions that are currently gathering pace around the impacts of climate change. There is no doubt that the sector will be expected to play a key part in delivering solutions.
At RSA, we aim to achieve net zero emissions overall by 2050, to align with the Paris Agreement, and to halve our operations emissions by 2030. Find out more about our climate strategy, and how we're helping people, businesses and society mitigate and adapt to climate change.
