Insurers fret over Suez Canal blockage

Insurers have been warning for years that the increasing size of vessels plying the global marine market is leading to a higher accumulation of risk. The fear is now being realised, potentially offsetting long-term improvements in safety and risk management, say experts at Allianz, a global financial services group, who commented on the Suez Canal blockage.

This comes as the Lloyds of London, a body of insurers operating in the UK market, has estimated that about $10 billion of daily marine traffic could be halted by the Suez Canal blockage, coming at a particularly bad time for global supply lines.

This is following the grounding of an ultra-large container ship in the Suez Canal, bringing traffic on the central shipping route between Europe and Asia to a standstill.

Rahul Khanna, Allianz Global Corporate & Specialty (AGCS) global head of Marine Risk Consulting, commenting on the development looks at some of the potential implications of this incident and highlights some of the risk challenges posed by ever-increasing ship sizes.

According to Khanna, such ships generate economies of scale for ship owners but also a disproportionately greater cost when things go wrong. Dealing with incidents involving large ships, such as fires, groundings and collisions, are becoming more complex and expensive, he noted.

“Fires on board large container vessels are now a regular occurrence and such incidents can easily result in large claims in the hundreds of millions of dollars, if not more. A hypothetical worse-case loss scenario involving the collision and grounding of two large container vessels, or a container vessel and a cruise ship, could result in a $4 billion loss if the costs of a complicated salvage and wreck removal and any environmental claims are included.

“Dislodging a ‘mega ship’ in a confined space like the Suez Canal will be challenging, requiring the expertise of a specialist salvage company – not all have the experience of dealing with such vessels. Their first job is to assess the degree to which the vessel is aground, and what could be the safest and quickest way to re-float the ship. A best case scenario would be that a combination of high tide and adequate tugs may free the vessel.

“However, if the vessel is hard aground then lightening the vessel may be the only option and containers may have to be removed from the ship. This will delay the salvage/re-floating process and is going to make the operation a lot more expensive,” he said.

On the potential claims scenarios from the incident, he said, “It’s still too early to comment on the causation of this incident as a number of different factors have been cited as contributing to the incident in reports.

“However, potential claims scenarios could include damage to the vessel’s hull and engine (if there was a machinery breakdown issue – a frequent cause of marine insurance claims); damage to the propeller and its shaft if the stern is aground as well; salvage and vessel removal costs – which can quickly escalate particularly in the event of wreck removal; third party liability claims especially with regards to damage to the canal; loss of any perishable goods in cargo; and business interruption and loss of revenue claims as a result of this blockage.”

If ships are unable to go through the Suez Canal, is there any chance they can take the longer route around the African coast, he replied. The option of going around the Cape of Good Hope (COGH) is always available, although it adds around 5,000 nautical miles or 9,000 kilometres to a typical journey from the Middle East to Europe. From Singapore to Europe it probably is less, around 3,000 to 3,500 nautical miles.

“This means a lot more fuel consumption and a much longer journey time (around 10 to 15 days more depending upon the speed of the vessel). Therefore, such a consideration is considerably more expensive but the ship can save on Suez Canal fees.

“The weather is another consideration as this can deteriorate while going round the Cape. Therefore, it’s not the first route choice for smaller vessels who may not even have the fuel capacity. Much also depends on the price of fuel and prevailing ship charter rates.

“Sometimes, higher fuel prices and charter rates combined could make the longer journey cost-effective. For a few days blockage it probably doesn’t make sense for ships to reroute, only if longer term delays are envisaged.”

On what could be the likely impact on global supply chains, and which goods may be affected, Khanna further noted that such incidents show the immediate impact that the blockage of one of the world’s major shipping routes can have and highlights how dependent global trade has become on mega ships.

“Between 10 and 12 percent of global trade passes through the Suez Canal with more than 50 vessels transiting it a day”.

He said Lloyds’ list had estimated that around $10 billion of daily marine traffic could be halted by this blockage, it coming at a particularly bad time for global supply lines. Car and computer makers are straining from a global chip shortage, exacerbated by a fire in a big chip making factory in Japan. Car makers have closed plants after a Texas cold snap earlier last month hit plastics production, and California ports have been hit by backlogs and delays.

The canal is an important route to transport oil and liquefied natural gas from the Middle East to Europe, and there is also the potential for delayed shipments to technology and automotive companies as well.