Can we afford to pollute the ocean with antiquated vessels?

The COVID-19 pandemic has reshaped the landscape, forcing the marine insurance industry to change the way it views risks. The marine industry is one of the most severely disrupted, through global supply chains, manufacturing output and delays to cargo in transit.

The global marine insurance market was valued at $26.83bn in 2020 and is projected to reach $33.90bn by 2028, growing at a CAGR of 3.1% from 2021 to 2028. While we cannot ignore the fact that the international maritime transport industry is a major part of the global economy, the reality is that it is also a significant contributor to global CO2 emissions which have been linked to wide-ranging and potentially devastating climate change impacts associated with rising sea levels and increased frequency/intensity of extreme weather events.

New ESG initiatives and policies

At the 26th United Nations Climate Change conference (COP26), in conjunction with the United Nations’ General Assembly, nearly 240 signatories of the Call to Action for Shipping Decarbonization demanded that national governments and international regulators establish policy frameworks that would ensure the industry reaches the goal of shipping decarbonisation by 2050.

These policy frameworks should be supported by the intermediate goals of having at least 5% zero emission fuels in international shipping by 2030, while the necessary infrastructure for scalable zero-emission fuels and energy sources, including production, distribution, storage and bunkering should also be in place by 2030.

A number of insurers and reinsurers, in cooperation with the UN Environment Programme, are working to establish the Net-Zero Insurance Alliance (NZIA). The seven companies (AXA, Allianz, Aviva, Munich Re, SCOR, Swiss Re and Zurich Insurance Group) share the opinion that the global (re)insurance industry can perform a crucial role in accelerating the transition to a resilient, net-zero emissions economy, in line with the 1.5°C target of the Paris Agreement on Climate Change.

The Poseidon Principles for Marine Insurance, developed in an effort spearheaded by global insurance institutions, represent a pioneering framework to engage with the shipping industry and support net-zero insurance.

These initiatives are beneficial to speeding up decarbonisation efforts in the maritime industry. Rapid action to convert existing fleets will be critical – with these being imposed by the International Maritime Organization, many vessels are going to be non- compliant.

Changes in ship design, fuel and propulsion types and infrastructure will affect the risk environment for marine underwriters. They therefore must be prepared to assess new risks and potential safety concerns. Marine insurers are also likely to act as facilitators for decarbonisation by offering advice to their insureds.

Insurance under pressure

As per the preamble of the UN Environment Programme Financial Initiative’s Principles for Sustainable Insurance, the insurance industry’s core business is to understand, manage and carry risk. With increasing significance assigned to a forward looking and sustainable business conduct, a growing number of insurers are taking ESG factors into consideration during their decision-making processes.

The growing pressure from all sectors of society to respond and find solutions to ESG issues has led to some reconsiderations within the marine insurance industry. These insurance companies are working on gaining a better understanding of predominant principles to identify and define ESG standards that align with their values and commitments as a company.

This approach will also guide what information they will seek from clients and other third parties. Considerations may comprise aspects of underwriting, claims handling, loss prevention, investment strategies, recruitment and education. Acknowledging the importance of ESG issues for the industry, some insurance companies have already integrated ESG issues and principles into their corporate strategy and established reporting procedures to ensure compliance with their defined ESG standards.

The marine market is already volatile with increased claims due to old risks like fire and new ones like cyber and complexities like larger ships, undeclared and dangerous cargo, higher general average costs and increased subrogation challenges.

Now we are witnessing another challenge faced by the marine insurance industry due to the new call to action for shipping decarbonisation, green fuels and natural disasters.

In addition, we are going through a difficult year for many insurers and insureds and regrettably, 2022 too does not look much better for the marine insurance industry due to knock-on impacts.

Rough seas ahead

We all know that the hard market existed before the COVID-19 pandemic and the depressing reality is that the market is further deteriorating. Unfortunately, we do not see signs that the hard market will dissipate soon. Insureds should expect to continue to face rate stress and possible dropped capacity across multiple coverage lines in the wake of this unprecedented situation. Insurers are expected to assess their old models of risk assessment and it may be the situation that due to the declining asset values, higher capital, and new unprecedented risks, they may need to adjust their approach when it comes to placement of reinsurance.

Similarly, reinsurers are likely to adjust their product offering and rates given the changing landscape of the marine industry. Without a doubt, while these are testing times, insurers will need to be comprehensive in their preparation to mitigate these knock-on effects in order to return to profitability at the earliest.

Although the impact of the above on the insurance industry is severe, once we adapt to these new conditions, it will also create a huge opportunity for the industry. As with every problem, there is a solution and an opportunity to learn and create something that is meaningful and might give us more options to make our business more robust.