By Captain Rahul Khanna, Global Head of Marine Risk Consulting, Allianz Global Corporate & Specialty
September 16, 2022
While the Covid-19 pandemic resulted in few direct claims for the marine insurance sector, the impact on the welfare of crews and the boom in shipping and port congestion, exacerbated by the Ukraine invasion, raises potential safety concerns.
Demand for crew is currently high with the shipping boom, yet following the Covid-19 pandemic many skilled and experienced crew are leaving the industry, having endured many months, and in some cases, years, stuck on vessels. For those that choose to remain, commercial pressures are running high, which can lead to mistakes and shortcuts.
High demand for shipping is also affecting the risk profile of certain sub-sectors, including container shipping. The global fleet is ageing, yet values and exposures are rising. High freight rates are also leading some operators to carry containers on bulk carriers, where crews are not trained or experienced in handling containers, while such vessels are not designed to carry them.
Crew crisis – Skill shortage in the making
Seafarers were the unsung heroes of the pandemic, keeping the world supplied with food, energy, raw materials and manufactured goods. Yet, Covid-19, and now Russia’s invasion of the Ukraine, has taken its toll on the industry’s workforce.
Covid-19 restrictions and travel bans meant hundreds of thousands of crew members were stranded on ships, some for years. At its peak in 2020, it was thought that up to 400,000 seafarers were unable to be repatriated, falling to 200,000 in 2021. The Covid-19 crew crisis is now largely over, but the experience is likely to have long-lasting effects.
In what has been termed the ‘great resignation’, the pandemic prompted many workers to rethink their work life balance, with some choosing to retire or switch careers. The combination of the pandemic and current working conditions risks a future skill shortage for the shipping industry.
Crew welfare and retention rate is a risk factor considered in marine insurance underwriting. From a risk assessment perspective, insurers prefer high levels of crew retention and evidence of good people risk management. Particularly with more modern vessels and technology, the ability to attract and retain experienced crew is critical.
Russia’s invasion of Ukraine has further ramifications for a global maritime workforce already facing shortages. Russian seafarers account for just over 10% of the world’s 1.89 million seafarers, while around 4% are from Ukraine.
With many direct flights to Russia suspended, and with fewer vessels calling at Russian and Ukrainian ports, seafarers from these countries may struggle to return home or re-join ships at the end of the current contracts. Ultimately, seafarers in the Black Sea are in a perilous situation, stuck onboard vessels or in ports with dwindling supplies and under fire, which is yet another blow for the industry and global supply chains, given crew levels have not yet returned to normal levels.
Regular crew changes are required across the world to ensure the flow of manpower is maintained. Last year, the International Chamber of Shipping and shipping trade association BIMCO warned there could be a “serious shortage” of officers within five years if action is not taken to increase training and recruitment levels. The report predicted that there will be a need for an additional 89,510 officers by 2026, yet there was a shortfall of 26,240 certified officers in 2021.
Higher values, conversions and older vessels increase exposures
The economic rebound from Covid-19 lockdowns has created a boom time for shipping, with huge increases in charter and freight rates. While higher rates are a positive for many in the industry’s finances, changing the use of vessels to take advantage of this, and extending the working life of ships raises warning flags for underwriters.
High demand for container and bulk shipping has seen the value of vessels rise dramatically, while charter and freight rates have skyrocketed. Charter rates in the container and LNG markets hit an all-time high last year, and a decade high in the dry bulk market, while values remain well above historical averages, according to VesselsValue.
At the same time, the impact of inflation resulting in rising claims costs adds to this challenging environment. Higher freight rates and a shortage of container ship capacity has tempted some operators to use bulk and product carriers to transport containers. It has also led some tanker operators to explore the possibility of converting vessels.
The use of non-container vessels to carry containers can raise questions around stability, firefighting and the securing of cargo. Bulk carriers and tankers are not designed to carry containers. Crews may not be trained or experienced enough to handle containers or respond appropriately to an incident at sea. Carrying containers could also change the maneuvering characteristics of a vessel and affect how it behaves in bad weather and strong winds. Converting a vessel or changing its use would likely be viewed as a material change in risk profile and could be categorized by underwriters as a higher risk.
With demand for shipping high, owners are also extending the working life of vessels. Even before the pandemic, the average age of vessels in the global merchant fleet was rising – 21.75 years in 2021, or 14.7 years for vessels greater than 2,000 gross tonnage (GT). This compares with around 19 years a decade ago, and 13 years for vessels greater than 2,000 GT, according to the IUMI Stats Report 2021.
Analysis has shown older container and cargo vessels (aged between 15 and 25 years old) are more likely to result in a claim. Newer ships need less maintenance and have the latest technology, which typically translates to a lower risk. Older ships are more likely to suffer from corrosion, while systems and machinery are more prone to failure and breakdown.
Port congestion and commercial pressures heighten risk
Covid-19 measures in China, a surge in consumer demand and the invasion of Ukraine have all been factors in ongoing unprecedented port congestion.
Congestion at the US ports of Los Angeles and Long Beach reached record levels in November 2021, with 116 container ships either in port or at anchor, while in March 2022, Los Angeles recorded its third-busiest month as work continued to clear marine terminals of cargo and reduce the number of ships waiting at sea.
At the same time, repeated outbreaks in China, resulting in the staggered lockdown of Shanghai in March/April 2022 for example, and Russia’s invasion of Ukraine is compounding ongoing supply/ demand pressures for shipping, which have resulted in port congestion, higher freight fees and longer transit times. Overall, port congestion globally is running above the levels seen last year, with specific container fleet congestion trending towards previous highs, Clarksons Research noted in March 2022, while the impacts of the invasion are likely to create further inefficiencies across the maritime transport system.
Port risks are already increasing with larger ships, which concentrates large volumes of trade into the fewer larger ports that have specialist infrastructure. Accumulations of cargo exposures at mega ports have been rising, while commercial pressures increase the risks of mistakes and accidents. Ports are also increasingly reliant on technology, where an outage or cyber-attack could effectively close a port.
Commercial pressures are already a contributing factor in many losses that resulted from poor decision-making. The pressure on vessels and crew is currently very high. The reality is that some may be tempted to ignore issues or take shortcuts, which could result in future losses. AGCS analysis shows that 75% of shipping incidents involve human error.
The international shipping industry is vital to world trade, so vessel safety is critical. While the sector continued its long-term positive safety trend over the past year, emerging risks and the lingering effects of the pandemic continue to challenge the industry. The insurance industry remains a steadfast partner helping the industry navigate these unprecedented times.