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A new report from Allianz reflects a generally positive trend: The number of ships lost globally continues to decline. Losses of large ships, however, continue to plague ship owners and marine insurers.
Just 54 large ships were lost worldwide last year, according to the Allianz Global Corporate & Specialty (AGCS) Safety & Shipping Review 2022, released in mid May. Total losses are down 57% over the past decade.
“Total losses are at record lows — around 50 to 75 a year over the last four years compared with 200+ annually in the 1990s,” said Captain Rahul Khanna, global head of marine risk consulting at AGCS.
Overall, there is still plenty of risk-transfer capacity, and buyers of marine insurance shouldn’t be experiencing undue sticker shock.
“The rating environment for cargo remains generally favorable after consecutive years of rate rises. Despite some increasing hazards, however, additional rate rises are more challenging than before as there is more capacity and willingness to use it in the market today,” said Rich Soja, North American head of marine and global head of inland marine at AGCS.
“Beyond pricing, terms and conditions remain stable, or are more restrictive in the case of cyber and war,” he added.
Fires, container ship and car carrier incidents leading to oversized losses, and general average being invoked are becoming more frequent, the report stated.
Important risk factors cited include: growing use of non-container vessels to carry containers, working life of vessels being extended, port congestion putting crews and facilities under pressure.
Sustainability concerns are driving up costs of salvage and wreck removal. Decarbonization of the shipping industry is creating new risks.
During 2021, 54 total losses of vessels were reported globally, compared with 65 a year earlier. This represents a 57% decline over 10 years (127 in 2012), while during the early 1990s the global fleet was losing 200+ vessels a year.
The 2021 loss total is even more digestible when you consider that there are an estimated 130,000 ships in the global fleet today, compared with some 80,000 30 years ago. Such progress reflects the increased focus on safety measures over time through training and safety programs, improved ship design, technology and regulation.
That said, big ships still sink, when perhaps, experts feel they shouldn’t.
“It is surprising that these big incidents keep happening,” said Miguel Herrera, senior maritime risk consultant with Alliance Risk Consultancy.
That said, “it is a very complex problem and lessons are being learned. Smaller ships have smaller problems, big ships have bigger problems. Everyone — builders, owners, charterers and insurers — are collaborating on modifications to design of vessels and fire protection, as well as training of crews.”
While the focus is on growing trends, especially aggregation of risk aboard immense vessels, Herrera stressed that some constants remain important drivers of loss. Undeclared cargo is first on that list.
“That has always been a risk of which the industry has been aware. And we emphasize risk mitigation from packaging and securement to crew training and equipment. Still, a fire in one container out of 3,000 or even 10,000 is easier to find and fight than in one out of 20,000.”
The ubiquity of lithium-ion batteries in everything these days only makes fire fighting all the more complicated, Herrera added. He further noted that even as ships and cargoes have gotten much larger, automation has meant that crews have stayed very small, even on the largest vessels.
“Despite all that, we cannot overlook the positivity in terms of overall losses,” said Herrera.
“The industry has come a long way in just a few years. Thirty years ago, losses were 200 ships a year; in the last few years, it has been 50 or 60 ships. And the fleet 30 years ago was smaller. Lessons are being learned. Training and regulations are being modified. Communication is better. Risk management is better. It just takes time to turn a big ship around.”
Crews are also an important emerging segment in risk management, Herrera said.
“There is a wider awareness of seafarers, their welfare and the role they play in the global economy.” The wellbeing of mariners, their ability to get to and from vessels, their care on board and shore side in foreign ports, all have come front and center as key to the global supply chain.
According to the report, there have been almost 900 total losses over the past decade. The South China, Indochina, Indonesia, and the Philippines maritime region is the main global loss hotspot, accounting for one-in-five losses in 2021 (12) and one-in-four-losses over the past decade (225), driven by factors, including high levels of trade, congested ports, older fleets and extreme weather.
Globally, cargo ships (27) account for half of vessels lost in the past year and 40% over the past decade. Foundered (sunk/submerged) was the main cause of total losses over the past year, accounting for 60% (32).
While total losses declined over the past year, the number of reported shipping casualties or incidents rose. The British Isles saw the highest number (668 out of 3,000). Machinery damage accounted for over one-in-three incidents globally (1,311), followed by collision (222) and fires (178), with the number of fires increasing by almost 10%.
The report did address the effect of the Russian invasion of Ukraine. Immediate insurance issues were, logically, confined to the Black Sea, but the report noted several wider implications.
Russian seafarers account for just over 10% of the world’s 1.89 million workforce, while around 4% come from Ukraine. These seafarers may struggle to return home or rejoin ships at the end of contracts due to the conflict.
Longer term, the report anticipated that “a prolonged conflict is likely to have deeper consequences, potentially reshaping global trade in energy and other commodities. An expanded ban on Russian oil could contribute to pushing up the cost of bunker fuel and impacting availability, potentially pushing ship owners to use alternative fuels.”
During the past year, fires on board the car carrier Felicity Ace and the container ship X-Press Pearl both resulted in total losses, the report noted. Cargo fires are indeed a priority concern. There have been over 70 reported fires on container ships alone in the past five years, the report noted.
Fires often start in containers, which can be the result of non-/mis-declaration of hazardous cargo, such as chemicals and batteries — around 5% of containers shipped may consist of undeclared dangerous goods.
Fires on large vessels can spread quickly and be difficult to control, often resulting in the crew abandoning ship, which can significantly increase the final cost of an incident.
“Too often, what should be a manageable incident on a large vessel can end in a total loss,” Khanna explained.
“Salvage is a growing concern. Environmental concerns are contributing to rising salvage and wreck removal costs as ship owners and insurers are expected to go the extra mile to protect the environment and local economies,” said Khanna.
“Previously, a wreck might have been left in-situ if it posed no danger to navigation. Now, authorities want wrecks removed and the marine environment restored, irrespective of cost.” &
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When an employee steals from their company, what should the employer do?
What even the most proficient risk professionals might not know is that employee theft can affect businesses of any type and size. The U.S. Department of Commerce reports companies lose $50 billion each year to employee theft, and such activity causes one in three bankruptcies. And that’s not to mention the new ways employees are accessing funds and other items.
“Traditionally, the biggest Crime & Fidelity exposure has been embezzlement by employees. This has been employee dishonesty. For example, employees setting up fraudulent accounts and having the company pay them to accounts that were not valid, or overpay,” said James Kardaras, Senior Director of Crime & Fidelity at Nationwide. “But now, electronic crime [criminal activity involving the use of computers or electronic means, to illegally transfer funds or steal, change or erase electronically stored data] is sharply on the rise.”
Given these expanding criminal trends, risk professionals should be securing the protection of a comprehensive Crime &Fidelity policy. But what exactly should they be looking for in their coverage and in their underwriter? Before investing in a Crime & Fidelity policy, it is essential that insureds consider the following.
James Kardaras, Senior Director of Crime & Fidelity, Nationwide
Current advances in technology allow bad actors to exploit a very dangerous tool: the Internet. Enabled on virtually every computer and smart phone, the Internet provides criminals with round-the-clock access to electronic data, resulting in rapidly increasing losses to insureds.
“When you have people outside the institution able to remotely access computers at a bank, for example, and divert funds, little by little, from the employee to other accounts outside the institution, you have this very real, very new risk that no one even thought about years ago,” said Kardaras.
Social engineering is a noteworthy growing trend, as more bad actors are succeeding in their criminal enterprises using this approach. “Social engineering fraud, otherwise known as fraudulently induced funds transfers, occurs when a criminal assumes someone else’s identity induces an individual within the institution to transfer or wire funds to an unauthorized account controlled by the embezzler,” Kardaras explained.
“Criminals can assume your identity using information readily available on social media, whether on LinkedIn, Twitter, Facebook or Instagram, because the more public information about you that’s out there, the more easily your identity can be stolen,” he said. “People purport to be an employee and they’re not. People purport to be a vendor and they’re not. People purport to be a customer or a client and they’re not.”
Sophisticated criminals continue to up the ante even further. Using “deepfake” technology, criminals have the technology to send a fake but flawless video messages from a company’s president or CFO giving authorization to transfer funds.
Up-to-date forms are a must. “Some computer crime policies date back to the ’90s as a base form. But a lot has changed since then, both with the technology and the tools criminals use to defraud insureds,” Kardaras explained. A comprehensive Crime & Fidelity policy should include modernized language that provides the insured protection for emergent risks.
Risk managers and their brokers should seek to procure a policy that provides coverage for the different types of employee theft – from electronic crimes to social engineering fraud.
In addition, because such criminal activities often extend into ransomware and demands for cryptocurrency payment, risk managers and brokers should seek a Crime & Fidelity policy that addresses those threats in coordination with coverage that may be provided for same under the insured’s cyber policy.
Additionally, criminal hackers commonly try to extort their victim when demanding ransom. “Insureds should therefore be cognizant of whether the Crime & Fidelity policy they are seeking to purchase provides coverage for extortion or alternatively contains an exclusion that would expressly preclude it.”
Risk professionals, when going to market for a Crime & Fidelity partner, should be proactive and already have certain controls in place to demonstrate they are a favorable risk to underwrite. Kardaras advised that when an insured knows their own exposures and can relay that to the carrier, the application and underwriting processes become that much smoother.
“The carrier needs to evaluate a full application, because they are covering internal exposures,” Kardaras explained. “Insurers can’t simply amass information about the company from public information; rather the company must set out the scope of the risk via the carrier’s full application.”
A full application likely poses the following types of critical questions: What internal risk controls are currently in place with regard to money, securities and other property? What authority do employees have to handle funds and up to what threshold? At what level is dual authorization required to release payment of funds?
With regard to larger firms, maintaining an internal audit department is key to being viewed as a favorable risk.
“If a large, sophisticated insured doesn’t have an internal audit department, to me, that would be a non-starter for providing coverage,” Kardaras said. On the other hand, “smaller firms that may not have the staff for an internal audit team,” he added, “should be able to provide the carrier with a complete picture of how, and to what extent, fund requests from employees, vendors and customers are authenticated by the insured.”
A final piece of the risk-ready puzzle can come down to how a potential insured trains its employees. Much like in the cybersecurity space, companies can train their employees to spot potential or attempted electronic crimes.
“Nationwide employs a questionnaire as a tool to help businesses become more aware of how well-trained their employees are,” said Kardaras. “Phishing education and testing employees once a year on cyber readiness is an important element of mitigating their exposure. Our questionnaire asks about that training and evaluates the staff’s preparedness for potential cyber crimes and attacks.”
Once risk professionals become familiar with the Crime & Fidelity landscape, it’s time to find the right coverage partner. That partner should be well-versed in the space, while also constantly and consistently evaluating the emerging trends to bring the best solutions to clients each day.
The Crime and Fidelity team at Nationwide prides itself on those very things.
The Crime & Fidelity business at Nationwide was developed to complement its established D&O liability, professional liability and cyber liability policies. Nationwide brought in Kardaras seeking to capitalize on his extensive and varied Crime & Fidelity background on both the brokering and underwriting sides. Kardaras has successfully employed this vast knowledge and experience, providing Nationwide clients with the Crime & Fidelity protection essential as criminal activity continues to rapidly grow and evolve.
“Nationwide’s Crime & Fidelity team works closely with brokers and risk managers to provide real time information and terminology,” Kardaras explains. “Our Crime & Fidelity team works in tandem with our cyber, D&O and Financial Institutions colleagues and we are well-versed on the potential overlapping risks and coverage solutions. We endeavor to be flexible and solution-oriented in our coverage. For example, if we straddle the border between cyber liability and computer crime, Nationwide will find a solution that provides our insureds with protection tailored to their needs.”
To learn more, visit: https://www.nationwide.com/business/insurance/commercial-crime/.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Nationwide. The editorial staff of Risk & Insurance had no role in its preparation.
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