Home / Analysis / Suez Canal crisis: mega ships equal mega claims
29 March 2021
The logjam in the Suez Canal is threatening to escalate into a complex and large-scale claims event for the insurance industry globally, as fears over the extreme risk posed by a new generation of mega ships are realised.
While Egyptian maritime authorities and an army of salvage crews work furiously to free the Ever Given – a skyscraper-sized container vessel that ran aground last Tuesday in one of the world’s most vital shipping routes – it is becoming apparent the blockage could unleash a torrent of claims in the coming weeks and months.
For now, it is premature to assess the size of the losses. But every day that the Japanese-owned ship remains stuck in a section of the canal’s sand bank, closing access to the trading lane, the financial cost for the insurance industry will grow.
It isn’t just the prospect of claims for damage sustained on the Ever Given – a ship of that size is usually insured for up to $US200 million ($262 million) or even more – that is worrying the industry. There is also a strong likelihood that the more than 300 container vessels caught up by the jam will also look to insurers to cover their losses.
About 12% of global trade passes through the 193-kilometre artificial waterway, making it one of the busiest trading lanes. There are easily more than 50 vessels passing through it every day, carrying consumer and industrial goods from Asia to Europe and vice versa.
The delays in getting the goods on time have many businesses in Europe and Asia fretting over what the potential costs to their balance sheets will eventually run to.
Jill Murphy, MD of marine-focused RedSky Insurance underwriting agency, says the incident will likely have very little impact on the Australian and New Zealand insurance market because the ship was sailing from China to Europe.
But there is a possible impact if cargoes were transhipped from feeder vessels, she told insuranceNEWS.com.au. And she says there will be a significant impact on insurance markets elsewhere in the world, particularly if a “general average” is declared.
The term “general average” is a global maritime industry loss mitigation convention whereby ship owners and cargo interests proportionately contribute to fully reimburse those in the venture who sustained loss or damage in preventing the total loss of a vessel, crew and its cargo.
Global broker Marsh says at this stage it is too early to tell the extent of insurance claims that will arise from the either the ship’s grounding or the canal’s blockage.
It says it’s obvious that delays to goods reaching their intended destinations, including through using alternative routes, will impose additional costs, which should be taken into account in risk finance planning.
“We are fielding numerous questions from concerned clients about a wide range of insurance issues arising from the Suez Canal blockage,” Marsh JLT Specialty Head of Marine Practice for Middle East and North Africa Abhijit Naik said.
“There is a great deal of uncertainty at this time, while ship and cargo owners consider their contingency plans and alternative routes.”
Marsh says it is possible that the largest claims will arise from ships that are stuck in the canal or are otherwise unable to proceed because of the blockage.
The UK’s P&I Club, a mutual marine insurance business providing cover for marine protection and indemnity risks, says it provided the ship’s Japanese owner with third-party liabilities cover.
“The UK Club has insured the owner of ‘Ever Given’ for certain third party liabilities that might arise from an incident such as this, including for example, damage caused to infrastructure or claims for obstruction,” the mutual said in a statement on Friday.
“The vessel itself and its cargo will have been insured separately. While the UK Club is unable to comment on any confidential insurance or potential claim details, all valid claims will be considered by the vessel owner, the UK Club and its legal advisors in due course.”
Ever Given was on its way from China to the port of Rotterdam when it ran into trouble as it made its way through the canal, apparently because of strong wind. It has been speculated that human error may also have contributed to the ship running aground.
A report from Allianz Global Corporate and Specialty (AGCS) says the incident has put the spotlight on the risk challenges posed by mega ships.
The corporate insurance arm of Allianz says capacity on container vessels has doubled over the past decade. A ship the size of the Ever Given, which weighs 220,000 tonnes and measures about 400 metres in length, can carry up to 20,000 containers.
Concerns about the challenges such huge ships pose have been brewing for some time, but last Tuesday’s incident has brought them into sharp focus.
“Insurers have been warning for years that the increasing size of vessels is leading to a higher accumulation of risk,” AGCS said. “These fears are now being realised, potentially offsetting long-term improvements in safety and risk management.
“It is clear that in some shipping segments, loss prevention measures have not kept pace with the upscaling of vessels. This is something that needs to be addressed from the design stage onwards.”
Ms Murphy says the insurance market must question the benefit of cargo vessels of such dimensions.
“The resources required to salvage such vessels are generally not available and the economic impact for world trade and the insurance industry is therefore immense,” she told insuranceNEWS.com.au.