When the Phoenicians ruled the seas of the Mediterranean from approximately 1000 to 200 BC, it is likely that the seascapes they had to combat were not dissimilar to those witnessed in the 1950’s. After all, the maritime industry has forever contended with seasonal weather events.
Known for their maritime skills, and the first people to introduce curved bottom boats, the Phoenicians -who occupied modern day Lebanon – would have been skilled at tackling extreme weather events. Yet, while these events have always been a mariners foe, their frequency and intensity is likely to have only radically changed from those ancient times in recent years; a signal of a broader, more persistent threat driven by the changing climate, and one that the marine insurance market cannot ignore.
The wider picture
Reams of data confirm the inescapable trend of increased frequency and intensity in weather events. According to the World Economic Forum’s (WEF) Global Risks Report 2024, extreme weather ranked as the most likely global risk to trigger a material crisis this year. Not only does it rank highest in the short term, but it remains a top concern over the next decade. This aligns with the scientific consensus that the global temperature rise will surpass 1.5°C by the 2030s, triggering more intense weather patterns.
For the maritime industry, these environmental shifts are creating a “new normal,” where droughts, floods, and intense storms will be the standard rather than the exception. This reality places pressure on marine insurance firms to adapt their policies and pricing models to reflect the heightened risk climate change poses to global shipping operations.
If we cast our minds back to the drought that affected the Panama Canal in 2023, it was a watershed moment for the shipping industry. The extended dry season severely restricted the canal’s water supply, leading to an unprecedented backlog of over 200 vessels. Shipments were delayed, supply chains were disrupted, and the financial cost to the shipping industry is still being calculated, but estimates suggest billions of dollars in losses.
From an insurance perspective, this incident raised a number of critical questions. How will insurers address similar congestion-related delays in the future? Will premiums rise to account for these climate-driven disruptions, and how will underwriters respond to increasing claims related to weather perils, once considered “atypical,” now becoming routine?
It’s not just the Panama Canal. Ports around the world are vulnerable to climate impacts that will reverberate across supply chains. In particular, low-lying ports in regions such as Southeast Asia, the Caribbean, and North America are facing rising sea levels and increased storm intensity. A study reviewed by the Environmental Defense Fund (EDF) found that climate impacts on ports alone, including infrastructure damage and operational disruptions, could cost the shipping industry up to $10 billion annually by 2050—and this number could skyrocket to $25 billion per year by 2100.
Ports are also increasingly forced to shut down due to extreme winds. Most recently, Super Typhoon Yagi temporarily closed critical economic hubs like Vietnam’s Nam Dinh Vu. Meanwhile, other major ports such as Shanghai and Ningbo face an average of five to six days of weather-related operational disruptions each year, primarily due to extreme wind conditions. In the past, catastrophic events such as Hurricane Katrina’s in 2005 leave even longer lasting effects, with the aftermath of that storm resulting in the port of New Orleans shutting down for nearly four months, illustrating the massive economic repercussions of extreme weather events.
Another area where climate change is already having a profound impact is container loss at sea. The World Shipping Council has reported that, since November 2020, the number of containers lost to rough seas has more than doubled compared to the previous decade. With 80% of global goods travelling by sea, this trend underscores the urgency of finding solutions.
The evolving risks associated with climate change have also been highlighted. In fact, Lloyd’s of London used risk scenarios to estimate the global economic impact of extreme weather events. Although the scenarios also captured weather events outside the maritime sphere, it was noted that the Caribbean, an area particularly suspectable to extreme weather events, could lose 19% of its GDP across a five-year period.
Innovative Solutions
Given these trends, the marine insurance market can no longer rely on traditional models that do not fully account for climate-driven risks. If extreme weather perils continue to multiply, insurance providers must be prepared to reassess what constitutes “standard” coverage. This involves a fundamental shift in how risks are evaluated, from individual vessels and fleets to broader supply chain vulnerabilities.
For FDR, adapting to these changes requires innovative solutions. Data analytics and digitisation are playing an increasingly important role in marine insurance, helping insurers model potential risks with greater precision. However, human oversight remains crucial, especially when it comes to navigating uncharted territory. Data alone does not provide the nuanced understanding that is often required to craft bespoke policies tailored to the needs of shipowners operating in this volatile environment.
While premium increases are likely, insurers must also work with shipowners to find more comprehensive solutions that address the full spectrum of risks associated with extreme weather. This may involve re-evaluating weather policies across entire fleets, ensuring that ships transiting high-risk areas like the Panama Canal are adequately covered for the increasing likelihood of climate-related disruptions.
The trends all point that extreme weather events are no longer isolated incidents — they represent a paradigm shift; a new normal that even the Phoenicians would not recognise. For marine insurers, the stakes will start piling up if the right course is not mapped out quickly. The increasing frequency and severity of these events will have far-reaching consequences for international shipping, making it essential for insurers to adapt their models and policies to reflect this new reality, working together with ship owners to find the right solutions for all parties.
After all, isn’t comprehensive coverage enough to weather any storm that might arise? Well, hold on to your life vests, because it is time for myth busting!
The Myth: “Owner and cargo insurance makes charterer’s liability irrelevant”
Picture this scenario: the shipowner has an insurance policy that covers the vessel, its materials, and any potential liabilities. Similarly, the cargo on board is protected against loss or damage by a comprehensive insurance plan.
The charterer, who hires the ship for transporting goods, might think they are in the clear. After all, what could possibly go wrong? But here is where the missing puzzle piece comes into play.
The false sense of charterer’s coverage
One misperception that often arises is the assumption that the charterer’s liability is redundant, because the owner and cargo are already insured.
The truth is, while the owner’s insurance covers the ship itself and its inherent risks, it may not extend to cover your specific responsibilities as a charterer. The cargo insurance likewise primarily safeguards the cargo owners’ interests, leaving gaps in coverage for your unique liabilities.
Charterer’s liability is a crucial component
Consider the world of commodity trading, where ships are chartered to transport goods. The owner’s insurance covers the ship and its materials, and the cargo insurance protects the goods being transported – all seemingly comprehensive. However, this doesn’t cover your obligations and potential legal repercussions as the charterer.
While the shipowner and cargo might be shielded by their respective insurance policies, as a charterer, you are in a unique position. You are not the owner of the ship, yet you are responsible for its operation during the period of hire.
This is where the concept of charterer’s liability steps in. Even if the ship is insured by the owner, and the cargo is safeguarded against risks, your role as a charterer is distinct and your potential exposure to liability remains.
Imagine not being covered and…
The ship sinks just before reaching the harbor. Worst-case scenario. Resulting in the loss of both ship and cargo. The port is now blocked, disrupting the flow of trade. The need for charterer’s liability becomes crystal clear when we think about the consequences.
Suddenly, the owner’s insurance on the ship and the cargo’s insurance seem insufficient. Who bears the responsibility for the disruption, the losses, and potential environmental impacts? This is where the true importance of a charterer’s liability surfaces.
The misperceptions of claim handling
Often, charterers might believe that their legal departments are equipped to handle any potential claims that arise. They might view charterer’s liability insurance as unnecessary, banking on their ability to manage claims through legal means. However, when faced with catastrophic scenarios involving substantial losses, legal prowess alone might not be enough.
Maritime claims can escalate to unprecedented levels. Even major corporations with deep pockets and larger legal departments, recognize the significance of charterer’s liability insurance. While smaller claims might be manageable, it is the potential for significant, game-changing claims that necessitates the protection of charterer’s liability insurance.
Bridge the gap between owner and cargo insurance
And your unique position as a charterer. This is precisely why charterer’s liability insurance exists.
In an industry where lots of money and tons of goods are at stake, the complexities of ownership, responsibility, and liability come to the forefront. When disaster strikes, the lines between friend and foe blur, and all parties involved might scramble to pass the buck on potential damages.
Affordably covered with charterer’s liability
Contrary to the misconception that charterer’s liability is an unnecessary expense, it is actually a relatively affordable insurance option. The rarity of damages, coupled with the relatively manageable size of most claims, makes charterer’s liability insurance a wise investment. Furthermore, any damages that do exceed coverage limits can often be shared among parties involved.
Curious if you are covered against all potential risks in the maritime industry? Investigate this by clicking on this link.
