As climate impact becomes ‘normal’, a new, innovative mindset will be required from marine insurers
Climate change has already started to demonstrate the potential sustained impact it is going to have on global maritime operations, creating a need for a recalibration in the insurance landscape, writes Marcel Krol and Robert Mackay
Climate change is set to profoundly impact marine insurance. There can be few such tangible and evidence-based examples of how climate change is impacting international shipping than in August 2023, when it was reported that more than 200 vessels were waiting to pass through the Panama Canal. This bottleneck was the direct result of measures, introduced by the Panamanian government, to conserve water levels in the canal, brought about by sustained drought in the tropical region.
There were undoubtedly instances where some of the owners of the 200 vessels could have had a claim on their delay cover, but for the vast majority drought or low tide cover were excluded as the root cause. The net result in not including drought or low tide in delay cover was significant financial losses for shipowners in demurrage and other costs.
These instances are becoming more frequent and multi-faceted. According to the World Economic Forum (WEF) Global Risks Report 2024, extreme weather ranked as the top risk “most likely to present a material crisis on a global scale in 2024”.
Panama was not an isolated example. Operations at the ports of Shanghai and Ningbo are disrupted for five to six days each year on average because of extreme wind conditions. In the aftermath of Hurricane Katrina, the port of New Orleans was shut for almost four months.
“We firmly believe that climate change poses a great threat to the shipping industry and the consumer overall. We are definitely seeing disruption, disruption happening all the time,” said Narin Phol, Maersk’s president for North America said in late 2023.
The role of marine insurers in supporting shipowners and charterers
The rapidity of change should be sharpening the minds of insurers in recognising how to mitigate increased chances of risk so that all parties are provided with the right cover.
At FDR, we’re already working with clients on how they can provide alternative products that extend to offer further, comprehensive protection, including parametric products that can provide a short-term solution today. In the case of droughts, this would mean a policy would pay out if drought reduces water levels below a certain threshold and impacts shipping routes. The speed and certainty of products such as these remove the need for lengthy claims processes and are thus more appealing to customers.
As underwriters start to consider climate impact as ‘normal’, they will need to invest in further solutions for shipowners and offer deeper, more nuanced insurance options to the insured parties.
Key questions will need to be asked by insurers, with algorithms for future, similar events undoubtedly being heavily analysed. For example, how does congestion impact delay cover if and when this becomes the norm? And will current weather policies be taken away or adapted from the market, especially if drought in key areas is deemed typical, rather than atypical.
If you would like to talk to us and explore innovative insurance solutions that are tailored to address the evolving risks of climate change in the maritime industry, contact us today.
