The Marine Insurer. March 2020. Issue 2

ISSUE 2

| MARCH 2020

The Marine Insurer N AV I G AT I N G N E W S & A N A LYS I S IN THE MARINE MARKETS

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EC

ISS L IA

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Covid-19: The threat to the shipping sector

Salvage sector needs to raise trust and profitability

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Sanctions: Between a rock and a hard place l

Piracy on the rise in the Gulf of Guinea

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l Decarbonising

shipping: The challenge ahead

Cyber threat to Asian marine sector l

16 October 2020

30+ SPEAKERS

7+ HOURS OF DISCUSSIONS

Attendees of London's first and only upstream energy insurance conference will learn about asset liability, underwriting for the future, technology-associated risks and decommissioning, as well as hearing from leading risk managers. Insurers, brokers and third parties will meet at the second annual event, to discuss the latest developments in the market.

We engaged with our Advisory Board to create an event that will address fundamental issues for the energy risk management sector and build an agenda featuring the industry’s leading figures, including regulators and clients. It is already shaping up to be a ‘must attend’ for the market, after such a successful inaugural conference.

Energy Insurance London 2020 is run by Cannon Events Ltd who are responsible for bringing the inaugural Marine Insurance London event to the market in 2018.

Companies who attended in 2019 included:

A Bilbrough & Co Ltd  Aegis London Holdings Ltd  AKD Advokaten  Alesco  Ascot Underwriting  Atrium Underwriting  AXA XL Beazley  BIMCO  Brit Insurance  Cannon Events  CCR RE  Chaucer  Chevron  Chubb  Clyde & Co LLP  CNA/Hardy  Commercial Risk Europe  DNV GL Noble Denton Marine Services  DWF  DWF Law LLP  Galloway Johnson Tompkins Burr & Smith  Gard AS  Global Risk Solutions  Guy Carpenter  Hawkins & Associates  Helvetia Specialty Insurance  Herbert Smith Freehills  HFW  Hiscox London Market  INDECS  INEOS Oil & Gas  International General Insurance Co. Ltd  IUA  Kennedys Law LLP  Korean Re  Lancashire Group  Liberty Specialty Markets  Lloyd’s Market Association  LOC  Lochain Patrick  London and International Insurance Brokers' Association  Markel International  Marsh JLT  MatthewsDaniel  Miller Insurance Services  MS Amlin  Munich Re  Neon Underwriting  Noria Digital  Noria Software  North of England P&I  Oil & Gas UK  Price Forbes & Partners Limited  Reynold Porter Chamberlain  RPC  SCOR SE  Sequel  Skuld  Sompo International  StarStone  Swiss Re  Talbot Underwriting  Tamesis Reinsurance  The Standard Club  Thomas Miller Specialty  TIW Group Ltd  U.S Chamber of Commerce, Global Energy Institute  Uniper Technologies  Verisk  Willis Towers Watson  Wood Mackenzie  Ed Broking  U.K. Oil & Gas  Willis Towers Watson

Energy Insurance London

16 October 2020

CONTENTS | EDITORIAL

Highlights

Comment Look before you leap

ROUND TABLES

INTERVIEW 04 Nick Shaw: The IG Adrian Ladbury inteviews The International Group CEO

14 IMO2021: Is the industry ready?

MARINE FE ATURES 08 Fighting fires

Experts discuss how to implement new cyber guidelines

28 From acorns to oaks

Under pressure in a tough market

Innovative solutions such as that introduced

by DNK, Noria and Clearwater for the war risks market are the way ahead for the shipping sector

13 Insurwave

IUMI’s Lars Lange on marine fire regulations

10 Salvage sector

Delivering a digital pathway for insurers

20 Cyber threat in Asia Maritime insurers face up to cyber threat

24 Piracy Gulf of Guinea emerges as piracy hotspot

26 Cyber The cyber silent debate continues

34 Covid-19 The impact on shipowners and P&I clubs

37 Decarbonisation

48 State of the market Closures and capacity withdrawals have reshaped marine insurance

50 Anti Fouling A sustainability issue

52 Global risk monitoring Bringing the benefits of space techology

The challenges facing marine insurers

54 The dawn of digital shipping

40 Coronavirus

New technologies transforming the sector

Shipping sector needs business continuity action

56 Sanctions

42 Digital transformation Industry needs to recognise sleeping giant

44 Marine is on the up After difficult years outlook is positive for marine

46 A new operating model DNK on digital transformation

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Rise up the agenda and show no signs of abating

58 Legal: Marine sanctions Between a rock and a hard place

60 Drug trafficking Ships are attractive to drug traffickers. Security is generally lighter and they travel the world

62 On the move

The sudden arrival and escalation of the Covid-19 Coronavirus is covered in depth in this second issue of The Marine Insurer because the maritime industry is highly exposed to such a pandemic.

The rapid spread of the illness and actions taken by governments show just how fragile the global economy has become and vulnerable to supply shocks it now is.

As with the rise of connected technology, arguably, the world’s business leaders and politicians have rather naievely been caught up in a wave of apparent advancement in both technology and supply chain management (leaner and meaner the better) without fully assessing the risk management implications.

It was pretty obvious to any corporate risk management professional back at the turn of this century that the world was heading for a financial crisis as the financial powerhouses and their risk professionals kept telling us not to worry because the risk associated to credit derivatives had somehow been ‘atomized’.

As any veteran risk and insurance professional will attest risk does not disappear because it is parceled up into ever smaller chunks and passed around. Finally, the music stops and somebody is left holding the toxic parcel and then they infect everybody else as with the LMX spiral that almost knocked over Lloyd’s.

So, if you keep stretching supply chains and holding ever fewer stocks when a catastrophe occurs – as clearly shown by the Thai floods of 2011 – the chains will inevitably snap.

Just as if you keep connecting everything to everything and automating as much as possible without embedding adequate protection and security then viruses (electronic and human) will spread faster and more violently than ever before.

The big lesson to learn from all this just as in 2008 was assess the risk properly first before taking the plunge!

Adrian Ladbury, Editor, The Marine Insurer

Editor Adrian Ladbury ladburya@gmail.com tel: +44 07713 873237

Publishing Director Grant Attwell grant@cannonevents.com tel: +44 07905 933252

Published by Cannon Events and Publications © Cannon Events Limited 2020

Art Editor Rob Crotty rob@greenlightpartners.co.uk

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The Marine Insurer | March 2020

04

INTERVIEW | NICK SHAW The International Group of P&I Clubs

The international shipping industry is facing up to the same rapidly changing economic, political, regulatory and social risk landscape that all other businesses are grappling with currently. Increasingly volatile trading conditions, fluctuating oil prices, demanding new environmental requirements, trade conflicts, war and terrorism and now of course the potentially huge impact of the Coronavirus outbreak has shipowners scratching their heads and calling for solutions from their beleaguered risk managers. Adrian Labury reports.

T

hankfully, though, there is one very solid and reliable support system that the international shipping community can still rely upon in these highly uncertain times: The International Group of P&I Clubs, (the IG). This body underpins the essential liability insurance coverage that the 13 mutual IG P&I clubs provide for their members in this increasingly volatile and challenging legal, regulatory and political environment.

And, as Nick Shaw, CEO of the International Group since last summer after a successful career as a marine insurance lawyer with ReedSmith, told the Marine Insurer the IG has once again proven its worth by managing to secure a further successful renewal of its annual reinsurance contract at basically unchanged terms and conditions in a rapidly hardening international commercial insurance market.

“The international shipowner community is well aware of the hardening reinsurance market and upward pressure on premiums. Despite this, the longevity and relative stability of the GXL programme (General Excess of Loss and Collective Overspill Programme) has enabled the IG to achieve renewal for 2020/21 on expiring rates for shipowners,” explained Mr Shaw.

“Further, the US$2bn excess of US$100m placed in the commercial market has been confirmed for two years. This helps provide a further level of reinsurance pricing stability for the next two years whilst maintaining flexibility to fund claims within the pool,” he added.

Mr Shaw said that on a structural basis the GXL programme remains relatively unchanged, with the emphasis having been on continuity and respecting the long-term relationships that the IG has built up with many of the world’s leading reinsurers.

Such relationships are critical at a time of rapidly changing market conditions. The positive use of those relationships at this potentially challenging time once again proves the core benefit brought by the IG for the individual clubs and their shipowner members.

These relationships enabled the IG to achieve a “fair balance” between the commercial reinsurance market and the risk retained by the Group through Hydra, its captive, a critical The Marine Insurer | March 2020

A steady hand component in any effort to smooth and control pricing and exposure in a hardening market.

Mr Shaw explained that the loss experience of the GXL programme on the policy years 2012/13 to 2019/20 remained “acceptable” to reinsurers. The Hydra reinsurance captive also continues to deliver positive results through its loss retention strategy. Perhaps not surprisingly there has therefore been “considerable” appetite in the market to write multi-year private placements on the IG programme at competitive pricing. “These factors combined enabled the IG to achieve another satisfactory GXL programme renewal result, with rates for shipowners remaining flat across all vessel categories,” said Mr Shaw.

Collective buying power

But, while the core role of the IG clearly remains the use of the collective buying power of the 13 clubs to secure the best possible terms and conditions from the reinsurance market and thus keep costs under control and stable for the P&I Club members, the IG has a far wider role than this, explained Mr Shaw.

Companies worldwide are waking up fast to the fact that risk is not something that just needs to be dodged where possible and transferred as much as possible when insurance pricing allows. Risk is something that needs to be much more effectively identified, measured and managed before transfer is

INTERVIEW | NICK SHAW The International Group of P&I Clubs

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risk of all – reputational risk.

Mr Shaw is well aware of this shifting risk landscape and the need for the IG to evolve along with it and actually seek to help drive the agenda and not just follow the crowd.

“This system really does work and has done for 120 years, for shipowners, the insurance market and the regulators. We insure 90% of the world’s fleet for P&I risks and it would be confusing and complex if the reinsurers had to deal with each club individually. So it is easier for them and for us,” explained Mr Shaw.’’

“But, the environment and the market is changing and new risks, such as cyber and climate change, are emerging. We are engaging with the market, through the reinsurance committee, which includes a member from each of the IG clubs and then IG policy is made off the back of that. Policy is amended and risks such as cyber, where there has only been tacit cover to date, are now expressly factored in, provided they are not excluded by our war and terrorism exclusion.’’

With cyber, as with supply chain risk, the prime focus has to be on loss prevention and risk management and, when the inevitable event occurs, risk mitigation and business continuity.

Mr Shaw said that the IG is well aware of this and playing its part.

Nick Shaw, CEO, The IG: ‘‘Obviously all the clubs fight tooth and nail to win business from each other and this system works well and has done for many years.’’

even considered.

This also needs to done on a more strategic and holistic basis than in the past. Risk and insurance management for all companies, not just shipping firms, now involves a far wider basket of risk than the traditional physical assets and basic third party liabilities of only 20 years ago. Risk has become less tangible as the assets owned and operated by companies have becomes more intangible, hence the rise of cyber and supply chain risk and demand for non-damage business interruption (NDBI) to supplement traditional property-based business interruption risks.

At the same time, and not by coincidence, the world has globalised and so has the regulatory, legal and political regime that attempts to govern it. This means that environmental, social and ethical risks are more important than ever. A few fine-sounding words in the annual report that say the company cares about the environment, safety and the health of crews are no longer adequate.

Tough new regulations such as the International Maritime Organisation’s (IMO) rules on low sulphur fuels and the new safety guidance for the stowage of dangerous goods on board containerships published by the Cargo Incident Notification System (CINS) at the end of last year are all examples of rules and the associated governance and reporting requirements that mean that companies need to take enterprise wide risk management more seriously or risk facing arguably the worst

‘‘The IMO said that it wants a 50% carbon reduction by 2030 and the industry to be carbon neutral by 2050. We are working with the other trade bodies to see how we get there and what is needed.”

Nick Shaw, The International Group

The Marine Insurer | March 2020

Pic: The International Group of P&I Clubs

Cyber Security guidelines

When BIMCO published its latest Cyber Security Guidelines on board ships in December 2018, the third set in as many years reflecting the constantly evolving nature of the risk, the Group was quick to spread the news and help raise awareness. “The guidelines require shipping companies to carry out proper risk assessments and include measures in their safety management system, not something tackled previously. This is a positive step forward in an increasingly important area for the whole industry, shipping firms and insurers,” noted Mr Shaw.

More recently, new safety guidelines were published for the stowage of dangerous goods on container ships by the Cargo Incident Notification System (CINS) in November of last year.

This was produced to try and increase safety in the supply chain, reducing the number of cargo incidents on-board ships and highlighting the risks caused both by certain cargoes and by packing failures.

Again, the IG was keen to take part in the ongoing development of these guidelines that represent the first in one of a series of initiatives – undertaken both by ship operators and by regulators –designed to enhance safety on board

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INTERVIEW | NICK SHAW The International Group of P&I Clubs

‘‘We insure 90% of the world’s fleet for P&I risks and it would be confusing and complex if the reinsurers had to deal with each club individually.

So it is easier for them and for us.”

Nick Shaw, The International Group

container ships.

“The publication was created in response to a number of serious fire incidents in recent years, very often caused by misdeclaration of cargo and poor cargo packing, and recognises - and also takes into account - the significant complexities involved in achieving effective and compliant stowage of containers on board ships,” explained Mr Shaw.

“It is vital that the whole industry, including insurers support these loss prevention and risk management efforts involving issues such as stowage of hazardous goods, container ship fires and wreck removals. These are all areas in which claims can escalate and so a better framework, better practices, better standards, education and training and loss prevention systems is vital. Each individual club invests heavily in these areas because loss prevention is one of the core differentiators between the clubs. At the IG level we have 40 sub committees looking into these important matters and knitting together the best initiatives of the clubs. This is how we work together and learn from each other and this helps direct and develop our highly successful training scheme P&IQ,” continued Mr Shaw.

This scheme is indeed a great example of how a group of highly competitive insurers can actually pool resources to raise industry standards to the benefit of all.

The P&IQ scheme was first launched in 2010 and over 2,000 examinations have now been taken with over 50 candidates gaining the full qualification. As a result of this success, the International Group announced in October of last year that it had taken the decision to open the programme for the first time to a wider audience including brokers, reinsurers, law firms, students and maritime authorities.

Data sharing

The environment is another hugely important area in which the IG has a big role to play, helping the clubs and their members become more aware of what is needed and helping with management of the risk through data sharing and the like, as is safety at sea. But, Mr Shaw, did point out that there is a line beyond which the IG and the individual clubs should not tread.

A healthy balance needs to be maintained and finding that balance is part of Mr Shaw’s job.

“From the environmental perspective it must be recognised that shipping represents a highly efficient way to carry quantities of cargoes from A to B. The carbon footprint per tonne/ mile is far lower than airlines, lorries and cars. So if you have a large cargo to transport and care about the environment then The Marine Insurer | March 2020

use a ship. This does not mean that we as responsible insurers should not be looking to do more to assist shipowners and help them navigate the evolving regulatory framework. The IMO rules on sulphur fuels that are now in place are just one example of what is likely to be coming our way,” said Mr Shaw.

“This needs a collaborative effort. The IMO said that it wants a 50% carbon reduction by 2030 and the industry to be carbon neutral by 2050. We are working with the other trade bodies to see how we get there and what is needed. It has to be recognised that this is not easy: Where are the new, sufficiently tested, carbon neutral fuels? Vessels being built now have a 25 year shelf-life and so if we regulate too quickly we could be spending huge amounts of energy now building obsolete vessels! How can that be a good thing? These questions need to be asked,” he continued.

This and other challenging regulatory areas can bring operators – such as the shipowners – and the regulators into a grey area whereby the authorities wittingly, or unwittingly, expect the operators to not only implement their rules but also police them. This is dangerous territory, says Mr Shaw.

Safety at sea

And he explained, “We are fully behind all efforts to improve safety at sea. But this is a big issue for the IG. The cargo on our vessels is not for us to regulate. If countries say that a cargo is allowed to be transported on a ship from A to B then it is not up to us to act as policemen. The same can be said for sanctions. We keep members fully briefed and up to date on sanctions laws but we don’t make those laws or enforce them.

Thus, while the core job of the IG remains to help keep the P&I rates for shipowners relatively stable, affordable and predictable over time is has become increasingly important to help the whole market more effectively identify and manage the underlying risks, raise awareness of what is coming next and share best practice to the benefit of all.

“Obviously all the clubs fight tooth and nail to win business from each other and this system works well and has done for many years. Our job is to ensure that it continues to work well and improves over time. I am here to bring the clubs together, make sure that improvements in safety and risk management are made, help ensure there is a sustainable environment for shipping and, at the same time, facilitate the provision of secure reinsurance cover for P&I risks at a competitive rate,” concluded Mr Shaw.

Marine Claims Dublin

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08

MARINE | IUMI

Fighting fires with robust regulations The Marine Insurer | March 2020

Lars Lange, IUMI Secretary General, argues that the SOLAS regulations have not kept pace with the growth of container vessels or the complexities of fighting larger and more dangerous fires and, unless this is addressed, the number and severity of large containership fires will continue to grow.

MARINE | IUMI

BETWEEN 2000 AND 2015, 56 FIRES STARTING IN THE CARGO AREA ONBOARD CONTAINERSHIPS WERE REPORTED. A TOTAL OF 8,252 CONTAINERS WERE DAMAGED RESULTING IN A TOTAL LOSS OF $1.037BN, EXCLUDING THE LOSS OR REPAIR OF THE VESSELS THEMSELVES. Lars Lange, IUMI

A core role of the International Union of Marine Insurance (IUMI) is to enable the marine insurance sector to speak with a single voice. Bringing global marine underwriters together to lobby for change is a powerful tool and one that is strengthened when we join with other industry representative groups.

For some years, we have been concerned about the increasing occurrence of fires onboard containerships.

In 2017 we issued our formal position and called for all relevant authorities to join in discussions on how to improve onboard fire detection, pro-

tection and fire-fighting capabilities.

A continued increase in these fires has prompted us to work alongside the German Flag State and other high-profile bodies on a paper to IMO’s Maritime Safety Committee (planned to meet in May 2020).

Together, we are calling for amendments to SOLAS Chapter II-2 regulations to enhance provisions for early fire detection and effective control of fires in containerised cargoes stowed under deck and on deck.

A very significant number of major containership fires were recorded last year and, tragically, many resulted in danger for the crew, injuries or even loss of life. Significant hull and cargo damage was suffered as well and environmental impact sustained.

The individual carrying capacity of containerships is increasing with vessels now capable of stowing up to 23,000 TEU. The average ship now carries 5,000 boxes compared with 1,000 just 20 years ago and the combined capacity of the global container fleet has grown over the same period from 4.4 million to 20 million TEU. Larger vessels carrying more containers represents a significantly increased concentration of risk

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and value.

In many cases it is not easy to identify the cause of these fires, but, most experts believe they are caused by undeclared, mis-declared or poorly stowed dangerous cargoes. This is our observation, too.

The most recent casualty - Cosco Pacific– in January of this year was most likely caused by a shipment of mis-declared lithium batteries. The major fire aboard Maersk Honam in March 2018 has also been attributed to undeclared or mis-declared (dangerous) cargoes and this incident sadly caused the deaths of five seafarers. The total cost of repairs to the hull alone was estimated to be around $30m and the cargo damage is likely to be the largest general average loss in history – although the outcome will probably not be known for many years.

Between 2000 and 2015, 56 fires starting in the cargo area onboard containerships were reported. A total of 8,252 containers were damaged resulting in a total loss of $1.037bn, excluding the loss or repair of the vessels themselves. An analysis of 29 known claims caused by container cargo fires from 2000-2019 shows hull damage at $188.7m.

We believe that current SOLAS regulations have not kept pace with the growth of container vessels or the complexities of fighting larger and more dangerous fires. Unless this is addressed, we believe the number and severity of large containership fires will continue to grow. This will cause needless seafarer deaths and injuries. It will also result in unprecedented hull, cargo and liability claims.

Now is the time for all container supply chain participants, service providers and regulators to come together and reverse this worrying trend. IUMI believes that two main issues need to be addressed simultaneously for a holistic approach: First, non or mis-declaration of (dangerous) cargoes and fire-response capabilities on-board; Second, detection, containing, distinguishing and separating in fire compartments.

The Marine Insurer | March 2020

10

MARINE | SALVAGE

Salvage sector needs to raise emerges as

trust, credibility and profitability

The salvage industry is under pressure in a tough market and the future of industry staples such as the Lloyd’s Open Forum remain uncertain. Adrian Ladbury reports on the latest news from the International Salvage Union and a recent meeting hosted by the Association of Average Adjusters and International Underwriting Association in London.

The Marine Insurer | March 2020

MARINE | SALVAGE

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chosen to diversify and offer other Latest statistics from the services in addition to their salvage work.

International Salvage This does not mean that the focus on high Union (ISU) show that “We continue to promote the standards and technical excellence will be revenues are falling and relaxed, he stressed. margins are under presvalue of our members who enable This will also require continued sure in the face of intense competitive investment in updating and renewing pressure. Richard Janssen, President of world trade by providing serstockpiles of equipment with a focus the ISU, said during the union’s annual on future needs and especially the year-end press conference that the focus vices which save life, protect the investment in people; divers, naval in 2020 needs to be on raising the credibility architects, engineers, tug masters and and awareness of the value offered by environment, mitigate risk and salvage masters. The “lifeblood’ of the sector. the sector.

In reality this means that individual reduce loss’’ This investment in skills and people is salvage firms need to be accepted by made more difficult to maintain than ever owners and underwriter’s as an important Richard Janssen, given the continued squeeze on margins part of the risk mitigation chain. To help International Salvage Union in the sector. This challenge was clearly support this goal the ISU needs to strive to shown by the latest ISU statistics. improve the sector’s image and ensure that it is “credible and trusted” said Mr Janssen.

These figures showed that activity levels had fallen in a “We continue to promote the value of our members who tricky environment and the salvage industry overall continues enable world trade by providing services which save life, to suffer reduced returns. protect the environment, mitigate risk and reduce loss…

The latest annual figures for 2018 showed that gross revenue helping others to recognise and appreciate the importance of for ISU members were down to $409m compared with $456m a properly funded salvage sector is the job of the ISU and our the year before. focus for next year,” said Mr Janssen.

Activity levels were also down with 234 services against To help refine the union’s strategy and goals, last year the 243 services. Lloyd’s Open Form (LOF) cases were actually ISU commissioned research among some 100 international up – despite the continued debate about the future of the form respondents to properly understand how the ISU and the – rising to 55 in 2018 compared with 46 the year before. LOF industry is regarded. revenue rose to $104m almost double the $53m generated the The survey showed that the “overall satisfaction” level year before. with ISU was 7.44 out of a maximum score of 10, a pretty good Wreck removal income was not so healthy at $208m result overall. generated from 71 services compared with $264m from 116 The overall perception of the professional salvage industry services the year before.

– as opposed to ISU – generally found it to be competent, The longer-term picture is a concern. The latest statistics reliable and safe, a result that Mr Janssen said is clearly “very showed an overall fall from 2017, but, they are up on the low encouraging.” But, there were some lower scores for professional point of 2016. The numbers are still, however, well below the salvors focused on the critical topics of trustworthiness and value levels of several years ago when annual income was typically for money. more than $700m, a serious concern for the salvage sector.

DRIVE ETHICAL STANDARDS

LOF DEBATE CONTINUES

“Our interpretation of the results suggests that we need to increase our interaction with owners and insurers about their present and upcoming challenges and how salvors can support them in that. We also must continue our drive to ensure high ethical and operational standards. But, then again, it takes two to tango,” commented Mr Janssen, obviously suggesting that this drive should not only be pursued by the salvors alone.

The ISU believes that it has made good progress over the last six years that is reflected in the negotiated agreements and improved working relationship with IUMI, the International Group of P&I Clubs and Lloyds.

Mr Janssen said that part of the “re-positioning” of the industry was because many of the ISU’s members have

The fact that the statistics show that LOF continues to be an important contract was interesting given that this discussion continues to rage – notably at the annual autumn meeting of the Association of Average Adjusters (AAA) jointly held with the International Underwriting Association (IUA) towards the end of last year.

This discussion showed that the salvage and adjusting community are still not happy with the continued trend among marine insurers to push for so-called side agreements that supposedly undermine the effective operation of the 100 yearold contract.

Paul Cunningham, marine and energy claims manager for Talbot Underwriting, presented the case against the excessive use of the LOF that, as he pointed out, is really intended for use The Marine Insurer | March 2020

12

MARINE | SALVAGE

only when a vessel is in dire straits and a scenario in which Lloyd’s decided to needs substantial salvage equipment and wash its hands of the LOF, generating “I accept that some of these [interservices. In these cases the LOF is the the risk of “tsunamis” of repercussions “absolute go-to contract” that should be for shipping businesses. national insurers] may be accused of used, he said.

Mr Evans highlighted the costs of However, according to the AAA report running a professional world-wide causing the current problems with on the event, Mr Cunningham added that salvage response in a declining LOF even historic supporters of the LOF are market. He said that the top three side-agreements and attempts to regularly tempted to deal with marine salvage companies start each year with emergencies by means of bespoke a combined overhead of $100m running mitigate an LOF contract, but, they amendments to the form or agree costs. There had been a fundamental alternative commercial terms. This is shift downwards in revenues and, actively involve themselves in any because it often makes commercial sense without the LOF when a big casualty for all parties. occurs this leaves the salvage company casualty their owner has.’’

He said that it has to be recognised that in a difficult position, he said. many London marine insurance market Mr Evans conceded that there is a Paul Cunningham, practitioners are closely looking at the valid concern that LOF could be abused Talbot Underwriting approach of international insurers in by salvors for non-emergency cases other markets that arrange contracts on behalf of their assureds when a casualty could be dealt with via a commercial tow or and negotiate directly with salvors. other fixed price arrangement.

“I accept that some of these [international insurers] may be The ISU man stressed, however, that salvors are often the accused of causing the current problems with side-agreements last line of defence arriving on the scene when the incident has and attempts to mitigate an LOF contract, but, they actively occurred and the underwriter is exposed to potentially rapidly involve themselves in any casualty their owner has. This is mounting losses if not handled quickly and professionally. something we aren’t very good at in London,” pointed out Failure to make best use of what salvors offer to mitigate Mr Cunningham. exposure just does not make sense, said Mr Evans.

“I feel that London insurers should not be the ones to take the decision, but we should be assisting and supporting our NON-EMERGENCY CASES owners by providing them with upfront claims procedures The ISU supports the use of the unchanged LOF and not the [from specialist bodies] who have full knowledge of tugs and kit ‘LOF Light’ concept. “The so-called non-emergency cases where available in most locations around the world and are therefore LOF is used suits most shipowners as a good contract basis. able to provide straightforward commercial assistance and However, in my view in these such cases the award should be guidance to owners,” he continued. comparable to a commercial terms basis with minimal enhance“If a commercial contract and terms can be agreed in good ment to take into account LOF terms and conditions. But, this time, so be it, but, if the vessel does need emergency LOF is down to the arbitrator system understanding the needs of the assistance, then this is what should be done and hopefully current market and what is available on a commercial basis,” insurers can take comfort around the arbitration process, but, it explained Mr Evans. will only be with effort and time, that benefits will be seen,” he Mr Evans said that he believes that the proposals for sidepointed out, referring to the “no cure, no pay” form that provides letters are coming from underwriters, as salvors compete for remuneration for salvors based on arbitration carried out by what they can in a tough market. Mr Evans reportedly said Lloyd’s Salvage Arbitration Branch. that, in his view the market is potentially on the “slippery slide” Mr Cunningham said that he recognises the potential pitfalls downwards and further consolidation of the salvage industry is of side agreements, reported the AAA. He said the LOF is a big concern. supposed to be a stand-alone and all-encompassing contract This situation will be exacerbated by the ever-increasing when, once signed, allows salvors to go get on with their job size of bigger ships in the merchant fleet leading to ever larger and mitigate losses for all. The use of side-letters or agreements liability levels, he pointed out. incorporated into the salvage contract can raise complications Rising scale, complexity and regulatory requirements in the and concerns. shipping sector clearly brings challenges for all parties involved, but, there is occasionally a ‘silver lining’. Mr Cunningham said, for example, that the strict new IMO regulations that limit the LAST LINE OF DEFENCE amount of sulphur in fuel oil could lead to more cases of engine Roger Evans, secretary general of the ISU, gave a strong defence failure with ships drifting at the mercy of weather. He said that of the LOF and also called for “co-operation instead of polarithis is “an insurer’s worst nightmare, but possibly… a salvor’s sation.” Mr Evans reportedly warned that many operations are cash cow!” already unviable for salvors and asked the audience to imagine The Marine Insurer | March 2020

MARINE | TECHNOLOGY In association with Insurwave

For the marine community Insurwave provides a platform that can digitise, enrich and share vessel data.

Insurwave

delivers digital pathway for marine insurance Insurwave is a software engineering company established in June 2018 through a joint venture with EY and Guardtime. The Insurwave SaaS platform provides a digital pathway for risk owners and participants in the commercial lines insurance ecosystem to exchange private data in real time to support placement, administration and servicing of commercial lines insurance contracts.

David Power, CEO, (below left) and Stefan Schrijnen, CCO, (below) from Insurwave explain the benefits it brings to the marine insurance community.

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rethink about how they handle the data for the benefit of their clients.

This becomes an increasing challenge as the marine sector starts to become defined in data and risk events become increasingly available for consumption through APIs. Consuming and managing that data will be a differentiator, those that cannot address this data explosion could well be crippled by ‘big paper’ rather than crippled by ‘big data’.

Technology driven solutions and shared platforms are vital to better serve the clients of the sector in a digital manner. We need to start to engage in a new technology direction based on the data that is available and reduce the paper-spreading linked to the risk-spreading so that the ecosystem can operate effectively.

The Insurwave ‘digital pathway’ is a smart pipe that enables real time, enriched data flows on a common SaaS platform. For the marine community we are providing a platform that can digitise, enrich and share vessel data, consume risk events and auto-service post-bind changes, such as war risk declarations. We deal with data privacy and trust through distributed cryptography to manage permissions and access rights that enable a trusted digital ecosystem.

We are working to reduce the costs of the ecosystem that consume up to 40% of a client insurance wallet.

We believe that operating in a digital manner will open up opportunities for the insurance sector to offer differentiated risk management services leveraging one shared view of the data.

TECHNOLOGY DRIVEN SOLUTIONS As risks ebb and flow, risk owners are increasingly looking for data driven solutions that help them to better manage their risks in an increasingly evolving and dynamic risk landscape – to support new business models, improve efficiency and drive growth for competitive advantage.

Many of the incumbent insurers and brokers have responded to the data challenge by either throwing more people at the problem to manage the paper flow that exists today within their organisation or to semi-digitise existing processes.

What is needed is a fundamental

AND SHARED PLATFORMS ARE VITAL TO BETTER SERVE THE CLIENTS OF THE SECTOR IN A DIGITAL MANNER.

The Marine Insurer | March 2020

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ROUND TABLE | In association with

Invest in awareness, training and technology to rise to cyber challenge The Marine Insurer gathered a group of risk, technology and insurance experts in a roundtable sponsored by Inmarsat to discuss the adoption and impact of the IMO’s new cyber guidelines - IMO 2021 – and how cyber risk is best identified, measured, managed and transferred in this fast-changing global environment.

The Marine Insurer | March 2020

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ROUND TABLE | In association with

THE PARTICIPANTS Stephen Harris- Senior Vice President, Global Maritime Practice, Marsh JLT Specialty Brendan Flood - Marine Underwriter, Hiscox Colin Gillespie - Director Loss Prevention, North of England P&I Club Peter Broadhurst- Senior Vice president, Inmarsat Adrian Ladbury - Editor, The Marine Insurer Laurie Eve - Director, Maritime Retail, Inmarsat

The international shipping industry, like all others, is adopting new digital technologies to improve performance and efficiency. As with all other sectors, however, the connected technology brings with it many risks that are not so apparent and often not fully considered when the brave new technology is adopted.

The sector and its regulatory body the International Maritime Organisation (IMO) is now, thankfully, finally waking up to the cyber threat in its myriad forms and issued its IMO 2021 guidelines that will need to be adopted soon.

Peter Broadhurst, Senior Vice President, Yachting and Passenger at Inmarsat and Senior Vice President of Safety and Security at Inmarsat Maritime, said that the focus on cyber was overdue and that the sector has some catching up work to do.

“The IMO has recognised cyber as a risk. As with other industries the shipping sector did not really understand at first because it was a new risk. Shipping firms simply introduced new IT systems and then operational systems without really considering the risks involved in full. The Internet of things has increased this risk and awareness is much higher now.

This put it on the agenda of the IMO to identify what the risk is, raise the awareness and try and create some frameworks and

guidelines so that the industry can come to a mature position as quickly as it possibly can. Once you understand the risk then you can take that risk on in a more measured manner,” he said.

“The unfortunate thing is that communication on ships has never been a high priority. The physical safety side of things is relatively straightforward. Anyone can introduce a communications system from wifi to GSM to satellite and so on, but, there is no standardisation or regulation. In the past ships were not connected and this is a risk of which people need to be aware,” added Mr Broadhurst.

Colin Gillespie, Director (Loss Prevention) at North of England P&I, stressed that the shipping sector needs to appreciate quickly that cyber is not an isolated risk to be handed over to the IT department and forgotten about. This needs to be dealt with on an enterprise wide basis.

“There are a series of risks including data theft, inadvertent disruption of operations through malware, financial risk such as man in the middle fraud and safety and physical risk caused by onboard technology being compromised either deliberately or by accident. Cyber attacks can also cause direct damage to equipment. So, cyber security is an enterprise risk management matter that affects the whole shipping organisation,” he said.

Brendan Flood, Marine Underwriter at Hiscox London Market agreed. “The type of risks mentioned affect every organisation, then you have to overlay some that are more specific to the maritime industry that makes it a bit more difficult to address,” he said.

Laurie Eve of Inmarsat pointed out that the rise of the Internet of things is reall making a difference to the risk profile for the sector. “I think shipping in the past has been more isolated. With digitalisation and rapid uptake of the Internet of things we are potentially opening up a lot of doorways through which everybody can become affected.”

Stephen Harris, Senior Vice President, Global Maritime Practice at Marsh JLT Specialty, said that the marine insurance

“The type of risks mentioned affect every organisation, then you have to overlay some that are more specific to the maritime industry that makes it a bit more difficult to address.”

Brendan Flood, Hiscox

The Marine Insurer | March 2020

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ROUND TABLE | In association with

“The IMO has recognised cyber as a risk. As with other industries the shipping sector did not really understand at first because it was a new risk. Shipping firms simply introduced new IT systems and then operational systems without really considering the risks involved in full. ” Peter Broadhurst, Inmarsat

market really has to look long and hard at the potential aggregation risk from the connected technology.

“Marine insurance and risk management was historically about what happened on an individual ship. This is a whole new mindset the marine insurance market has to work out.

With globalisation something happening in one part of the world can have a direct impact globally and there will be aggregation risks arising out of one event. This is a major worry for insurers and shipowners, operators, charterers, cargo owners, everyone. It is not just the physical damage it is also the delay and business interruption that will result from it. This particularly worries people that are reliant on just in time (JIT) shipments. We are in a stage where insurers are not sure of just how big a risk this is. Are they opening a pandora’s box by offering cover?” he asked.

PEOPLE RISK The participants agreed that it is essential for the sector to appreciate that people lie at the heart of cyber risk in the shipping sector as in all others.

“The first thing to do is create awareness,” noted Mr Broadhurst. “There are two aspects to this. First, compliance and what should you do for the company. This has to be holistic. You need a lifeboat and trained people. This is a finite risk. Once you start connecting a ship to the rest of the world - to the shipping industry, charterers, brokers and the like - then you have this web and need to ask where the weakest link appears and how it could affect you. From the insurance perspective it is very difficult as it is from a shipowner’s perspective because nobody on board the vessel has true IT or cyber security experience. Unfortunately, the crew will tend to have a go but not know what they are really doing. There are 1.6 million seafarers and you need to train these people,” he said.

“We have seen time and time again people are the weakest link, it’s not systems. You can build security, but, most of the successful attacks have been because people have failed, not systems,” added Mr Harris.

The Marine Insurer | March 2020

WOOLY REGULATIONS Training and awareness is clearly key with cyber and, as with any new risk arena, people are understandably looking for guidance. The rise of principles-based, as opposed to rulesbased, regulation does not make that easy. The rules say what needs to be done but not how.

“The regulatory side is a big driver. This is what is going to ultimately make companies take the measures needed. But what they actually need to put in place, the way it’s worded at the moment, is a bit wooly. We find a lot of customers’ understanding of what they need to have in place is not that clear to them,” said Mr Heath.

And, as Mr Flood pointed out, ticking the regulatory box is very different from embedding the culture in the company.

Mr Broadhurst again stressed the important of training.

“From an insurance perspective if someone says can you insure me against using this chainsaw the first thing you’d ask is if they’d been trained on how to use it. The same applies to cyber,” he said.

Mr Gillespie said that he sees considerable progress in the sector but there is still plenty of road to travel.

“Five years ago there was minimal awareness and minimal training going on. The industry has been on an awareness journey. There have been education campaigns, big incidents have raised awareness and there are commercial and regulatory drivers. The industry has reached a point where it realises that cyber security must be put in place,” he said.

“Experts have been helping owners to expedite the process of cyber risk management because there is a shortage of cyber risk expertise and in particular cyber risk expertise with experience in the marine business,” he added.

Mr Gillespie pointed out that driver behind the IMO Resolution MSC.428(98) appears to have been that the authorities, particularly in the US and Europe, were very concerned about cyber security primarily from a terrorism and crime perspective. Hence, the IMO introduced MSC FAL, guidelines on cyber risk management.

ROUND TABLE | In association with

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“Marine insurance and risk management was historically about what happened on an individual ship. This is a whole new mindset the marine insurance market has to work out.”

Stephen Harris, Marsh

“I would say that shipowners are now 100% aware that cyber risks pose a threat. Experience and survey data suggests that 6070% of companies have experienced some type of attack, whether it’s successful or not. The industry has come a long way in the last few years in terms of awareness and the purpose of MSC.428(98) was to expedite industry action,” he said.

“In 2021 it will come on stream so if you look at it from that point of view we have got from a position as insurers where there is a largely unknown and largely uncontrolled risk to a place where owners are having to put controls in place. This is another milestone in the industry’s cyber journey,” added Mr Gillespie.

INSURERS AS ENFORCERS Another grey area for many in the shipping industry and marine insurance community is how the new IMO guidelines and other cyber related rules and edicts are actually going to be enforced and policed. Issuing a set of guidelines is relatively easy, but, actually understanding and enforcing them is another matter altogether.

“It is going to be difficult from port state control perspective,” pointed out Mr Broadhurst. “Cyber is intangible. It is very easy to count the number of life jackets, lifeboats, crew and the like, but, with cyber security you have to take it on trust. Shipowners will say: Here are my assets, this is how I protect them, this is how I update them, these are all the processes and this is how I control password management, training and the like and it is all written down. It will be a challenge for port state control to police this,” he added.

Mr Gillespie said: “It is encouraging that people are looking at it. You can’t just give it to the IT team and say just go away and do something because they do not have a clue about what is happening on the ships. The risk manager has to go and talk to people and that raises awareness around the organisation. Shipowners are pretty good at managing operational risk, they do it every day. So, the organisation

starts going through this wheel of virtuous cycle of improvement. Over time it will mature.”

Mr Harris said that he does not think the shipping industry can be expected to self-regulate but commercial pressure from the insurers and banks could be significant.

“Like with so many other things it will be commercial pressures on the shipping industry that will force it to do so and it will be insurance requirements that question just what they are doing. More important than insurance are going to be the shipping financiers because if a shipowner wants to buy a new ship they are not going to use their own money they will go to a risk finance house. The asset for the loan will be the ship so you can bet the banks are going to be asking some very awkward questions about the management practices of the company because the very asset on which the loan has been offered could be threatened if it’s not properly managed. So, to some extent we can leave it to the insurance and banking industry to force the shipping industry to do these things,” he said.

“Regulatory levers are out there already. Flags will expect cyber security to be in place. Class are offering cyber notations. Port state control regimes will be training their inspectors. There are commercial levers such as the banks and the big charterers looking for governance of cyber risks. It will become increasingly hard to finance ships unless you can show that you are managing cyber security. Insurers have got a role to play. Insureds must act prudently Then you’ve got the charterers who are going to be looking at securing their own network. The commercial levers are already being pulled so the pressures are on shipowners to make sure that they can comply with the regulatory levers and assuage the doubts of their commercial partners. If it’s done right that should be a virtuous circle of improvement over time,” added Mr Gillespie.

The Marine Insurer | March 2020

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ROUND TABLE | In association with

“There are a series of risks including data theft, inadvertent disruption of operations through malware, financial risk such as man in the middle fraud and safety and physical risk caused by onboard technology being compromised either deliberately or by accident.”

Colin Gillespie, North of England P&I Club

PRESSURE ON SUPPLIERS Another potential way in which cyber risk will be ‘regulated’ without the regulators is by pressure placed on suppliers and partners by the shipping industry itself to mitigate supply chain or infection risk.

Mr Gillespie pointed out that one of the questions in the latest BIMCO survey was whether a company would work with another company that had poor cyber security. Some 87% said no. “That will start to flow through into how people run their business and the decisions they make. Every company needs to take action to protect itself and then it needs to ask trading partners what they are doing to protect themselves, it’s a network effect,” he explained.

“There is a multi-speed approach in that the big companies are working hard on these things because it can severley disrupt their business. The tanker companies are being forced to do it through compliance with TMSA and they are slightly ahead of the game. Cruise ship operators are worried about all the passenger data such as credit card details, being stolen and they’re ahead of the game. Other sectors are catching up,” continued Mr Gillespie.

For insurers the key is to identify those parties that are actually putting good practice in place and rewarding them with improved terms and conditions. Those without good practice will be uninsurable. “The insurance industry must respond within well-defined terms and conditions it is not enough to say that as we don’t have a clear picture of the risk that it can’t be covered,” he said.

Mr Harris agreed but pointed out that balance is needed.

“This makes sense but then you have Lloyd’s and the PRA stating that the market has to tackle the whole silent cyber issue but do not say how! This has been left to the syndicates to work out how to deal with silent cyber and this might be viewed by some to be passing the buck really.”

ping industry will need some help from the cyber risk experts.

But are there enough of them out there?

“Shipping doesn’t have the expertise to do that because there aren’t cyber security experts out there so the industry has to go to third parties for help,” said Mr Gillespie. “So, you have cyber security experts from other fields coming into that space to fill that need. The majority of small and medium-sized shipping companies don’t need an in house cyber security expert. If they can get a third party to help them put a framework in place to manage the risk and then systematically build up over time then that should be enough,” he added.

Sadly, currently such expert services are not commonly available through coverage as is becoming more standard in the wider corporate insurance market, explained Mr Flood.

“For the conventional corporates outside of shipping the product they buy does give all that, expert services to back up the coverage is widely available from all sorts of markets. But, it is very different in shipping. This is still an immature part of the market,” he noted.

Mr Broadhurst wisely pointed out that actually cyber risk is fundamentally no different to any other and needs to be assessed and risk managed in the same way. It does not have to be overcomplicated because it involves technology, he said.

“This is primarily about risk management as Colin said. You have to look at your assets for physical cover and it’s the same for cyber security but it is different. Two identical ships can be launched on the same day and within two weeks their IT infrastructure is completely different. So, the first thing is to dive in and find out what you’ve got. Take a pragmatic approach and ask how to keep the ship running. If the server is not available ask how you get access and keep the ship moving. You don’t need to be a cyber expert to do a risk assessment. But if you come across something you don’t understand you may need some help,” he said.

EXPERT SERVICES

BUSINESS CONTINUITY FOCUS

With a challenge as big as this it seems obvious that the ship-

Mr Gillespie also pointed out that business continuity planning

The Marine Insurer | March 2020

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ROUND TABLE | In association with Inmarsat

needs to be a critical part of the cyber risk management strategy as with all other areas.

“Every safety management system has got a shipbaord emergency plan and all companies should have business continuity plan. So, if a cyber incident occurs and leads to loss of propulsion or loss of navigation equipment then you can plan for those and drill for those. This is relatively easy for all companies to invest in. Take the pragmatic approach – drill for switchover to manual operation of machinery or navigation without use of ECDIS,” he explained.

And, as Mr Harris pointed out, the impact of a cyber attack or failure does not have to be catastrophic to have a big impact.

“Remember shipping moves 90% of all internationally traded goods by volume. If you wanted to disrupt that and damage the global economy what a great target. All you have to do is just slow it down. Modern industry has become so dependent on JIT (just in time) supplies and ships that anything that slows it down will have a big impact,” he said.

The speed of change and fluidity if this risk is also one of the reasons why the guidelines are not prescriptive and need to be incorporated into wider risk and business continuity management plans, said Mr Gillespie.

“That is the driver behind the IMO resolution. It didn’t want to put any framework in place because if you write cyber security regulations today they’re outdated tomorrow because the threat landscape changes so quickly. You have to have an agile stance in order to keep at least one step behind,” he said.

INSURANCE STANDARD? One interesting question for the shipowner community to consider when trying to adopt the IMO cyber guidelines is whether the insurance sector will use them as a standard of insurability.

“I think the guidelines give us something to challenge, enable us to ask what companies have been doing,” said Mr Gillespie.

“PI is different because we are there to pay claims because the owner owns the club. As a commercial insurer you have that standard and can interrogate the cover that it gives you a better footing,” he added.

“This is the start of the journey. You can’t just release this

and then do nothing for the next two or three years. Expect the IMO to advise on how to improve best practice because best practice today is outdated tomorrow because the risk is moving on so quickly. Insurers will probably have to police it to an extent in order to protect their own capital. But, I don’t want the industry to become a quasi-regulator,” said Mr Flood.

Mr Harris added that insurance cannot be expected to fill the gap of knowledge. “There have to be areas that are uninsurable because commercial insurance can’t be expected to answer it all, whether that gap should be filled with company funds or whether it should be uninsurable full stop,” he said.

Mr Broadhurst asked how much work is being done on this tricky area by the insurers and how much clarity is available on the terms and conditions and what is insurable and what is not.

Mr Harris pointed out that this is currently a work in progress and something of a grey area. “This is because the cover is included in many standard policies, hence the silent cyber question and attempts by the big commercial insurers to shift to affirmative cover. If it were an opportunity for insurers there would be cover offered for all types of cyber, but, malicious is effectively excluded which proves that there are areas that are not seen as an opportunity for insurers,” he explained.

NEED FOR DATA As with all emerging risks the insurance industry needs data to better analyse the risk before it can offer cover. All participants agreed that a market-wide effort would benefit all.

“If the shipping industry started to share data on the incidents, then from that insurers could extrapolate potential costs and adapt terms and conditions. This is something that insurers should all be promoting,” said Mr Gillespie.

“To make this work the IMO or a similar body will need to take this forward, act as a central reporting body. The problem is that people won’t want to share their data if it is deemed to be commercially sensitive so there needs to be a central body to which they report,” said Mr Harris.

“A cultural shift is needed. I believe this will happen in time,” concluded Mr Gillespie on a positive note.

“I think shipping in the past has been more isolated. With digitalisation and rapid uptake of the Internet of things we are potentially opening up a lot of doorways through which everybody can become affected.”

Laurie Eve, Inmarsat

The Marine Insurer | March 2020

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ASIA MARINE | CYBER

emerges as Partnership needed to tackle cyber threat to maritime sector The maritime industry and its insurers have been slow to wake up to the cyber threat in Asia and worldwide according to a leading regulator in Singapore. A collaborative effort to improve risk management, mitigation and transfer is needed. Adrian Ladbury reports.

Late last year, Benny Chey, Assistant Managing Director, Monetary Authority of Singapore, gave a chilling reminder to the maritime sector of the ever-rising and changing threat of cyber risk at the launch of the report ‘Shen attack: Cyber risk in Asia Pacific ports’ Mr Chey reminded the audience, including Lloyd’s CEO John The Marine Insurer | March 2020

Neal, that shipping and trade is the “lifeblood” of Asia. The scenario analysis, produced by the University of Cambridge Centre for Risk Studies, on behalf of the Nanyang Technical University’s Cyber Risk Management (CyRiM) project, in partnership with Lloyd’s, found that a single cyber attack on major ports across Asia-Pacific could cost $110bn, which is roughly equivalent to half of all losses from natural catastrophes globally in 2018.

Mr Chey not surprisingly reminded the Asian shipping and insurance community that this needs to be taken seriously.

He urged the insurance, cyber security and maritime sectors to deepen their collaboration, conduct joint research, buyer education and outreach, and develop more insurance and risk management solutions to narrow the “massive” protection gap in cyber risk for the maritime sector.

The Shen scenario analysis (Shen is a shapeshifting sea monster from Chinese mythology: image above) found that the $110bn of losses could occur in an extreme scenario in which a computer virus infects 15 ports across Japan, Malaysia, Singapore, South Korea and China.

Despite the massive potential costs the report showed that the global economy is underprepared for such an attack with 92% of the total economic costs uninsured, leaving an insurance gap of $101bn.

ASIA MARINE | CYBER The Shen scenario analysis (Shen left is a shapeshifting sea monster from Chinese mythology)

“An attack via a computer virus carried by ships could scramble the cargo database records at major ports and lead to severe disruption, according to the plausible scenario depicted in the report. Although the virus only directly affects ports in Asia-Pacific, economic losses would be felt around the world due to the global interconnectivity of the maritime supply chain,” explained Lloyd’s as the report was launched.

“An attack of this scale targeted at ports would cause substantial economic damage to a wide range of businesses through reduced productivity and consumption, incident response costs, and supply chain disruption,” it added.

Mr Chey said that the Asian maritime and insurance sector needs to take this nightmare, but highly plausible, scenario very seriously indeed.

“Regulators, policymakers, and companies within the insurance, maritime and cyber security sectors can use this report to understand the scale, scope and extent of financial impact from a catastrophic cyber attack. Due to low cyber insurance penetration, the protection gap is a staggering 92%!” he pointed out.

Mr Chey said that the maritime sector clearly needs to boost its risk management and cyber resilience effort or face potential calamity with a huge knock-on effect for the regional economy.

“Trade and shipping are the lifeblood of Asia. Trade accounts for between 38% to over 300% of GDP for Asian economies. International shipping is responsible for over 80% of world trade by volume and Singapore is the world’s busiest transhipment hub. Therefore, disruptions to trade or shipping could have major economic and financial impact,” said Mr Chey.

HIGHLY VULNERABLE The regulator pointed out that with ships increasingly connected, digitised and dependent on technology for navigation, monitoring, satellite communications, cargo tracking and management, the maritime sector is highly vulnerable to cyber risk. He pointed to the high profile $350m loss suffered by Maersk from the NotPetya ransomware attack in 2017 and the cyber attacks suffered a year later by the ports of San Diego, Barcelona and Long Beach.

The worrying news from a risk management perspective is that a recent survey of shipping companies carried out by shipowner association the Baltic and International Maritime Council (BIMCO) found that, while over a fifth of respondents had experienced a cyber attack, only about half of respondents have a business continuity plan in place. “Investments into cyber resilience will need to step up significantly in the new

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normal world where cyber attacks are a matter of ‘not if, but when,” warned Mr Chey.

IMPROVED GUIDELINES Better news is that the maritime regulatory authorities and international groups are taking steps to strengthen cyber resilience of this sector.

The International Maritime Organisation (IMO) released Guidelines on Maritime Cyber Risk Management in 2017 and has mandated that cyber security be addressed in ships’ safety management systems by 2021. In December of 2018, a leading group of maritime industry bodies led by BIMCO published improved Guidelines on Cyber Security Onboard Ships, aligned with the IMO guidelines.

Mr Chey explained that the Maritime and Port Authority of Singapore (MPA) launched a new 24/7 Maritime Cybersecurity Operations Centre, in May 2019, called MSOC. “MSOC will strengthen Singapore’s maritime cybersecurity posture through early detection, monitoring, analysis and response to potential cyber-attacks on maritime Critical Information Infrastructure providers, working in concert with its Port Operations Control Centre,” explained Mr Chey.

MPA is, with its partners, also developing a new “Maritime Cybersecurity Intermediate Training Course” for maritime

“Apart from mounting cyber defences, more needs to be done on cyber risk financing and mitigation to boost cyber resilience, and that’s where most of you come in. The maritime sector needs to be able to quickly respond, recover from, and manage the financial impact of cyber attacks.”

Benny Chey, Monetary Authority of Singapore

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ASIA MARINE | CYBER

personnel and is working on a Maritime confusion about what the coverage Cybersecurity Research Programme actually provides. “Second, while there focused on the protection of shipboard is growing awareness of cyber risk, systems. converting this awareness into action, But, Mr Chey said that more needs in the form of buying cyber insurance, “Coverage for cyber risk in the to be done and fast and the insurance remains a challenge. Third, the lack sector needs to up its game. “Apart from of standardisation in policy language maritime sector, however, is mounting cyber defences, more needs and definitions of cyber has caused to be done on cyber risk financing and confusion to buyers and lowered their lagging. Marine policies tend to have mitigation to boost cyber resilience, confidence in cyber insurance policies. and that’s where most of you come in.

There is uncertainty as to whether cyber exclusions. Stand-alone cyber The maritime sector needs to be able cyber is covered as part of property, to quickly respond, recover from, and and whether an act of war is covered, coverage is also not being widely manage the financial impact of cyber as well as how to prove that an event is attacks. This is where cyber insurance an act of war, especially in the case of purchased.’’ plays an important role,” he told state-linked attackers,” added Mr Chey. delegates at the launch event.

And, the insurance sector itself Benny Chey, Mr Chey pointed out that global is only just really working out how Monetary Authority of Singapore marine insurance premiums reached to underwrite this risk, another big US$28.9bn in 2018, with Asia Pacific challenge for all. “Fourth, on the supply accounting for about 31% of premiums. side, cyber underwriting, which is already challenging due to Singapore is the third largest marine insurance market in the lack of historical data in this newer line of risk, has even Asia, contributing close to 16% of Asia’s premiums. A larger less claims data, to rely on for the maritime sector, due to low proportion of that spend needs to be directed towards the cyber insurance penetration rates. There is also chronic undercyber threat – both prevention and mitigation and not just reporting of cyber events at about only 11.7%,” pointed out Mr transfer, he said.

Chey.

“Cyber insurance does not just cover the financial costs But, progress is underway in the sector and thankfully of a cyber attack. Many cyber insurance policies include is involving positive co-operation between customers, the access to a panel of experts to help manage the forensics insurance market and public bodies. This is good news for the and investigation, system repair and recovery, and public Asian shipping community. relations aspects of a cyber attack. Cyber insurance “In response to these challenges, bespoke insurance underwriting involves working with clients to help them solutions have been developed by a range of specialty insurers, enhance their cyber security posture and rewarding and Protection & Indemnity Clubs. Several of the key cyber companies with more robust risk management practices insurers and brokers have established cyber insurance teams with lower premiums and better coverage,” explained Mr in Singapore, overseeing Asia Pacific. These teams perform Chey. deeper dives on local and regional market dynamics, partner with cyber security firms and data providers, and engage and educate potential buyers, in partnership with multipliers NUMEROUS CHALLENGES such as industry associations and boards. Public private There are, however, numerous challenges that are impeding partnerships, such as CyRiM’s catastrophic port cyber scenario the development of cyber insurance penetration in the marireport today, add value by improving our understanding of this time sector and these need to be overcome, said Mr Chey. complex risk,” explained Mr Chey.

“Coverage for cyber risk in the maritime sector, however, is lagging. Marine policies tend to have cyber exclusions. Standalone cyber coverage is also not being widely purchased.

PACE ACCELERATED There are several challenges impeding cyber insurance This collaborative effort needs to be deepened and broadened penetration within the maritime sector. First, cyber risk is and the pace accelerated if the sector is to rise to the cyber a newer line of risk, and across industries, cyber insurance challenge and this shape-shifting monster brought under conpenetration is low. Global cyber insurance premiums account trol, concluded Mr Chey. for only about 1% of commercial insurance premiums.

“I would like to urge the insurance, cyber security and Purchasers of cyber insurance tend to be concentrated in maritime sectors to deepen their collaboration, conduct joint sectors more exposed to personal information given growing research, buyer education and outreach, and develop more data privacy and breach regulations,” explained the regulainsurance and risk management solutions to narrow the tor. massive protection gap in cyber risk for the maritime sector,” Converting awareness into action is a problem as is the he said. increased average size of vessels.

The Marine Insurer | March 2020

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MARINE | PIRACY

Gulf of Guinea emerges as piracy hotspot In the past couple of years the Gulf of Guinea off West Africa has taken over from the seas of Somalia and the Sulu-Celebes Seas in the Philippines as the hot spot of kidnapping and theft, reports Peter Birks The key messages for piracy over 2019/20 has been a continued decline in activity around the Philippines in the Sulu-Celebes Sea, where the hardline strategy of Philippines President Rodrigo Duterte, in office since June 2016, has impacted the effectiveness of separatist group Abu Sayyaf.

However, this has been matched by a rapid increase in piracy in the Gulf of Guinea, where kidnapping is on the rise.

While generally small-scale piracy – the seagoing equivalent of house burglary – continues in the region of Singapore and elsewhere in Asia, it was the Gulf of Guinea that accounted for 90% of global crew kidnapping in 2019.

What Abu Sayyaf and the pirates in the Gulf of Guinea seem to have learned from the activities of pirates off Somalia earlier in the last decade was that kidnapping can prove as profitable as hi-jacking, and a kidnapped crew is easier to conceal than a hi-jacked tanker.

While some of the activity in 2018 and 2019 seemed to be cargo theft – particularly oil – in recent months we have seen a number of kidnappings that seem to follow similar modus operandi to each other, leading one to suspect that one organised operation could be at work.

The Marine Insurer | March 2020

KIDNAP TO CONCLUSION The process from kidnap to conclusion has also been somewhat consistent. Most of the crew on a vessel are kidnapped.

Negotiations begin, and between four and eight weeks later the crew is released. One does not need to be an expert in forensic accounting to conclude that a ransom was probably paid.

The pirates have also been operating an underground business model that parallels the legitimate business world.

Profits from the earlier kidnappings have been reinvested in larger vessels, enabling the pirates to increase the range of their operations. Although it is hard to be confident about anything in the field of piracy, at the moment the Gulf of Guinea appears to have reached a certain level of stability.

Of course, that could change if other businesses try to break into what is clearly a highly profitable operation. This would introduce volatility both on the piracy side and on the response side.

While the shipping industry can perhaps tolerate (although not be content with) a cost of $5m a month, it would be more likely to implement a stronger and immediate aggressive response if that average cost rose to, say, $100m a month.

In 2011, at the height of the Somalian piracy situation, there were 237 incidents reported in the area. Since then, however, piracy has decreased significantly off the Horn of Africa. While the official line remains that the increase in military patrols

MARINE | PIRACY

The fourth quarter of 2019 saw 64 crew kidnapped in the Gulf of Guinea, in six separate incidents. In two incidents in December 2019 there were 19 and 20 crew taken.

“The International Maritime Bureau (IMB) 2019 piracy report found 162 incidents of piracy and armed robbery against vessels in 2019, down from 201 in 2018. But, many more seafarers were kidnapped, with 134 crew seized in 19 incidents.” was the major factor, few would deny that the increase in armed security on vessels was also important.

REWARD TO RISK Piracy is not an unskilled profession. As the reward to risk ratio increased, fishermen-turned-pirates from Somalia understandably began to ask for greater rewards from their employers, the organisers of the operations.

The International Maritime Bureau (IMB) 2019 piracy report found 162 incidents of piracy and armed robbery against vessels in 2019, down from 201 in 2018. But, many more seafarers were kidnapped, with 134 crew seized in 19 incidents.

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The Gulf of Guinea saw a more than 50% increase year-on-year.

The fourth quarter of 2019 saw 64 crew kidnapped in the Gulf of Guinea, in six separate incidents. In two incidents in December 2019 there were 19 and 20 crew taken. Both incidents were more than 100 nautical miles from the coast, a clear indication that the pirates were now operating with increased range, presumably paid for from the profits of earlier kidnappings.

The IMB said that there could be no doubt that the Gulf of Guinea presented “a serious and immediate threat to the safety and security of crew and vessels operating in the region”.

Although it is easy to look at the similarities between the current situation off west Africa and the incidents eight or so years earlier off Somalia, one should also note one significant difference. Somalia was in effect a failed state, with a ready pool of potential employees among fishermen who could no longer earn a living.

In the Gulf of Guinea there are no failed states, and the pool of employees consists not so much of unemployed fishermen as members of criminal enterprises who had previously worked in oil theft, perhaps kidnappings on land and the like.

The states bordering the areas of major activity are functioning, but, there are many of them. Cooperation between all or at least the vast majority of states from where the pirates could operate will become a necessity if their activities are to be prevented via land-based actions.

An additional problem in Nigeria is the nature of its political structure, with a considerable degree of autonomy among regional authorities.

HUGE OIL WEALTH Much of the problem is rooted in the Niger Delta. Huge wealth has been generated from oil, but little of that wealth has been of benefit to local people. There is widespread poverty and political unrest.

This led to pirates emerging from the delta’s creeks and swamps in speedboats to raid passing ships (often of oil that was quickly transferred to other vessels), to kidnap crews and take them back to Nigeria’s shores. Those were the early actions. Recently attacks have been increasingly likely to take place further out to sea, with a mother ship and speedboats operating from there.

The attacks in December 2019 both involved heavily-armed and clearly professional pirates. This was not a cottage industry.

The first attack saw a product tanker that was underway some 118 nm off Cotonou, Benin, attacked, with 20 seafarers being taken. The second involved the kidnapping of 19 crew members from a VLCC, about 100 nm south of Bonny Island. As the IMB noted, this was a serious escalation in the situation, the attacks being well outside territorial waters.

Should the situation in the Gulf of Guinea deteriorate further in 2020, one would expect shipowners, and their insurers, to be happier to pay extra for armed security guards both willing and capable to shoot back.

It is not a particularly popular stance to say that fighting fire with fire is the best way to go about things, but, sadly, it seems to work.

The Marine Insurer | March 2020

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MARINE | SILENT CYBER In association with Marsh JLT Specialty

The silent cyber debate within the marine sector Silent cyber is not an easy matter for the insurance market and risk managers in the marine sector and all others are not very happy with the way it has been handled by the insurance market. Claire Davey, Broker, Cyber Practice at Marsh JLT Specialty explains how this important topic affects the marine sector and what needs to happen next.

The deadline of 1 January has been and gone, and the silent cyber debate continues within the maritime insurance sector. Leading insurers such as Allianz and AIG publicly announced their intention to deal with this tricky matter last year and so the year-end renewal was always going to be a defining moment. The situation had to be clarified for the benefit of all – customers, brokers and insurers.

The Marine Insurer | March 2020

It was mandated by Lloyd’s (Y5258), issued in July last year, and recommended by the Prudential Regulation Authority (PRA) that syndicates and insurers clarify the extent of cyber coverage within maritime insurance products. This impacts areas such as P&I, hull and marine, cargo and yachts, in addition to non-marine lines of business.

Having completed the 1 January renewal season, and progressing into the first quarter

of 2020, it is timely to highlight the misinformation and confusion in the market regarding silent cyber.

One very important fact to note is that Lloyd’s has mandated that syndicates clarify whether they intend to provide cover for losses arising out of a cyber-incident. It has not mandated that cover should be removed.

Lloyd’s has not, however, prescribed a particular clause or approach that syndicates should adopt. This is leading to a proliferation of clauses being applied across the London market.

Company markets have not been ‘mandated’, only recommended, by the PRA to clarify whether the intention is to provide cover for losses arising out of a cyber incident. This means that they may choose the easy way out for now, and remain silent, as opposed to adopting an appropriate clause. This is not ideal.

The preferred approach, from the insured’s perspective, is to adopt a clause which provides affirmative coverage for losses arising out of a cyber-incident.

The likelihood of being able to successfully negotiate this clause is largely

MARINE | SILENT CYBER In association with Marsh JLT Specialty

dependent on market conditions for that particular line of business.

Whichever clause is applied to a maritime policy, the risk manager needs to be sure to check that it addresses malicious acts, and non-malicious i.e. operational error.

Another important point to bear in mind is that, whichever clause is applied to the maritime policy, the risk manager needs to be sure to check that vague terms such as ‘computer system’, ‘data’, or ‘computer network’ are defined.

Also, beware of ‘carvebacks’. Risk managers need to check that the carveback offered is an affirmative carveback for all the coverage that is excluded and not a partial carveback. To confirm, exclusion carvebacks do not provide the insured with more cyber coverage than they had previously.

Even if the renewal is not due until later in 2020, it is prudent to discuss this matter with the broker as soon as possible. This will enable the insured to agree a strategy and alternative risk transfer solutions can be negotiated, if required.

AVOID COSTLY DISPUTES While the Lloyd’s mandate is a positive, pro-active approach, the market must be conscious that we are not sticking plasters on policies that were not intended to provide cyber coverage. As we have seen with cyber losses being notified to property insurance programmes, these insurers did not expect to indemnify such losses and, in turn, this can cause lengthy and costly disputes which all parties would rather avoid.

Key maritime cyber risks include the threat of malicious attacks on, or operational error of, operational technology, software and data.

Unless these lead to property damage, it is unlikely that an existing maritime policy will pick up the losses arising from such risks not just the property damage, but also the enterprise risk.

EVEN IF YOUR RENEWAL IS NOT DUE UNTIL LATER IN 2020, IT’S PRUDENT TO DISCUSS THIS ISSUE WITH YOUR BROKER AS SOON AS POSSIBLE, IN ORDER THAT A STRATEGY CAN BE AGREED UPON AND ALTERNATIVE RISK TRANSFER SOLUTIONS CAN BE NEGOTIATED. Claire Davey, Marsh JLT Specialty A fit-for-purpose, stand-alone, cyber insurance policy would cover: l Lost income caused by loss of hire and costs involved to get back up and running; l Cyber incident response costs (legal, PR, IT forensics, crisis management, notification of data subjects) l Cyber extortion payments; l Privacy regulatory fines/penalties and investigation costs; l Third party damage claims and defence costs arising from the loss of personal or corporate data; and, l Data and software restoration costs.

As with the silent cyber endorsements, there are many cyber insurance products available in the market. As a result, it can be confusing as to which offering provides the most value to your organisation. With the increasing reliance on technology, a cyber insurance policy is an efficient risk transfer method, but the following points should be considered ahead of making a purchase: 1. Which loss scenario is most likely?

2. Which loss scenario is likely to cause the biggest financial impact to your balance sheet?

3. How much cover do you have under existing policies?

4. Do you want to share your policy limit with other insureds, or know

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that it’s yours alone?

5. What existing cyber defences do you have in place? Would you benefit from building relationships with new cyber security/forensics vendors?

6. Revisit these questions on an ongoing basis – your answers may change, and this issue isn’t going away.

The Global Maritime Issues Monitor 2019, published by the Global Maritime Forum in partnership with Marsh, identified that cyber attacks and data theft were likely to have a large impact and high likelihood in the next 10 years.

The maritime sector is in the crosshairs between geo-political risk and cyber risk, meaning that its exposure is at an all-time high. Yet, the transience and off-site positioning of mariners means that their cyber awareness training is often patchy.

The aforementioned report also identified the need for diversity within the maritime industry – and the two issues of cyber security and diversity are not mutually exclusive. Greater diversity would bring an array of skills, cultures and perspectives to the maritime industry, which could not only increase its technical cyber-readiness, but, also provide an alternative view on its risk management.

Insureds will have to look outside of the usual maritime pools of talent, or upskill those within the industry, in order to respond to this ever-pressing concern. When employees are the weakest link, it only seems natural that hiring and talent development practices should be one of the first functions under the spotlight.

In conclusion, cyber risk is ever-evolving, in the threats that it poses and the technical solutions on offer. It’s only right that our challenge and questioning of risk transfer solutions continues alongside this to make sure that insureds are advised of all the options and select the most appropriate for their risk appetite and ever-changing exposures.

The Marine Insurer | March 2020

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ROUND TABLE | In association with

From acorns to oaks

emerges as

The innovation in the war risk market introduced by DNK, Noria and Clearwater tracking vessels using sensor data and connected insurance to automate policy administration has generated a lot of interest from the global marine insurance market.

Participants in this roundtable discussed this solution, the way it has affected the market the wider implications for the insurance market and how it could and should embrace the digital age.

The rise of the digital age and the fourth industrial revolution clearly offers huge opportunities for the insurance and risk management sector to seriously up its game, shed the baggage of the past and all the cost associated with it, design innovative new products and services for customers and offer a wholly new and painless experience for all parties in the chain.

To date, however, real innovation has only really been seen in the personal lines and health insurance sectors in which forwardlooking established players and new disruptors are coming up with on-demand coverage that much more accurately reflect the lifestyles of customers. This new approach will accelerate and revolutionise the sector breaking down age silos and barriers and blurring the age-old divisions between risk holder and distributor.

The application of the new technology to the commercial and corporate insurance sector – such as marine - has been less dramatic and potentially game-changing. This is a complex business that becomes increasingly complicated by the day as the combination of globalisation and adaption of new technologies and ways of doing business by customers in all sectors is more often than not leaving insurers scratching their heads and wondering how they are going to keep up.

Supply chain is a great example. Companies the world over would love to buy an affordable, all-singing, all dancing, comprehensive and real-time coverage for non-damage business interruption to their ever longer and more interconnected supply chains using the latest digital technology.

But if they themselves don’t actually know who their third and fourth tier suppliers are and where they are located how can the insurance industry be expected to keep up?

The Marine Insurer | March 2020

It seems therefore that, for now, the rise of the digital age in the commercial insurance space will be a more iterative process, evolutionary rather than revolutionary.

Solutions such as DNK’s sensor-based automation system, based on the idea of making the process better for the customer and therefore for the whole sector, is the way ahead. This is a ‘win-win’ for insurer and customer through the application of cutting-edge technology to a very old challenge as Svein Ringbakken, Managing Director at DNK and Chairman of Osprey Solutions, explained. “As a war risk mutual we receive thousands of AP calls (when a vessel is about to enter a high war risk area and needs to arrange short term cover) every year.

This is really labour-intensive and not efficient for us or for the customer. So we spent a 10-year period looking at the options to simplify and make the process more transparent, efficient and accurate. Finally, we founded an Internet of Things (IOT) solution - the Raptor sensor and gateway that collects and sends position and performance data directly from the vessel every 6-7 minutes,” he said.

“This understandably generated a lot of interest among members as it provided much more rapid information about when a ship was entering and leaving an AP area based on the receiver on the ship. This significantly brought down the volume of manual labour involved. This became particularly useful in 2019 when the attacks occurred in the Straits of Hormuz. For members this was much simpler – better for us and they are able to use it for their own purposes. A win-win situation. We have seen a great improvement in the numbers, our solution

ROUND TABLE | In association with

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CUSTOMER DRIVEN

THE PARTICIPANTS Ronny Reppe – CEO, Noria Group Will Unwin- CEO, Clearwater Dynamics Svein Ringbakken - Managing Director, DNK Neal Croft - Global Client Relationship Director, Willis Andreas Hovelsrud - Insurance Director, DNK Irene Phillips - CEO, Osprey Solutions Chris Bhatt- Global Sales Director, AON Adrian Ladbury – Editor, The Marine Insurer

is far more accurate and efficient. For customers a vessel is a high and long-term investment, usually about 15 years. We have given this to the members because it protects their asset and investment and our interest at the same time.”

Irene Phillips, CEO Osprey Solutions, said that the customer pull rather than provider push nature of the solution was critical to the success of the project.

“This is a genuine solution to an old problem that shipowners and their insurers have grappled with for a long time. It combines both business process and technological improvements to give an end to end solution for all. It was designed the right way around, through an analysis of the problem and what was needed first rather than finding a technology that looked good and then working out how to apply it which is how it often works. This can also be replicated in other areas which is very encouraging.”

Chris Bhatt, Global Sales Director Aon Marine, agreed that following the herd is not the way ahead. “I liken the whole Insurtech space to a kids football match with everyone all bunched up and chasing the same ball. This is not the way to play the game. This kind of solution is the way ahead as it is uses the latest technology and data to deliver a real solution for the customer. Brokers such as Aon have vast amounts of data and we are at the centre of the relationship between carrier and customer. The key is not to just collect a lot of data but to work out what to do with it, how to use that data to the benefit of all.”

Ms Phillips stressed that transparency and accessibility is key for the market to make real progress, She said the sector needs to dare to simplify, not a natural tendency for this market.

“We have to work out a system that enables the data owner – the customer – to share with the insurers and brokers to gain a view of the reality and truth. This has to be an open and transparent process that enables a much better dialogue and analysis of the risk and therefore solutions that benefit everyone…we dare to simplify. The marine insurance industry is very complex with a lot of connections and bespoke solutions.

The key is to not necessarily seek to boil the ocean and solve all the challenges with one solution but to dare to simplify.”

HISTORIC BARRIERS “This is exactly what is needed. The insurance industry has been slow to adapt and is, perhaps lurching forward in the way technology is applied. This may be a very individual case and the big question is where do we go from here? How can such a solution be applied to big risks such as geo-political volatility and supply chain disruption?” added Mr Bhatt.

For Neal Croft, Global Client Relationship Director, Willis Towers Watson, the key is to link the systems and data in an enterprise wide manner.

“I think this is great what has been done. There are so many links between immediate and secondary risks that affect all organisations in so many different ways. As with this example in the marine war risks area the data and technology has to be used effectively to help link up all the factors and provide solutions. We have all these individual risks, the next step is how to link them all and manage them in an enterprise wide manner.”

William Unwin, CEO Clearwater Dynamics suggested that a new collaborative approach is needed across the market to make real progress.

“Having co-innovated and implemented a dependable digital solution, a market-wide response makes a lot of sense

“As a war risk mutual we receive thousands of AP calls (when a vessel is about to enter a high war risk area and needs to arrange short term cover) every year. This is really labour-intensive and not efficient for us or for the customer.”

Svein Ringbakken, DNK The Marine Insurer | March 2020

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ROUND TABLE | In association with

“There are so many links between immediate and secondary risks that affect all organisations in so many different ways. As with this example in the marine war risks area the data and technology has to be used effectively to help link up all the factors and provide solutions,” Neal Croft, Willis creating unique data resource for shipping companies. There are a limited number of satellite providers competing for a modest maritime market ensuring keen competition. A solution integrating Raptor near real time tracking and granular domain awareness built from the ground-up has driven an insurance step change . Maintaining an agnostic approach to hardware and position reporting creates opportunities to future proof ongoing innovation,” he explained.

“Working hand in glove with DNK afforded CWD extensive opportunity to finesse the final platform, this is a rarity many technology initiatives do not have. There is a lot of focus in this sector on two areas risk mitigation and loss prevention directly improving processing and enhancing risk mapping.

The industry has struggled to deliver substantive end-to-end deployments at scale given many non-aligned [interests] in shipping operations and security. This has impacted on a number of potentially good solutions not being used,” added Mr Unwin.

“Approached from an insurance perspective with a consolidated stakeholder approach as is being applied within Osprey we contend there are a number of practical wins for shipowner, operators and insurers alike. This successful initiative is directly reducing the burden on the insurer and shipping companies. The shipping and insurance industries are pilloried for not keeping up with technological developments, but, this shows that by using a partnership rather than acquisition approach scaleable deployments can be achieved.

The market will change rapidly over the next decade and incremental adaption is needed rather the big bang approach,” continued Mr Unwin.

NO BIG BANG “The market will change dramatically over the next decade and regularly not all in one go, in one big bang. There will not be a dramatic Insurtech change we will see incremental change.

Efficiency is the key. We still have manual input throughout the insurance value chain and this has to change very quickly,” he said.

“There are two parallel changes here. The search for efficiency in the insurance industry and the need to improve the customer experience. This DNK initiative delivers both goals, it makes the whole process more efficient and improves the customer experience. This moves towards where the market The Marine Insurer | March 2020

is headed – insurance when needed and on demand. Less focus on the annual contract, but, rather providing what the customer needs today. One of the big challenges for the industry is cyber because neither the customer nor the insurers really understand this risk.”

All participants in the roundtable – and it seems all risk managers generally – agree that a lack of market standardisation is a problem and barrier to positive change.

“The Internet of Things is not one standard tool, but, many things. I worked in finance and other markets before returning to the insurance market and I have to say that they are very different,” said Ms Phillips.

“The banking market worked out a while ago that its value does not come through transactions but advice. As a result, the sector adopted standards and common systems such as the international settlements system that all can use because it does not really provide a competitive edge. This enables the banks to focus on where they can really add value. The insurance industry has not taken this approach and so is hampered and this makes it more difficult to derive value out of new technology,” she continued.

HAPHAZARD APPROACH Mr Ringbakken agreed that the somewhat haphazard approach that the insurance market is taking to the adaption of new technologies is holding back progress.

“The biggest insurance and reinsurance companies are investing in new technology. The sector is changing, the fourth industrial revolution will hit this sector, but, there is a huge disparity in how companies are adapting. Some of the big insurers are very forward looking but others appear to be doing nothing about it.”

Ms Phillips pointed out that in some ways it is easier for a mutual such as DNK to focus. “Perhaps there are advantages to being a mutual in this sense because, by definition, the insurer has to focus on risk management and view everything from the customer or member perspective. This gives focus on what is really needed to the benefit of all. The big question for the wider insurance market is not just how can it improve its own processes and efficiencies, but, how to improve the underlying risk.”

Mr Croft added that this is why it is so important to take an enterprise wide approach.

“This is why we are looking at geopolitical risk through a six coloured lens. The risks that all companies face are numerous

ROUND TABLE | In association with

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“Having co-innovated and implemented a dependable digital solution, a market-wide response makes a lot of sense creating unique data resource for shipping companies.”

Will Unwin, Clearwater Dynamics

and interconnected. These risks cannot effectively be dealt with in isolation and in silos they have to be tackled on an enterprise wide basis.” he said.

And, as Mr Bhatt stressed for this reason communication and partnership is critical to make progress.

“A more joined up approach to risks in this increasingly interconnected world is vital. This demands greater partnership and improved communication to the benefit of all. We are working on an interesting project in the maritime sector currently that involves authorities from around the world. We are seeking to create a set of cyber standards to help everyone improve the way the risk is identified, measured and managed and benefits all parties.”

CYBER THREAT Mr Unwin pointed out that a more joined up and pro-active approach is definitely needed in the ever more critical world of cyber risk.

“It is now widely accepted that a pro-active threat hunting approach fused with more traditional defensive strategy is essential to keep on top of fast evolving current and future threats. This is complex for organisations with a sophisticated cyber strategies and even more so within the maritime sector.

Good cyber hygiene is further hampered driven by event fatigue and cyber skills shortages. Those in the maritime industry are also grappling with wide reaching automation and digitalisation objectives substantially increasing opportunities for cyber criminals to exploit connected systems,” he pointed out. And taking a ground-up approach again makes sense.

“CWD’s Horizon platform simplifies and consolidates cloud computing risk monitoring enabling down skilling delivering actionable insights through a single pane. This empowers

existing IT teams to manage cyber security and reduces the need to hire cyber experts. We have had the good fortune to hire a highly regarded former senior cyber expert from GCHQ, Horizon was built from the ground up employing a hackers perspective,” explained Mr Unwin.

“This level of expertise is not readily available outside of specialist security providers, in real terms building capability integrating active rather than passive defence approach consistently assists in the early indicators of compromise. It has been reported criminal hackers are generally evolving their techniques circa 90% faster than the defensive capabilities under development within the private sector. These are shifting sands and risks continue to evolve unabated. The shipping industry is entering an unchartered and increasingly unsettled period,” he added.

Ms Phillips stressed that, in her view, customers need the insurance sector to do more to apply their risk management expertise to rising challenges. she said.

“The core question is who is handling the data and what are they supposed to do. The insurance and wider risk management industry needs to be much better at understanding the data and helping the shipowner prioritise all the risks. This simplifies everything. The insurance sector needs to look at what the banking industry has done in this area – how simple online banking has become. All the hard work needs to be carried out by the insurers. Insurers are the experts on risk management and should make a greater effort to provide understandable solutions, without customers needing to become experts themselves to be able to buy insurance.”

RAISING VALUE Ronny Reppe said that, in his view, the insurance business

“I liken the whole Insurtech space to a kids football match with everyone all bunched up and chasing the same ball. This is not the way to play the game.”

Chris Bhatt, AON

The Marine Insurer | March 2020

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ROUND TABLE | In association with

“This is a genuine solution to an old problem that shipowners and their insurers have grappled with for a long time. It combines both business process and technological improvements to give an end to end solution for all.”

Irene Phillips, Osprey Solutions does not need to be so complex. It needs to package its products and services differently and standardise at the same time or risk being seriously disrupted.

“The customer does not need all the complexity that is built into the insurance industry. I recently spoke with a life insurer who said that it would be impossible to replace life insurance because it is so complex with all the actuarial work involved and the like. I do not think that this is the point. Does it really need to be so complex for the customer? Can it not be package differently? Those that hide the complexity and offer simple and easy to use products to the customer will win. We have to look at delivering more value for money. We have to improve products and efficiency,” he said.

Mr Ringbakken added that potential systemic threat posed by cyber and the whole host of geopolitical threats outlined

by Mr Croft really demands urgent collective action.

“I see a potential perfect storm here. If you consider the major events that took place in 2019 and into 2020 – trade wars and political tensions between the US and China, the conflict and attacks in the Gulf of Arabia, catastrophic events in Asia and Australia and now the real prospect of a pandemic and serious impact on global supply chains and therefore shipping – then you have many interlinked risks manifesting at the same time. Add to this the rising cyber threat that threatens all sectors not just marine then this demands a much more co-ordinated and robust response.

Risk identification, analysis and management needs to be significantly improved using the latest data and technology to cope with this.”

INNOVATION NEEDED NOW This scenario outlined by Mr Ringbakken demands a more

innovative approach from the insurance sector and new solutions said Chris Bhatt. “If the market can more effectively gather and analyse all the data it holds then it can more effectively work out the probability of risk, help to reduce and prevent risk and then develop new products and solutions that focus on the risk that cannot be managed and retained,” he said.

“If the market shifts its capital focus to more difficult risks such as pandemics or cyber because the more predictable risks are retained and managed then this would be progress.

Companies would be able to retain more traditional risk and buy more innovative coverage for the more challenging risks with the same budget. The global surveys of the major risks find that almost 50% of them are currently uninsurable. There is trillions of dollars of capital out there that could be put to work with these currently uninsurable risks if the market can come up with workable solutions such as it already has by using parametric triggers. This will help ensure that the industry retains its relevance and resists the disruptors.”

And, finally as Mr Ringbakken reminded participants, the ever present and onerous area of compliance really should not be forgotten because new technologies can be adapted to this critical area too.

“Another important aspect that we have not considered is compliance and regulatory pressure. There are a lot of demands on shipowners currently – such as environmental standards - from international bodies such as the IMO, regulators, banks and insurers. Everyone is doing their best to keep up and comply. We need to use technology to help in this area too, use solutions such as Osprey to help shipowners comply by giving them the data to comply. We need to focus our minds on what we can do to help using this technology.”

“The market will change dramatically over the next decade and regularly not all in one go, in one big bang. There will not be a dramatic Insurtech change we will see incremental change.

Efficiency is the key.”

Ronny Reppe, Noria Group The Marine Insurer | March 2020

54th ANNUAL HMEIC THE WESTIN GALLERIA HOTEL HOUSTON, TEXAS

SAVE THE DATE: September 20 -22, 2020

MANAGING RISK IN A SUSTAINABLE WORLD For more information on the Conference, visit www.HoustonMEIC.com

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MARINE | COVID-19 In association with West of England Insurance Services

Covid-19:

the impact upon ship operators, shipyards and P&I Insurers The Coronavirus threatens to paralyse the world economy, is already massively disrupting global supply chains and will lead to a huge economic cost. Nicola Cox Head of Defence at West of England Insurance Services, explains what is not covered and what is covered under protection & indemnity policies.

The spread of the Covid-19 virus worldwide has potentially far-reaching effects under charter parties, bills of lading and shipbuilding contracts.

Many - but by no means all - the claims and liabilities that arise will be insured by P&I Clubs.

This article explores some of the practical issues and the types of claims that can arise.

1) Crew, passengers and Club cover: l Crew: Shipowners, as employers, owe a duty of care for the safety and well-being of their crew. Precautions should be taken to minimise the spread of the disease on board, including: > Regular hand washing > Keep bathrooms and sinks clean > Covering the mouth and nose when coughing and sneezing > Wear a medical mask fitted tightly to the face in an area with a known outbreak. The mask should not be touched or handled during use The Marine Insurer | March 2020

> Thoroughly cooking meat and eggs > Avoid close contact with and refuse boarding to anyone showing symptoms of respiratory illness such as cold or flu > Seek prompt medical attention if you have symptoms of fever and respiratory illness. > Consider restricting shore leave and crew changes in ports where Covid-19 cases have been reported > The Master should convene a meeting with all crew, prior to arrival at a port where cases of Covid-19 have been reported to discuss the measures necessary to mitigate the risk of contracting the virus.

Where a crew member becomes ill with Covid-19, owners will be reimbursed by their P&I Club for any hospital and medical expenses incurred.

Reasonable funeral expenses will also be paid by the P&I Club, including the cost of repatriating the crew member’s dead body.

In addition, where the vessel deviates in order to save the crew member’s life, the’ P&I Club will reim-

burse owners for additional costs incurred due to the deviation (fuel, insurance, wages, stores, provisions and port charges). l Passengers: If a passenger becomes ill or dies as a result of being infected by Covid19 because of owners’ negligence in failing to contain the spread of the virus, owners will be reimbursed by their P&I Club in accordance with club rules for any liability in damages to the passenger.

If, because of owners’ negligence in failing to contain the spread of the virus, the vessel is not able to complete her voyage, owners will be reimbursed by their P&I Club in accordance with club rules for the cost of repatriating passengers and, possibly, for cruise compensation.

2) Charter parties: From a commercial perspective, the outbreak of Covid-19 can have unanticipated knock-on effects. For example:

MARINE | COVID-19 In association with West of England Insurance Services

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able time to make enquiries. If the port becomes unsafe after charterers have nominated the port, charterers will have an obligation to nominate an alternative (safe) port.

l Commencement of laytime and free pratique: In voyage charter parties, the vessel must be physically and legally ready to perform the charter service required when the Notice of Readiness is given. If there are no circumstances that would affect the vessel being granted free pratique, a valid notice of readiness may be given without having obtained the necessary clearances.

However, where there is a known, or possibly just a suspected infection of Covid-19 on board the vessel, owners should ensure that they have the necessary free pratique clearance before issuing a Notice of Readiness. l Off-Hire: If several of the crew on board are ill and this prevents or delays the service required by charterers, this may be considered as an off-hire event (e.g. “deficiency of men” offhire event in Clause 15 of the NYPE 46 Form). Note that some charters specifically refer to “quarantine restrictions” (eg Shelltime 4).

l Deviation: Where a crew member becomes ill during the voyage, many standard charter party forms will give owners the right to deviate in order to save the life of an infected crew member.

In a voyage charter, although the deviation would be permissible, owners would not be able to claim additional freight unless owners have included an express clause providing that additional freight is earned where the vessel is forced to deviate to save the life of a crew member, eg because of an actual or suspected case of Covid-19. l Safe Port: Under most standard time charter party forms, charterers are obliged to nominate a safe port and owners must generally comply with the order to proceed to that port unless owners reasonably assess that the port is unsafe. The Master does not, however, have a duty instantly to obey charterers’ orders so that if owners are in doubt about the safety of the port, owners/the master will have reason-

l Claims arising under an implied indemnity: Owners may be able to claim the benefit of an implied indemnity against time charterers if owners can show that the loss arose from a risk which was not reasonably foreseeable and that owners had therefore not agreed to bear when owners agreed to sail to the port. However, if owners agree to go to a port which is known to be affected by Covid-19, it is likely that owners will be held to have agreed to bear the risks arising from such voyage order and/or have waived any implied indemnity against charterers. If there is a specific clause in the charter that relates to diseases, epidemics an the like the provisions of the specific clause are likely to exclude such an implied indemnity.

Note that BIMCO’s “Infectious or Contagious Diseases clause” gives owners wide-ranging express indemnities for costs and claims (including liability to cargo interests) where, for example the cargo is discharged at an alternative port

FORCE MAJEURE IS NOT RECOGNISED UNDER ENGLISH LAW AS A LEGAL PRINCIPLE. THEREFORE, IF PARTIES WISH TO AGREE ANY EXCEPTIONS TO LIABILITY AND/OR FACTORS WHICH WILL EXCUSE PERFORMANCE OF THE CONTRACT, THIS MUST BE DONE VIA EXPRESS CONTRACTUAL CLAUSE.

The Marine Insurer | March 2020

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MARINE | COVID-19 In association with West of England Insurance Services

because the intended discharge port is an “Affected Area” because of the risk of exposure to a “highly infectious or contagious disease that is seriously harmful to humans”, such as Covid-19. Under the BIMCO clause, owners are also indemnified by charterers for any claims or costs that arise after the charter party has been concluded, such as cleaning, quarantine or fumigation costs or and/or losses because the vessel has traded to the affected area.

3) Bills of lading and contracts of carriage: l Deviation during the voyage: Whilst under the charter, party owners may be entitled to deviate to save life at sea or refuse to proceed to a port, carriers will still have an obligation to deliver the cargo under the bill of lading to the designated port with utmost due despatch and to take care of the cargo. However, where the Hague Visby Rules are incorporated (article IV rule 4), it is likely that the carrier will have a defence to claims for cargo damage caused by delay because the vessel has deviated to save the life of a crew member exhibiting symptoms of Covid-19. l Discharging the cargo at a different port: The carrier may be entitled to discharge the cargo at a different port if the bill of lading incorporates a liberty clause (e.g. “so near thereto as she may safely get”) and the cargo can be safely delivered to the party entitled to take delivery at that alternative port. l Claims for delay to delivery of cargo: If, as a result of quarantine and/or deviation arising from Covid-19, delivery of the cargo is delayed, a carrier may be able to rely on the exception of “restraint of princes” in Art. IV rule 2(g) and/or the quarantine exception in Art. IV rule 2(h) of the Hague Visby Rules.

The Marine Insurer | March 2020

UNDER MOST STANDARD TIME CHARTER PARTY FORMS, CHARTERERS ARE OBLIGED TO NOMINATE A SAFE PORT AND OWNERS MUST GENERALLY COMPLY WITH THE ORDER TO PROCEED TO THAT PORT UNLESS OWNERS REASONABLY ASSESS THAT THE PORT IS UNSAFE. Nicola Cox, West of England Insurance Services 4) Frustration and Force Majeure (charter parties and shipyard contracts): l Frustration: Frustration occurs when, without default of either party, the performance of a contract is rendered impossible or when the principal purpose for entering into the contract is rendered “radically different”.

It is important to note that under English law it is difficult to prove a contract is frustrated: financial loss does not in itself render the charter frustrated; the delay or disruption has to be so radical that “performance is really in effect that of a different contract“.

Covid-19 is less likely to frustrate a time charter that has a wider trading limit because the time charterer can legitimately give orders to the vessel to sail to alternative ports that are not affected by Covid-19 (even if the charterer finds it difficult to find lucrative employment for the vessel). l Force Majeure Force Majeure is not recognised under English law as a legal

principle. Therefore, if parties wish to agree any exceptions to liability and/or factors which will excuse performance of the contract, this must be done via express contractual clauses, usually by means of list of events in which Force Majeure can be invoked by one (or both) of the parties to the contract.

Accordingly, whether Covid-19 will constitute a Force Majeure event largely depends on the wording of the Force Majeure clause. For example, where the Chinese government is offering Force Majeure certificates to local companies unable to fulfil their contractual obligations because of Covid-19, this will not excuse performance by the local company unless the giving of such Force Majeure certificates is an event expressly listed as a Force Majeure event in the contract. Bear in mind, also, that Force Majeure clauses are construed restrictively against the party claiming the benefit of the clause. l Shipbuilding contracts: In shipbuilding contracts, delays caused by “plague”, “epidemics” and/or “quarantine” are often expressly stated to be Force Majeure events which constitute “permissible delays”, thereby postponing the contractual delivery date. Parties should, however, be aware of strict provisions and deadlines for the yard to declare Force Majeure and for the buyer to challenge Force Majeure notices. However, as with permissible delays generally, even where the contractual delivery date has been postponed due to permissible delays, the buyer will usually still be entitled to cancel the newbuild contract if the delay extends beyond the “drop dead” date specified in the newbuild contract.

This article is intended for general guidance only and should not be relied upon as legal advice.

DECARBONISATION

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Decarbonising shipping: the challenges for marine insurers The Marine Insurer examines how measures to transform the shipping sector will impact marine underwriters.

While the headlines have covered the increasing number of vessels on the Northern Route from Asia to Europe, of equal significance is the far larger number of cruise vessels taking passengers to – for the moment – unspoilt waters, as well as the increase in the number of fishing boats exploiting the changing habits of North Atlantic fish stocks.

Shipping plays a pivotal role in the global economy with up to 90% of global trade carried by sea each year.

This means the sector has a critical role to play in global efforts to mitigate the impact of climate change.

The maritime sector generates more than 2% of annual global CO2 emissions, according to the most recent survey by the International Maritime Organisation (IMO), the industry’s regulator.

With other sectors acting to reduce their own emissions and the shipping sector continuing to grow, some forecasts suggest this could increase to 10% by the middle of the century.

The Marine Insurer | March 2020

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DECARBONISATION

As environmental lobbyists take aim at the sector, there is a clear need for action to make shipping more energy efficient and reduce its environmental impact.

The IMO has recognised the need to decarbonise and set out its long-term vision for change in 2018.

The IMO2050 strategy aims to cut international shipping emissions at least by half by 2050, with the ultimate goal of zero carbon shipping at some point during the current century.

recognise the need to evolve. With marine insurers and their parent companies seeking to drive improvements to underwriting performance, there has been a greater willingness to explore “In terms of climate change the opportunities presented by new technologies. issues, I am convinced that IMO Efforts to decarbonise the maritime industry will increase the need for can develop a robust and effective innovation within the marine insurance market. regulatory framework in the The big challenge for underwriters as the shipping industry moves to global context,’’ decarbonise is that it will be asked to insure new technologies that are EFFICIENT DESIGNS relatively unproven.

Within this strategy the IMO has called Given underwriters’ traditional for the strengthening of energy efficient Hideaki Saito, reliance on historical data for calculating designs within ships as well as collaboraIMO premiums, calculating an appropriate tion with ports to help reduce emissions rate for largely untested technologies will be a major hurdle for from shipping. the marine insurance sector to overcome.

The introduction of new fuel types, which could include As the risk evolves, marine insurers will need to take steps electric and hybrid power, hydrogen as well as the potential use to become more comfortable with the exposures they are of biofuels, is also central to the planned transformation. asked to cover.

Through the IMO’s Energy Efficiency Design Index (EEDI), Enhanced dialogue with the shipping sector will be critical introduced in 2013, the regulator has created mandatory design as the industry works to adapt its product suite to become fit requirements to improve the energy efficiency of new ships. for purpose for modern vessels.

The IMO hopes future phases of the EEDI will deliver a 30% The dialogue between marine underwriters and their reduction in the carbon intensity of new ships by 2030, with a insureds needs to begin now, if it hasn’t already, if the further interim target to reduce carbon intensity as an average insurance sector is to develop a thorough understanding of the across international shipping by at least 40% by 2030. changes it can expect to see over the coming years.

Awareness is growing within the shipping industry of the need To meet the IMO’s carbon-reduction targets, insurance to act and the decarbonisation of shipping is expected to be one broker Marsh has said commercially viable, zero-emission of the most significant challenges facing the sector during the vessels must start entering the global fleet by 2030, with their next decade. numbers radically scaled through the 2030s and 2040s.

In the Global Maritime Forum’s most recent survey of the The shipping sector’s insurance needs will likely extend sector, decarbonisation and new environmental regulation beyond traditional marine covers as it moves away from were ranked within the top three concerns facing the maritime carbon-intensive activity. Marine underwriters will potentially industry during the 2020s. need to collaborate with peers from other classes to bring an The decarbonisation of the maritime sector will come at appropriate product suite to their clients. a financial cost. A study released in January by University Taking these steps can help marine insurers be part of the Maritime Advisory Services and the Getting to Zero Coalition solution as the maritime sector transitions towards a lowsuggested at least $1trn of capital investment will be needed. carbon industry.

While substantial investment will be needed to build new ships and retrofit the existing fleet, much of the estimated $1trn needed will be for investments on land, particularly for the NEW FUELS production of low carbon fuels and fuel storage.

One of the big challenges facing marine underwriters as the maritime sector moves to reduce its greenhouse gas emissions will be understanding the quality of new types of fuel.

INSURANCE IMPACTS The introduction of new fuel types will present a significant Investment on such a scale will have inevitable consequences challenge, given the relatively short time period in which these for marine insurers, bringing both opportunities and risks for the fuels will need to be developed and tested. sector.

Fuel problems can lead to engine failure which can in turn Marine is perhaps the most traditional of insurance classes trigger claims for hull and machinery insurers, with further and has historically been resistant to radical change. costs from salvors if towing is needed.

Recent years has seen a shift in the sector’s willingness to The Marine Insurer | March 2020

DECARBONISATION

The way in which IMO2050 is enforced will also have implications for marine insurers. Protection and indemnity clubs may be liable for any fines imposed on their owners for failing to comply with regulations.

Regulatory uncertainty is viewed by respondents to the Global Maritime Forum survey as the biggest potential barrier to shipping’s decarbonisation over the next decade.

However, Hideaki Saito, chairman of the Marine Environment Protection Committee at the IMO, said he is confident the body can take the necessary regulatory measures to facilitate decarbonisation.

“In terms of climate change issues, I am convinced that IMO can develop a robust and effective regulatory framework in the global context,” he said.

Marine insurers will need to monitor developments closely as this framework is developed.

The introduction of new regulations limiting sulphur oxide emissions from the start of this year – IMO2020 – provides some guidance as to the issues marine insurers may face as the maritime sector works to decarbonise.

Shipping is one of the largest emitters of sulphur among all sectors, responsible for between 5% and 10% of annual emissions.

IMO2020 has sought to address this, prompting the development of compliant fuel types.

MACHINERY DAMAGE

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maintenance which in turn will bring an improved loss record.

As older vessels head to scrapyards, demand for demolition voyage insurance and other associated covers may increase.

A failure to make the transition towards a zero-carbon industry will leave the shipping sector facing considerable reputational risk. This risk may extend to marine insurers if they are seen to be facilitating a sector which is a major contributor to climate change.

While the short-term financial cost to the shipping sector will be significant, the long-term impact on the environment of the sector failing to adapt will be far costlier.

Marine insurers have a key role to play in ensuring appropriate cover is available to help facilitate the shipping industry’s move towards a cleaner and more efficient future.

WHAT NEXT? The IMO is scheduled to complete its fourth Greenhouse Gas Emissions study by October this year, which will include an inventory of current global emissions as well as scenarios for future international shipping emissions until 2050.

The Marine Environment Protection Committee is expected to establish its own working group on the reduction of greenhouse gas emissions from ships.

A draft MEPC resolution has been agreed on national action plans to encourage member states to put in place the legal, policy and institutional frameworks necessary to facilitate emission reduction from ships.

The IMO Intersessional Working Group on Reduction of GHG Emissions from Ships has been tasked with developing a plan for follow-up actions to begin delivering on the IMO’s initial strategy. A final IMO plan detailing the transition is due to be finalised in 2023.

In its most recent Safety and Shipping Review, Allianz Global Corporate & Specialty warned of the industry’s concern over the potential for increased machinery damage due to the risks associated with these fuel types.

Machinery damage is one of the most common causes of loss in marine insurance.

“The worry is that we could see an increase in the frequency and cost of machinery breakdown claims related to IMO 2020,” said Justus Heinrich, chief underwriter for marine hull in Central and Eastern Europe at AGCS. “The increased cost of fuel and the extent to which this can be passed on via higher freight costs, may also influence cost-saving in other areas, like crew training or maintenance.”

Amid the concerns about the introduction of measures to improve the environmental impact of shipping, there are several potential benefits for marine “Shipping is one of the largest emitters of sulphur among insurers.

The transition will encourage the sectors, responsible for between 5% and 10% of development of a younger, cleaner fleet which should bring better efficiency and annual emissions.’’ an improved safety record. Retrofitting the existing fleet should also lead to better

all

The Marine Insurer | March 2020

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MARINE | COVID-19

Covid-19

demands urgent business continuity action from shipping sector The maritime sector is highly exposed to the fast rising threat of coronavirus (Covid-19).

It is not clear how the insurance market will help out and so shipping firms need to act fast to mitigate the risk. Peter Birks reports.

At the time of writing the extent of the global spread of Covid-19, the coronavirus that was first reported in Wuhan, Hubei Province, China on December 31st 2019, is unknown, but, it is spreading rapidly across Asia and worldwide.

In late February the World Health Organization (WHO) said that it was too early to declare the virus as a pandemic but the world should do more to prepare for this outcome. It also said that it is worried that the window of opportunity to stop the virus has narrowed significantly. By the time you read this the world could be facing up to a pandemic.

The virus’s relatively long incubation period, and the possibility of passing on the virus while still asymptomatic means that the illness poses a greater potential threat than its coronavirus predecessor, SARS. In economic terms, shipping companies in commodities, finished goods, components and, in particular, cruise lines, have been impacted.

AP Moller-Maersk said on February 20th that the outbreak would weigh on earnings this year, although it still expected global container demand to grow by 1% to 3% in 2020, compared with 1.4% last year and 3.8% the year before.

The outbreak has been described by the International Monetary Fund as a global health emergency. Morgan Stanley has estimated that Covid-19 could knock 0.5pp off the previously predicted Q1 2020 global growth rate of 2.5%, China’s GDP was expected to expand by just 4.2% in Q1, year on year.

Covid-19 is a particular threat for two obvious reasons. First, it has shown itself to be more infectious compared with SARS The Marine Insurer | March 2020

or MERS. Second, China is far more integrated into the global economy today than it was when SARS emerged 15 years ago.

Insurers are writing far more Asia-related business today than they did in the early 2000s. As BIMCO observed in a February note, “when China sneezes, we all catch the flu”.

THE LEGAL BIT Legal firm Clyde & Co observed that one aspect of insurable cover thrown into the spotlight as a result of the outbreak of Covid-19 had been the concept of force majeure. Nearly all legal experts have come up with the same answer. “It depends”.

Early in February the Chinese authorities effectively gave buyers in the country the right to declare a force majeure (FM) situation. So, if you were thinking of taking legal action in China, good luck.

China’s various measures have meant that many companies have found themselves unable to perform their contractual obligations, or were at risk of being unable so to do.

Although the concept of FM was globally recognised in commercial transactions, there were key differences in the treatment and recognition of FM across different jurisdictions.

Under common law systems such as English law, parties who wish to rely on FM must come within the express wording of the FM clause, one which expressly excuses non-performance upon the occurrence of certain specified events beyond a party’s control. A party must bring itself clearly within the wording of the FM clause before it can claim FM. Civil law systems are different. They may excuse nonperformance of a party based on FM, even in the absence of an express FM clause.

MARINE | COVID-19

Restrictions preventing crew leaving the ship or denying seafarers access to a visa-on-arrival have been imposed in Singapore, Indonesia, Malaysia, Philippines, Russia, Australia and South Korea.

Just to further muddy the water, the concept of FM is also a creature of statute in some jurisdictions, including the People’s Republic of China.

That said, epidemics and pandemics are usually excluded from standard insurance policies. It was therefore possible that container ship companies, ports and other insureds, face major losses that they will be unable to recover from their insurers.

GOODS COMING FROM CHINA Jonathan Moss, Head of Marine and Trade at legal firm DWF, noted in late February that “increasing factory closures across China are causing severe supply chain disruptions for retailers, whilst Chinese ports are also severely under-staffed. with only half of port officials and tug operators working at the ports of Shanghai and Hong Kong – two of the world’s busiest container shipping gateways. As a result Chinese ports have set expectations of significant disruption in the first quarter, which will likely continue into the second”.

He said that, without doubt, there would be an increase in business interruption, credit risk and cargo claims, with purchasers along the supply chain being compromised by nondelivery. He added that obligations stipulated in sale and supply agreements that were not respected would also give rise to insurance disputes.

Vessels were leaving Chinese ports significantly underloaded.

That meant that shipowners could be unable even to cover their fuel costs. Mr Moss said that this would impact shipowners’ ability to pay premiums for Hull & Machinery cover, should the marine insurance market begin to harden.

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It gets worse. Mr Moss also noted that shipowners were also “Increasing factory closures across failing to fulfil their contractual obligations under their charter China are causing severe supply parties, which in turn was likely to trigger chain disruptions for retailers, an influx of disputes with their charterers, whilst Chinese ports are also leading to a rise in FD&D claims and claims under severely under-staffed.” charterers legal liability cover.

Jonathan Moss, Insurance disputes DWF could focus on whether or not a vessel operating under cargo-capacity rendered it offhire. And, if so, whether the shipowner would permitted to invoke force majeure.

During February it was estimated that diminished trade was costing container shipping lines $350m per week in lost volumes.

Shipowners were in fact looking at something of a perfect storm, hit from all sides. They could face the costs involved with claims from cargo interests if the cargo had not been shipped under the bills of lading. Insurers are likely to see a burst of claims under shipowners’ Freight and Cargo policies as a result, with many leading to coverage disputes.

THE THREAT TO CREW HEALTH While much of the talk was on supply chain disruption, Singapore-based ship manager Synergy Group noted that the impact on the seafarers who crew the ships had largely been overlooked.

Synergy said that seafarers had been working under tremendous pressure and were understandably, anxious about when they might be able to see their families again. Shipping lines had imposed temporary restrictions on crew changes, while quarantine periods were being enforced on arrival at some countries.

The increased restrictions on crew had led to a change in demand. In particular, late February saw a surge in demand for Eastern European seafarers and a fall-off in demand for crew from the Far East.

Restrictions preventing crew leaving the ship or denying seafarers access to a visa-on-arrival have been imposed in Singapore, Indonesia, Malaysia, Philippines, Russia, Australia and South Korea. Crew calling at Chinese ports cannot disembark.

Synergy noted that the logistics of managing crew changes had become so complicated that some vessels had diverted to an intermediate port, just so that the crew could be changed.

At the time of writing it appears pretty clear that this virus will not simply disappear and is rapidly spreading worldwide and sadly the death toll is rising. The disruption caused to individual lives and all businesses could be enormous and the international maritime sector is particularly exposed with, it appears, little hope of redress. Now is clearly the time for the risk and business continuity manager to step up to the plate.

The Marine Insurer | March 2020

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MARINE | DIGITAL TRANSFORMATION In association with Concirrus

Time to wake the sleeping giant Last year was a one of real change for the marine insurance industry in which the adoption of digital technologies picked up pace. These technologies are being implemented to solve problems and drive efficiencies, but, Mark Phillips of Concirrus, the insurance focused software firm, believes the industry has failed to realise the sleeping giant that exists. Drawing on real-life cases and insights nurtured through collaboration with the industry and other insurtechs, he believes that the industry is on the precipice of an opportunity to do things differently.

For the last 200 years, the insurance market has existed to provide solutions to the world’s most complex risk challenges and the most remarkable risk innovations in history.

The risk transfer mechanisms it has created have rebuilt disaster zones and made the world a more resilient place, facilitating global trade, commerce and innovation.

As we progress into 2020, the same value chain that has served the market so well for centuries is fragmenting with two distinct approaches coming to the fore. One that exists to serve traditional products to traditional risk categories and the other, centred around a new operating model and approach to underwriting and broking, driven by technology, and underpinned by the democratisation of The Marine Insurer | March 2020

data. Those embracing the new model have recognised that the world has changed and, with it, the risk that they serve.

RISK HAS CHANGED The world has become increasingly dynamic and connected, with a myriad of threats that no longer fall within the traditional lines of business categories and cannot be quantified based on experience or historical approaches.

Super vessels such as the Pioneering Spirit are completely unique, cyber attacks on vessel systems are becoming more frequent, climate change is opening new trade routes and having a dramatic impact on the seas and US foreign policy is increasingly protectionist. Add to this connected ports, increased automation, the New Silk Road Initiative and the various global blockchain

initiatives, it is clear to see that we are undergoing a seismic transformation.

We are seeing clusters of low orbital satellites being launched and technologies such as Satellite Aperture Radar making it viable to track all vessels globally, regardless of cloud cover or AIS signal. Data is becoming more widely available and machine learning technologies are enabling shipping companies to leverage this data to implement significant operational efficiency. As a result, insureds are becoming incredibly sophisticated in their approach to their underlying risk and are starting to demand more than cover from their insurers.

As of December 2019, TradeLens, a blockchain-enabled digital shipping platform jointly developed by Maersk and IBM, has managed to onboard over 50% of global containerised trade. Imagine where it will be in a few years and compare that to the limited historical claims data sets that insurers use today.

The result is a change in risk transfer behaviour, leading companies to retain more risk on their balance sheets, while seeking only specialist cover and services from specialist providers. There have been several high-profile examples of large accounts leaving the Lloyds market in favour of P&I. This has less to do with price and more to do with the core competencies of loss prevention and member services

MARINE | DIGITAL TRANSFORMATION In association with Concirrus

that P&I Clubs have always provided. The Clubs have identified this trend and many of them are in the middle of significant digital transformation strategies, centred around the use of data to increase their products and services.

OPPORTUNITY 2019 was the year that maritime insurance technology finally achieved product market fit and adoption became widespread.

Price Forbes announced the first successful end-to-end marine hull risk placement through the Whitespace digital platform with AXA XL, MS Amlin, Talbot Underwriting and Neon Underwriting all writing the risk electronically. The DNK has launched a purely digital war product and we have seen Munich Re and others launch condition monitoring, based on the use of sensor technology for wine shipments and pharmaceuticals.

For our part, we have seen a 400% increase in our client base over the last 12 months with market leaders such as Marsh, Willis Re, Skuld, Hiscox, North P&I implementing the Quest Marine digital platform at the core of their workflows to enable dynamic, data-driven decision making and pricing. We are seeing brokers digitise global data sets to develop predictive pricing models, companies leveraging data to enter new lines of business, and the launch of new digital products and services.

As of the second quarter of this year, Marsh brokers will be entering Lloyds with behavioural analytics at the core of their submissions. Existing Concirrus clients will be able to easily ingest this data and run against their own view of behavioural risk, generating a predictive price and full behavioural history in under five seconds. At this moment, the conversation will be transformed into a data-driven one facilitated by a digital platform.

Those capable of having this conversation through the embedded use of technology and data will have a significant advantage over others. The best risks will gravitate towards this distribution and capacity as the digital market is able to value, as part of an insurance submission, the use of technology in making their operations

THE WORLD HAS BECOME INCREASINGLY DYNAMIC AND CONNECTED, WITH A MYRIAD OF THREATS THAT NO LONGER FALL WITHIN THE TRADITIONAL LINE OF BUSINESS CATEGORIES AND CAN’T BE QUANTIFIED BASED ON EXPERIENCE OR HISTORICAL APPROACHES. Mark Phillips, Concirrus

more resilient. For those that do not, there will always be business to be done, but this business will become increasingly commoditised and transactional.

On the reinsurance side, Willis Re is working with its global clients and an identified consortium of reinsurers to identify the benefit in reinsurance terms of insurers adopting the Quest platform. The outcome of this work will be the digital transfer of risk data; new predictive measures of exposure for specialty lines as well as brand new reinsurance structures that are elastic in nature.

As with the above, this is likely to lead to new rate differentials between those who display an ability to prove performance against these new measures of exposure and those who cannot.

SLEEPING GIANT We have seen that companies throughout the value chain are investing in technology and data solutions to drive efficiencies, gain competitive advantage, develop their product offering and navigate through the complexity of a changing world. To date, most of this technology investment has been localised to specific use cases or industry challenges. But, in some areas we are seeing the market begin to collaborate around the use of data to do what it does best, provide solutions to complex risks.

In 2020 and beyond, we expect the sleeping giant; that is, the new digital market, to awaken. The various siloed technological initiatives from

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supply chain blockchains, digital placement, smart contracts and the use of data-driven insights will become connected to create a new data democracy. Companies will realise that there is so much data available, that their own data sets in raw form are limited in value, leading to greater sharing of data and increasing risk clarity.

With historical risk codified in trillions of rows of behavioural data, traditional risk transfer will become increasingly transactional and automated.

Underwriters will turn their attention to the risks of the future, working with their market counterparts to develop new services based on the trends they are seeing. The lines between reinsurance and insurance will become even more blurred than they are today, with underwriters becoming portfolio managers, tasked with deploying capacity in the most efficient ways.

The role of the broker will shift away from placement, towards becoming risk service providers, combining expertise with analytics and technology to advise clients on their risk profile. At Concirrus’ Power20 Summit last month, Marcus Baker, Global Head of Marine and Cargo at Marsh JLT Specialty outlined the company’s vision for the digital future of broking. He stated that in today’s market, its broking value is based upon its personal experience and often its personal relationships. But tomorrow, he expects their value to be based upon their access to, and their analysis of, data.

At the same summit, brokers, insurers, P&I clubs, reinsurance brokers and reinsurers came together to challenge traditional trading relationships and discuss the possible opportunities of collaborating around digital data and analytics.

Although there will be challenging discussions ahead, this is an indicative sign that many of today’s market leaders across the value chain are quickly recognising the wealth of opportunity that lies ahead. This will come about, not simply through the adoption of digital technologies, but, also coming together to build a new insurance ecosystem that guarantees a more sustainable and profitable future.

The Marine Insurer | March 2020

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MARINE | MARKET VIEW In association with Liberty Specialty Markets

Marine

is on the up....

It shouldn’t come as a surprise to anyone that marine insurers have experienced some very difficult years.

A prolonged period of rate discounts, rising costs, attritional and catastrophe losses have all taken a heavy toll on the sector – all set against the backdrop of intense global competition. Yet although the sector remains challenging, the perspective is that, with the right discipline, the market is on the up.

Mike Burle, Head of Marine Specialty at Liberty Specialty Markets.

A few high-profile hull and cargo insurers have scaled back their activity in the London Market, and with no significant new entrants, capacity has been reduced by about $250m since 2017. On the back of an increase in large claims, loss reserve creep, broker facilities under increasing pressure and heightened scrutiny of business planning, 2018 seemed to have marked the low point for the marine insurance market.

The Marine Insurer | March 2020

As the challenging operating environment has caused some markets to withdraw completely or reduce their portfolios and appetite, this has generated an uptick in trading and opportunity for those that remain, with pricing, conditions and data improving in every marine class. This improvement coupled with the deployment of advanced analytics to improve risk selection means we are starting to see optimism for the first time in years.

The recovery however is still in its infancy. A more full-blooded recovery in results will depend on both improved rates, deductibles, conditions, as well as reduced claims activity. In 2019 low income levels eroded the buffers that offset major losses and it would only take a handful of claims in 2020 to outweigh even moderate premium increases. Therefore, there must be a longer concerted effort to reshape the market landscape to provide a strong and secure market for new and existing clients.

PRUDENCE IS A VIRTUE We have been active in marine insurance for over 30 years as a lead insurer, leveraging our mutual heritage to adjust pricing in a planned way over the cycle. Our objective is to provide certainty and stability. In order to achieve that goal, we have adjusted our pricing carefully over the cycle and sought to build solid long-term relationships with high quality clients, typically risk-managed shipowners, cargo owners and terminal operators

MARINE | MARKET VIEW In association with Liberty Specialty Markets

that combine ambition with discipline, and where we can establish strong relationships based on a deeper mutual understanding.

To ensure that we can remain at the forefront of the marine market, for the long term, we have reviewed our strategic priorities.

We are focusing particularly on clients where operations are of the highest standards to meet the requirements of their trading partners and customers.

For marine hull, we concentrate on highly regulated vessel sectors including liquid natural gas carriers, liquid petroleum gas carriers, product tanker, cruise vessels and specialised vessels such as offshore support and cable layers. Our marine cargo account specialises in mature insureds who are willing to invest capital and time improving their risk profile. Particular areas of expertise include project cargo, oil and gas and manufactured goods.

Complementing the focus on industry type, we are also taking more

direct control of our marine liability underwriting which was previously delegated under market facilities.

This ensures that the business being declared is within our risk appetite, the rating meets adequacy thresholds and the business is in line with our expectations in the years ahead.

Restructuring the risk portfolio and enhancing underwriting discipline in this way has enabled us to make huge strides in terms of information capture, detailed analytics and improved management reporting. As we continue to re-engineer the book, we are laying stronger foundations for a more sustainable operating model.

Focusing on analytics, the tools that we now use to interrogate data have been a real game changer for LSM. We have developed new enhanced rating models that use more risk factors from both internal and external data sources. This has helped us to make better informed decisions on risks in the challenging market environment. This means we are able to provide our clients with a stronger and more tailored offering to meet their risk profile.

DISCIPLINE WILL REMAIN Discipline will continue to be required as the market looks to balance the challenges and growth opportunities ahead. Regulatory issues, compliance

A MORE FULL-BLOODED RECOVERY IN RESULTS WILL DEPEND ON BOTH IMPROVED RATES, DEDUCTIBLES, CONDITIONS, AS WELL AS REDUCED CLAIMS ACTIVITY. Mike Burle Liberty Specialty Markets

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with strict new emissions rules on vessels as well as geopolitical threats - for example heightened risk in the Persian Gulf potentially compromising important marine trade routes following the recent US-Iran conflict - are significant hurdles to overcome now and in the future.

Politically motivated cyber-attacks are another key concern for the market with 2017’s NotPetya malware attack highlighting the issue after the impact on Maersk – the world’s largest container shipping company. Inevitably, this led to delays and business interruption losses for several clients.

GREAT EXPECTATIONS A hardening market changes the dynamic and brings tougher negotiations. There may be price increases and changes to policy conditions in some areas. But the benefit of a more disciplined underwriting approach will reap rewards with improved performance, risk management and a good choice of stable long-term risk transfer opportunities. The test for the London Market will be if it can stand up to the challenge from competitors from Asian, Bermudian, European or US platforms.

The international shipping industry is responsible for the carriage of around 90% of world trade, making it the life blood of the global economy. Without it, intercontinental trade, the bulk transport of raw materials and the import/export of affordable food and manufactured goods would simply not be possible.

Despite the recent dip in oil prices, an increase in trade growth and improving freight conditions bodes well. Disciplined underwriting will lead to success for insurers.

In this complex and changing seascape, the partnership between the risk manager, broker and underwriter has never been more vital.

It’s certainly a fascinating time to be a marine underwriter.

The Marine Insurer | March 2020

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TECHNOLOGY | WAR RISK In association with Norwegian Shipowners’ Mutual War Risks Insurance Association (DNK)

A new operating model for digital transformation The Norwegian Shipowner’s War Risks Insurance Association (DNK) insures approximately $224bn billion assets and is one of the world leaders in marine war risks insurance. Some 470 shipping companies are covered by the association against possible damage resulting from war, terrorism, piracy and cyber attacks. DNK’s CEO Svein Ringbakken explains how the 85 year-old war risks insurer’s digital journey is leading it from technology investments to a new operating platform.

Digital transformation has become a top priority for businesses in all industries that are under seemingly ever-rising pressure to innovate and grow in a constantly changing environment. Marine insurance is no exception. With a business model that has been largely unchanged since the 17th century, the marine insurance The Marine Insurer | March 2020

industry is particularly exposed to the rapidly changing needs of its core client base.

As shipping and supply-chain logistics are embracing digital opportunities at full speed, so the insurance providers that support this important sector find themselves devoting significant time, effort and capital to keep up.

Marine insurance in general, and the specialty war risks insurance market in particular, is making considerable progress in addressing new risks that emerge from new technologies and the increasing cyber risk facing the maritime industry. Insurers are responding with new products, innovative pricing platforms and digital distribution models.

Most insurers are planning to invest even more aggressively in technology going forward, expecting that this will strengthen their strategic position and yield positive commercial effects.

However, when one considers industries such as finance or media that embarked upon their digital transformation paths long before the marine insurance industry, there is little evidence to suggest that investment in technology alone leads to tangible results.

TECHNOLOGY | WAR RISK In association with Norwegian Shipowners’ Mutual War Risks Insurance Association (DNK)

DIGITAL TRANSFORMATION DNK believes that digital transformation is about more than implementing discrete technologies. Rather, it requires the development of a broad set of technology-related capabilities that prepare the entire organisation for the journey towards becoming a “digital-proof ” enterprise.

Over the last decade, the business has made significant strategic investments in technology in order to keep its business model relevant for customers. DNK transformed its traditional emergency support capacity into a pro-active, data-driven intelligence operations center that works closely with shipowners on a daily basis to provide critical threat assessment and loss prevention. DNK uses intelligence tools and databases to collect and evaluate relevant information, and apply market-leading technology as an integral part of its incident response capabilities.

Two years ago, DNK launched an industry-pioneering Internet-ofThings (IoT) solution to automate reporting of trade in high risk areas.

This implements a digital tracking system which sends encrypted signals by satellite about a ship’s position in virtually real time to the insurance system, and into a cloud portal where the data can be accessed also by the insured.

Today, the “Raptor” tracking device is deployed to almost 2,000 vessels in DNK’s fleet, providing shipowners with valuable new data and insights about their operations, while significantly reducing their administrative burden. Together with the group’s technology partner from the automation project Clearwater Dynamics, we launched the startup company Osprey Solutions which provides Insurtech and IoT solutions to the maritime industry.

The next big service challenge is to ensure relevant, practical insurance solutions for the increasing cyber threat to the digitised maritime business. Providing cyber war cover makes this a necessity.

MARINE INSURANCE IN GENERAL, AND THE SPECIALTY WAR RISKS INSURANCE MARKET IN PARTICULAR, IS MAKING CONSIDERABLE PROGRESS IN ADDRESSING NEW RISKS THAT EMERGE FROM NEW TECHNOLOGIES AND THE INCREASING CYBER RISK FACING THE MARITIME INDUSTRY. Svein Ringbakken DNK A NEW OPERATING MODEL As DNK’s service offering has become more and more digitised, we realised that our next strategic investment needs to be to secure the right level of digital maturity within our own organisation to be enable us to deliver to our service value proposition.

To establish a common understanding of where we are, we have conducted a comprehensive digital maturity review of our operational model across various dimensions such as organisation and culture, systems and processes, strategic alliances and – not least – customer experience.

On the basis of this analysis, we have identified a number of strategic ambitions to prepare our operational model for digital transformation, ranging from IT platform architecture redesign to the introduction of new roles with cross-functional responsibility for digital change projects.

One of the key focus areas for our new operational model is customer experience. In a business-to-business environment such as marine insurance, it is easy to believe that we are companies dealing with companies.

However, as with any other business, we are actually human beings dealing with human beings.

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Our customers are individuals who expect us to build our solutions around their specific needs and preferences to ensure a seamless user experience from which they can derive what they want, when and where they want it. New technology will hardly be able to improve customer experience if the solution is developed from the insurer’s perspective without truly understanding who the user is.

As a member-owned organisation, DNK has always had a sharp focus on the provision of excellent service to our customers and business partners. By investing in new, digitally enhanced user interfaces, adjusting and processes and extending the internal use of data and analytics, we will be able to establish a 360-degree view of our customers across the entire organisation and make our offerings even more customercentric.

DIGITAL-PROOF As with most organisations in the marine insurance industry, we are so-called “incumbents” of the digital age, which means that our operational model was designed at a time when collaboration, analytics and decisions-making was very different from today. And like other marine insurers, we can’t possibly predict what the future holds for our industry.

However, we strongly believe that our ability to reap the benefits of digital technology for our industry depends upon our willingness to fundamentally transform how we work today, and migrate to a new operating platform that is suited for the digital future. By adopting new structures, processes and methods that help us work smarter and collaborate better, and by continuously striving to truly understand our customers’ needs, we can establish a new DNK-operating model that should keep even an 85 year-old industry veteran fit for a digital future.

The Marine Insurer | March 2020

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MARINE | STATE OF THE MARKET

Syndicate closures and capacity withdrawals have reshaped marine insurance.

Adrian Ladbury reports

Marine market sails into unchartered waters as insurers rethink appetite Marine insurance markets have sailed through choppy waters during the past 18 months and look set for continued uncertainty during 2020 as insurers look to improve the profitability of their portfolios.

Capacity reductions, which effectively began with the Lloyd’s 2019 business planning process, have spread beyond London with ramifications for underwriters, brokers and buyers across international marine markets.

Exits from the class have seen underwriters facing job losses and a reduction in capacity available to brokers. This, in turn, has driven up the cost of cover for buyers.

The current predicament was born out of a need to improve pricing following several years in which marine classes had struggled to achieve profitability.

Recognising the need for action, Lloyd’s senior management, led by franchise performance director Jon Hancock, reshaped the business planning process ahead of the 2019 underwriting year.

Syndicates were required to review the worst performing 10% of their portfolios with poorly performing syndicates facing even more stringent requirements to have their business plans passed.

For many syndicates these poorly performing classes included marine lines, and this triggered the widespread withdrawal from the class which has reshaped marine insurance markets.

The Marine Insurer | March 2020

Withdrawals have included the demise of certain marinefocused syndicates. The Standard Club’s Syndicate 1884, Skuld Syndicate 1897 and Advent’s Syndicate 780 are among those to have entered run-off.

Marine hull exits for the 2019 underwriting year included Aspen’s Syndicate 4711, Channel Syndicate 2015, CNA Hardy Syndicate 382, Liberty Syndicate 4472 and Navigators Syndicate 1221.

Barbican, which has since been acquired by Arch Capital, exited marine hull and cargo but did increase capacity for marine reinsurance.

RIPPLE EFFECT Outside Lloyd’s, Swiss Re Corporate Solutions announced that it would be closing its London marine hull operation and instead writing the business from its office in Genoa.

Events in London had a ripple effect to other international hubs which have also seen marine capacity reductions, notably in Asia.

Singapore has lost several hull carriers, among them ArgoGlobal Syndicate 1200 which exited Lloyd’s Asia and most of its hull underwriting business after warning that the business was not sustainable.

Allianz Global Corporate & Specialty (AGCS) revealed it was exiting marine hull and liability markets in Asia and North

MARINE | STATE OF THE MARKET

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increase rates. But, they were limited in their success by a continued abundance of capacity.

Reinsurance broker Willis Re reported that some reinsurers had pushed hard for increases on clean accounts, while buyers looked to reduce their retentions “Exits from the class have seen and limit volatility.

The ripple effect from capacity underwriters facing job reductions across marine markets will continue to play out in 2020 as insurers losses and a reduction in rethink their risk appetite for marine classes. capacity available to brokers.

While the spate of exits over the past 18 months has created a somewhat This, in turn, has driven up the chaotic market, there are signs of optimism. cost of cover for buyers.”

From the perspective of those insurers still in the market, the exits have had a desired impact on pricing with the market firming across all marine classes.

Broker Aon has reported the highest increases in marine cargo, ports and terminals and logistics classes, with shipowners and cruise business also seeing doubledigit increases.

The broker said capacity had tightened across virtually all marine lines.

Withdrawals have included the demise of certain marine-focused syndicates.

The Standard Club’s Syndicate 1884, Skuld Syndicate 1897 and Advent’s Syndicate 780 are among those to have entered run-off.

America with effect from February 2020 in a bid to improve profitability.

The capacity withdrawals have been prompted by greater management focus on underperforming lines amid a recognition of the need to improve underwriting results.

Already in 2020 there are signs of the trend continuing. In January, Beazley revealed that it is to place several marine lines in the UK into run-off, including regional cargo, freight liability and commercial hull. The decision did not impact its core London market marine business.

Those that have remained have sharpened their risk selection. According to Lloyd & Partners, each carrier is now scrutinising renewal terms as if they were the market leader.

Carriers are now much more selective about which risks they will provide capacity for, with a reduction in the number of carriers willing to write multi-year policies.

While marine hull and cargo classes were at the heart of the market changes implemented in 2019, Lloyd & Partners said marine liability classes were also showing signs of instability towards the end of 2019 with some retraction of capacity.

Should this trend continue, marine liability classes will also experience upward rating pressure and more selective risk selection in 2020.

At the January 1 reinsurance renewals, insurers saw a late renewal season with reinsurers generally attempting to

SIGNIFICANT CAPACITY Marine hull, which has seen the most significant capacity withdrawal, has been selected as one of the two pilot classes for the new syndication model at Lloyd’s which is aiming to create a greater distinction between lead and following markets at Lloyd’s.

The Corporation hopes that this modernised means of risk syndication will bring several benefits, one of which is cost reduction.

While the market has been dominated by exits, there have been some new entrants looking to capitalise on the improving rating environment.

Most notable of these has been Convex, the new start-up led by Stephen Catlin and Paul Brand.

John Potter left Antares at the end of last year to head up a new marine account at Convex, where he has since been joined by Peter Gower as marine liability underwriter.

The recalibration of the marine market is expected to continue during 2020. Insurers are continuing to manage their books at an increasingly granular level in a bid to improve profitability, in many cases they are investing in data analytics to analyse their portfolios in greater detail.

Lloyd’s has promised it will continue its tough approach to underperforming business, suggesting there will remain upward pressure on the pricing environment.

The choppy waters of the past 18 months will have caused pain for some in the sector, but, the prolonged soft cycle which led to the widespread capacity reduction was ultimately unsustainable.

The Marine Insurer | March 2020

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HULL | SUSTAINABILITY In association with Skuld

Anti-fouling paints have multiple functions. They were originally used to prevent biofouling (marine growth) on the ship’s hull and to prevent corrosion.

Hull biofouling will increase the energy consumption for maintaining the ship’s required speed which again leads to increased emission of CO2.

By Geir Jørgensen, Senior Vice President, Global Head of Loss Prevention, Skuld.

Anti-fouling

– a sustainability issue The industry has tried different ways of controlling biofouling and in the 1960s organotin compounds such as tributyltin oxide (TBT) were found to be highly effective. TBT was widely available in the United States and Canada by the late 1960s but was not generally distributed to the rest of the world until the early 1970s. TBT antifouling worked by providing an unstable surface in which a toxic biocide is contained. Paints containing TBT lasted for up to 60 months if a hull cleaning took place every third year. In the late 1960s it was suspected that TBT was harmful to the environment and after scientists proved it to have several negative impacts for the marine environment, it was banned. Today there are still so called “hotspots” with high concentration of TBT. These “hotspots” are normally associated with old commercial ports and shipyards.

The use of anti-fouling paint is now regulated by IMO’s AFS Convention The Marine Insurer | March 2020

(International Convention on the Control of Harmful Anti-fouling Systems on Ships). The Convention came into force in 2008. “Under the terms of the AFS Convention, Parties to the Convention are required to prohibit and/or restrict the use of harmful anti-fouling systems on ships flying their flag, as well as ships not entitled to fly their flag but which operate under their authority and all ships that enter a port, shipyard or offshore terminal of a Party,” states IMO on its web page.

The different Anti-fouling systems to be prohibited or controlled are listed in an annex to the Convention, this annex is amended when deemed necessary.

IMO further acknowledged the risk of spreading invasive aquatic species between the oceans and adopted the Ballast Water Management (BWM) Convention, which entered into force 8 September 2017. Furthermore, IMO

Resolution MEPC.207(62) contains guidelines that recommend every ship to have a Biofouling Management Plan and a Biofouling Record Book onboard. Such a plan is not mandatory, but it is highly recommended. A vessel with a clean hull is less likely to spread invasive species from one ocean to another.

BIOFOULING MANAGEMENT Some countries have gone beyond the IMO regulations. From June 2012 The US Coast Guard required all vessels to have a Biofouling Management Plan implemented onboard, in addition the State of California has had its Marine Invasive Species Act since 2003. In Australia there are several guidelines which need to be followed. New Zealand has its Craft Risk Management Standard which entered into force in May 2018 and in short requires all vessels arriving at New Zealand ports to have a clean hull.

HULL | SUSTAINABILITY In association with Skuld

THE QUALITY OF ANTI-FOULING PAINTS

energy consumption and maintenance cost.

What we see is that more shipping companies now have sustainability as a part of their strategy.

Going forward it is likely that this trend will continue, and it gives the industry further opportunities.

To be sustainable in the shipping industry it is important to understand all the elements that come into play. To achieve this understanding in an industry that has become more and more fragmented, the need for better collaboration becomes visible. Anti-fouling is just one example in which the industry has room for improvement. UN SDG 14 Life below water should be seen by the industry as a golden opportunity to join forces.

VARIES A LOT. UNFORTUNATELY, ONLY

ENVIRONMENTAL GOALS

30-40% OF THE VESSELS TRADING WORLDWIDE ARE COATED WITH THE HIGHEST QUALITY OF IMO has initiated the GloFouling Partnership, which is a project to address the transfer of harmful aquatic species through biofouling in some of the regions of the world.

This 5-year project is now ongoing and is a collaboration between the Global Environment Facility (GEF), the United Nations Development Programme (UNDP) and IMO. It has representatives from 12 countries, 4 regional organisations, IOC-UNESCO, the World Ocean Council and several strategic partners. This project aims to meet several UN Sustainable Development Goals (SDGS), including SDG 14 Life below water.

Other initiatives are in play by different privately funded organisations, all with the goal to reduce the risk of spreading invasive species.

Manufacturers have worked hard and invested a lot of money to develop anti-fouling paints with non-harmful materials and this is

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ANTI-FOULING PAINT. Geir Jørgensen Skuld

still an ongoing business. The quality of anti-fouling paints varies a lot.

Unfortunately, only 30-40% of the vessels trading worldwide are coated with the highest quality of anti-fouling paint, i.e. the paint that gives less marine growth, minimised corrosion and less friction through the water. A ship with a clean hull can sail faster and with less energy. Less corrosion means less maintenance cost. A good and long-lasting antifouling system might extend the ship’s docking interval which again gives the vessel increased availability.

Cost is the driving factor since the high-quality paint costs more. It should be in the interest of all stakeholders to go for the best possible option which will reduce the vessel’s

Hopefully, important questions will be raised by different stakeholders, so the most sustainable anti-fouling is chosen for the vessel’s hull. It is a common responsibility to reach environmental goals. When environmental impact is reduced, and cost is saved through less energy consumption it is a win the industry must grab. Some ship managers have been teaming up for collaboration with paint suppliers by which they together monitor and evaluate hull performance with different tools and more frequent hull inspections. This is a positive development. Charterers might also involve themselves more with regards to this, in their work to secure sustainability in their chain of business.

More attention will drive the whole industry forward.

Scientists have estimated that there is a potential for a 15-20% energy reduction by having all vessels fouling free. The potential for a massive energy reduction is there for the industry to take advantage of. The financially sustainable solutions are often also environmentally sustainable and should be promoted by all interested parties.

The Marine Insurer | March 2020

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MARINE | GLOBAL RISK MONITORING In association with Skytek

Innovative space tech used to manage sanctions risk NASA award-winning software firm Skytek brings benefits of space technology to global marine risk monitoring as sanctions breaches rise to the top of the political agenda.

Data from outer space provides the key to problems on the seas below.

From underwriting to compliance to risk, Irish space company Skytek’s award-winning Marine Aggregate Tool technology is designed to help the insurance and reinsurance sectors answer the hardest questions they face.

This represents a sea change in monitoring insured assets as they traverse the globe, said Dr Sarah Bourke, CEO at Skytek, noting that it creates an environment in which insurance and reinsurance companies can more effectively monitor and control their portfolio risks.

“The ability to take vast amounts of satellite, earth observation and spacebased data to create tailored insurance products has changed the landscape The Marine Insurer | March 2020

in the monitoring of insured moving assets,” she said.

For underwriting it offers automated individual portfolio risk scoring, and insurers can adjust the risk score based on their individual risk appetite.

Risk assessment allows for risk concentration and the provision of alerts based upon predefined criteria, and incorporated weather data.

The development follows the 2019 creation of a strategic partnership with London-based Aon, the leading global insurance broker and professional services firm.

In December 2019 Skytek won the European award from newspaper Lloyd’s List for its ground-breaking technology for the marine insurance industry.

Crucially, the software also addresses one of the key marine threats today: An increasingly volatile global political climate.

As geopolitical risks worsen and the regulatory and legal environment becomes ever more challenging, the marine insurance sector faces challenges that need to be met by new and innovative technologies.

By deploying space data in real time alongside historical information, Skytek’s software is designed to combat a growing threat: Sanction breaches.

This is done through customisable alerts and reporting that can be

configured to show live vessel activity in any zone of interest, be it a restricted area or one of suspicious activity.

The tools also leverage historical voyage information for up to three years to learn the most commonly-used routes for navigation and identify potential deviations towards sanctioned areas.

Advanced AIS ‘spoofing’ identification technology is also used to determine when a vessel is transmitting incorrect location details by identifying messages without GPS coordinates through to checking reported position against signal validation.

Re/insurers have already had a shot across their bows on the issue.

Both the United Nations Security Council (UNSC) and the US Government have noted the important role that insurers and reinsurers can play when monitoring potential policy breaches in the marine sector by their insured hull and cargo owners.

Potential breaches include illegal ship to ship transfers of oil by a sanctioned entity and the disablement of collision avoidance (AIS) trackers in

MARINE | GLOBAL RISK MONITORING In association with Skytek

THE RISE IN GEOPOLITICAL TENSIONS IN THE MIDDLE EAST HAS RESULTED IN INCREASED RISK FOR INSURERS ALONG WITH STRONGLY RISING PREMIUMS, PARTICULARLY FOR WAR RISKS. Dr. Sarah Bourke, Skytek sanction zones. This has lead the UN to call for greater action from banks and insurers “whose due diligence efforts fall extremely short”.

In 2018 the UNSC issued a report stating that North Korea was bypassing sanctions on oil purchases using ship-to-ship transfers, complaining that “insurers do not monitor the AIS of the vessels for which they provide coverage and services”.

It also noted that increasingly advanced evasion techniques were being deployed in sanctions breaches.

“These deceptive measures triggered no alerts on the part of the global and regional banks that unwittingly facilitated the multiple financial transactions associated with this transfer or of the insurers and reinsurers that provided protection and indemnity and hull insurance,” the report UNSC stated.

Shortly prior to the report’s launch, the head of the UN’s panel of experts, Hugh Griffiths, explained that while only ten traders and ten insurers or reinsurers had ties to known suspect ships, every one of these ships has

reinsurance with Western firms.

“The vessels switch off their AIS just before they meet at sea, meaning that they cannot be tracked any longer,” Mr Griffiths said. “If a vessel switches off its AIS at sea, there is a heightened risk that it’s doing something clandestine or illegal,”he added.

Meanwhile, the rise in geopolitical tensions in the Middle East has resulted in increased risk for insurers along with strongly rising premiums, particularly for war risks. One senior insurance industry executive described the situation to the Financial Times as a “cocktail of instability”.

In February 2020 Bimeh Markazi, Iran’s Central Insurance Agency claimed that global reinsurers without direct links to the US would continue to share risks with Iran.

“Reinsurance in Iran is active and operates like all insurance companies in the entire world,” said Bimeh Markazi governor Gholamreza Soleimani.

However, analysts warned that reinsurers are likely to further review rates for war coverage in 2020, as they did in 2019.

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In response to this worsening risk climate Aon and Skytek have launched a suite of War Aggregate Tools using satellite and space technologies to help insurers visualise the precise location of their insured risks, and how they aggregate across their entire portfolio of vessels, in real-time.

Christian Silies, Head of Marine and Energy at Aon’s Reinsurance Solutions business, said that the goal is to allow the insurance sector to make more informed decisions.

“Our collaboration uses innovative technologies to boost knowledge of insurers’ marine risk and enhance risk management practices. The technology enables re/insurers to respond to regulatory pressures while obtaining insights into vessel behaviour and paving the way for data-driven decision making with more efficient risk transfer,” he said.

The key to the project is Skytek’s adoption and deployment of space technologies for practical business purposes.

Already well known for its specialist software, Skytek’s clients include NASA and the European Space Agency. Originally set up as a broadly focused web technology business, an early contract win set Skytek on a literal course for the stars.

The company developed the software platform that regulates every part of an astronaut’s life on the International Space Station, and has twice won awards from NASA for outstanding innovation.

Piera Di Vito, the project’s Technical Officer at the European Space Agency, which supported Skytek in the development of the application, said seeing Skytek’s technology find a business application in marine affairs is gratifying.

“It is rewarding to see a practical application of science to the insurance industry – and in turn supporting re/insurers globally to have confidence in the protection of their assets,” she said.

The Marine Insurer | March 2020

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TECHNOLOGY | DIGITAL SHIPPING In association with UK P&I Club

The dawn of

digital shipping

Exciting new technologies such as smart contracts and autonomous vessels will have a transformative effect on the maritime sector and offer huge potential benefits and efficiencies. But, these revolutionary advances need to be manged carefully and the continued critical role of humans in the process must not be forgotten argues Andrew Taylor, Chief Executive Officer at UK P&I Club.

Nearly every industry across the globe has witnessed or is undergoing a digital revolution of one form or another, and the shipping sector is no different. As technological advancement infiltrates further into wider society and our everyday life, exponentially increasing connectivity, it brings with it an inherent pressure to embrace a more digitised environment.

From blockchain to cyber security to autonomous vehicles and enhanced customer experience, there is much to ponder for the shipping industry.

The Marine Insurer | March 2020

The industry faces new opportunities, and to some extent threats from the rise of digital, data, analytics, and automation. In a sector so focused on physical assets and rooted in traditional methods, change can be slow.

However, the digital era presents potentially disrupting business models and new value streams. Customer expectations of the global maritime sector are being radically reshaped by e-commerce and innovation in logistics.

With outside innovation being gradually adopted, the industry is in a state of flux.

BUILDING THE BLOCKCHAIN Blockchain is the new buzzword in the shipping industry and, as such, is increasingly difficult to avoid. Put simply, blockchain has the capacity to transform and fully digitise contracts within the shipping sector. It is essentially an online communication protocol, which allows interdependent users to participate in a transaction.

All parties to the transaction have access to the same information and no one party can attempt to amend or vary the transaction unilaterally without acquiring the permission of the others.

Blockchain is extremely secure. It is virtually impossible for transactions to be manipulated by an external party as the whole process is guarded by sophisticated cryptography, with exact copies of the transaction’s ledger distributed among the participants. Its industry-wide adoption would have a tangibly positive effect on instances of fraud and corruption, for example eliminating demands for ‘grease payments’.

Blockchain can be used to convert shipping contacts and agreements, such as sales contracts and bills of lading, into self-executable computer software. As the technology progresses, the prospects are that natural

TECHNOLOGY | DIGITAL SHIPPING In association with UK P&I Club

language contracts might even be done away with completely and be replaced with a contract made entirely of code. The higher the degree of automation in a contract, the larger the potential benefits.

Smart contracts can have a transformative effect on the maritime industry, leading to increased accuracy, security and transparency, as well as decreased reliance on intermediaries and savings of cost and time.

The World Economic Forum estimates that 10% of GDP will be stored on blockchain by 2027, highlighting the scale of impact the technology will have. Smart contracts technology is still in its infancy and some legal hurdles still need to be cleared.

Nevertheless, they will gradually become pervasive in the wider maritime industry, offering practical solutions to challenges which have negatively impacted trade for years.

THE AUTONOMOUS EVOLUTION Another hot topic within the marine world is the potential and scope of autonomous vessels. Autonomous shipping is looking ever more likely to be the future of the maritime industry. The autonomous shipping market was estimated to be worth $6.1bn in 2018 and is expected to expand exponentially, reaching $136bn by 2030.

The exciting development of “smart shipping” will revolutionise the landscape of ship design and operations, but, this revolution will come with many challenges.

First, there is currently no international definition of what an autonomous or unmanned ship is, what the various levels of autonomy are, or whether an autonomous ship is considered a ship under international law. Bodies such as the International Maritime Organisation (IMO), European Commission and Lloyd’s Register have developed divergent classifications, which makes the legal and regulatory framework of autonomous vessels a minefield to navigate.

The absence of an internationally accepted definition could have the con-

THE WORLD ECONOMIC FORUM ESTIMATES THAT 10% OF GDP WILL BE STORED ON BLOCKCHAIN BY 2027, HIGHLIGHTING THE SCALE OF IMPACT THE TECHNOLOGY WILL HAVE. Andrew Taylor UK P&I sequence of an autonomous ship being considered a ship under the law of her flag state, but, not under the law of the coastal or port state. Other obvious challenges relate to the absence of crew, navigation rules, seaworthiness and perhaps most pertinently, cyber risks.

Autonomous ships are highly dependent on computers and other robotic equipment, that could exacerbate the consequences of a cyber attack. If there is no crew onboard, there will be no possibility of physically overriding remote or autonomous control. Therefore, a vital requirement is the adoption of best practices for cyber resilience. It may be that “the IMO’s cyber guidelines” could be fully developed and become part of flag and class requirements for autonomous ships.

Undoubtedly, autonomous shipping has the potential to revolutionise the industry with a shift towards a more technologically advanced future.

Blockchain is extremely secure.

It is virtually impossible for transactions to be manipulated by an external party as the whole process is guarded by sophisticated cryptography.

55

However, there are still many challenging regulatory and legal hurdles that must be addressed.

If these legal and regulatory frameworks keep pace and adapt to the technological improvements, the industry can truly harness and embrace the full possibilities that autonomous shipping can offer.

THE HUMAN TOUCH While technology has undoubtedly moved the dial, advancing efficiencies, safety and processes within the global shipping world, the industry is still built on the dedication, expertise and experience of the people who serve it. It is important that we do not lose track of the human element, merging and aligning technological improvements to the benefit of the wider community.

A good example of this in practice is the newly accessible digital platform created for members, brokers, customers and network partners - Thomas Miller Connect. The online platform allows Members of the UK P&I Club, UK Defence Club and TT Club and their brokers to manage all their accounts, documentation, payment and claims data in one digital space via a single log-in and password. Users can download documents, export data and change account details quickly and easily, with industry-leading back-end technology ensuring robust security.

Though not characterised by its willingness to readily embrace change, the further digitisation of the global shipping industry is inevitable in a world driven by data and obsessed with faster technological solutions.

Collectively as a sector, it is integral that we continue to adapt to these shifting demands, reviewing where, how and in what context technology can enhance and bring benefit to our methods, roles and end-customers.

Sources: 1. http://www3.weforum.org/docs/WEF_ GAC15_Technological_Tipping_Points_ report_2015.pdf The Marine Insurer | March 2020

56

LEGAL | SANCTIONS In association with Shipowners’ Club

Sanctions are increasingly becoming the foreign policy tool of choice for a variety of governments and major powers including the United Nations, the European Union (EU), and the United States (US). The variety of sanctions restrictions has broadened, creating an abstruse and fluid landscape against which to determine risk.

Camilla Slater, Head of legal,Shipowners’ explains.

Sanctions

rise up the agenda and show no sign of abating There has been much discussion of how the shipping and insurance sectors have been caught in the web of complexity created by sanctions.

However, most reports refer to the operations of traditional, larger vessels rather than that of small and specialised vessels for which the risk is at least as great.

With oil being one of the sectors targeted by sanctions, incidents involving large tankers are among some of the more high-profile cases to have appeared in the maritime press. This may lead some observers to believe that sanctions only affect operations of this type. However, much of the legislation is broadly The Marine Insurer | March 2020

worded, meaning that all vessel types are potentially affected.

The impact on small and specialised vessels can be far reaching.

Large offshore projects depend on a multitude of specialist vessels ranging from anchor handling tugs, to dredgers, pipe laying vessels and OSVs. Sanctions impacting such projects are widely felt by owners, charterers and the wider maritime community that supports the services provided by each of these vessels.

CHANGES IN LANDSCAPE

Significant developments have been seen in the sanctions landscape recently. Notably, the restrictions

have escalated with respect to Iran, Venezuela and North Korea. The US Government has demonstrated that it is prepared to pull away from the EU in its sanctions strategy in some areas, and has adopted a robust stance in doing so. In the context of shipping activities, the US has made it clear that it is willing to target those in the shipping industry that facilitate sanctions evasion.

The majority of vessel owners and charterers simply wish to comply with the various regimes in place in order to avoid entanglement with sanctions activity. However, even the most well-intentioned owners and charterers can become unwittingly implicated in sanctions breaches and in doing so, the stakes are high. It has become a feature of the sanctions landscape for vessel activity to be monitored by governments and authorities. If suspected of sanctions breaches, the consequences can be

LEGAL | SANCTIONS In association with Shipowners’ Club

Incidents involving large tankers are among some of the more high-profile cases to have appeared in the maritime press.

with little forewarning and to be subject to rapid change. Furthermore, the intended reach and impact of some of the relevant legislation is unclear. With legal uncertainty comes commercial uncertainty; owners and charterers intending to enter into long term commitments are often understandably nervous about the impact of sanctions on their operations.

SENSIBLE APPROACH Owners and charterers almost always recognise the need to take a sensible approach to compliance, but there is a legitimate expectation from the maritime industry that compliance procedures should be proportionate.

Increased compliance expectations place a high burden on all shipping companies. However, for smaller shipping companies operating outside of the traditional large vessel sector,

extremely harmful for innocent vessel owners, whose vessels have been drawn into these situations.

THE MAJORITY OF VESSEL OWNERS AND

COMPLIANCE QUESTIONS

CHARTERERS SIMPLY WISH TO COMPLY

Compliance expectations have considerably increased in recent times and there are a number of challenges in reaching a point where parties can feel comfortable to engage. Alongside these increased expectations, many vessel owners question the extent of the due diligence that they ought to carry out.

Parties are well advised to consider, as a minimum, which sanctions regimes they and their counter parties may be subject to and the nature of the underlying activities. With such a multifaceted landscape, competing sanctions regimes can also come into conflict with each other.

To add a further layer of complexity, it has become common for sanctions legislation to be implemented

WITH THE VARIOUS REGIMES IN PLACE IN ORDER TO AVOID ENTANGLEMENT WITH SANCTIONS ACTIVITY. HOWEVER, EVEN THE MOST WELL-INTENTIONED OWNERS AND CHARTERERS CAN BECOME UNWITTINGLY IMPLICATED IN SANCTIONS BREACHES AND IN DOING SO, THE STAKES ARE HIGH. Camilla Slater Shipowners’ Club

57

the expectation can be particularly challenging to manage. Resources must be dedicated to compliance, but, this may be difficult to balance against the competing demands of a relatively small business, especially where the competitive environment brings its own challenges. On the other hand, without adequate checks and in the absence of expert advice (where necessary) the impact on a business can be very damaging.

It is understandable for many vessel owners to expect that, once they have carried out their due diligence, the way forward should be clear and uncomplicated. In other words, that they will have a ‘yes or no’ answer to the question: ‘Can I carry out this trade?’. However, there are often shades of grey in these situations, and it can be difficult to achieve absolute clarity.

Rather, more often, what becomes important is to achieve a clear understanding of all the various issues at play, allowing an informed decision to be made as to the level of risk. If a decision is taken to proceed, then there is the question of what measures should be put in place to counteract the risks, if any.

Different entities involved in proposed works could be subject to different sanctions regimes and risk appetites may vary. This can account for a variance in the stance taken by different parties faced with the same proposition, in the same sanctions space.

Finally, a key issue that must also be considered, is whether engagement is going to be possible from a practical perspective. This practical perspective is a dominant feature in the sanctions landscape. Banks are often unwilling to process transactions in any currency, if those payments have any link whatsoever to countries where sanctions regimes are implemented, or if there is even a minor connection to sanctionable activity. This unwillingness often remains even if there is, in fact, no legal restriction to processing a payment.

The Marine Insurer | March 2020

58

LEGAL | SANCTIONS In association with Quadrant Chambers

Sanctions:

Between a rock and a hard place

Marine underwriters may think that sanctions automatically enables them to avoid a claim.

Michael Davey, QC, Quadrant Chambers explains why it is not that simple.

When US President Donald Trump announced in May 2018 that the US was withdrawing from the Iran Nuclear deal, and unilaterally reinstating sanctions that were suspended as part of that deal, the sanctions regimes in the UK/EU and in the US were set on a collision course.

US sanctions purport to have extra-territorial effect, with consequences outside of US territory for non-US persons and companies.

The indirect effect of breaching such sanctions include banks refusing to handle all US dollar transactions, whether or not connected with Iran.

The EU considers this to be objectionable, and since 1996 has enforced a “Blocking” regulation (Council Regulation (EC) 2271/96) that protects against the effects of the extra-territorial application of specified legislation.

The Marine Insurer | March 2020

The regulation was updated in August 2018 to include various US sanctions against Iran. As implemented in UK law, it is a criminal offence to “comply” with such sanctions. Those involved in transactions which fall foul of US extraterritorial sanctions, UK/EU persons are therefore given a choice between criminality on the one hand and risking a loss of banking services.

In Mamancochet Mining Limited v Aegis Managing Agency Limited (2018), a marine cargo policy covered consignments of steel billets from Russia to Iran in 2012. The cargoes were stolen from bonded storage in Iran and the insured made a claim in March 2013.

Of the 30 underwriters, 9 were ultimately controlled or owned by a US person, and were therefore a relevant

entity for the US sanctions regime.

They declined to pay their proportion of the claim on the basis that they would be subject to US sanctions were they to do so.

Although the insurance was not subject to sanctions at the time it was entered into, or at the time the cargo was stolen, payment would arguably have been caught by the US sanctions regime by the time the claim was submitted to underwriters.

STANDARD WORDING The policy included the standard wording developed by the Joint Hull Committee, as follows: “No (re)insurer shall be deemed to provide cover and no (re)insurer shall be liable to pay any claim or provide any benefit hereunder to the extent that the provision of such cover, pay-

LEGAL | SANCTIONS In association with Quadrant Chambers

59

UNTIL RECENTLY THERE WAS NO DIFFERENCE

is. However, if the clause responds to a change in sanctions, it is more than a mere rule of construction, and purports to vary the parties’ rights and obligations as to cover.

The clause further provides that no insurer “shall be liable to pay any claim”.

BETWEEN EU AND UK SANCTIONS LAW. EVEN

VALID CLAIM

ENGLISH LAW GIVES EFFECT (THROUGH LEGISLATION) TO UN SANCTIONS, AND

POST-BREXIT, UK AND EU SANCTIONS LAW IN PRACTICE REMAINS ALIGNED. Michael Davey QC, Quadrant Chambers

ment of such claim or provision of such benefit would expose that (re) insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws, or regulations of the European Union, United Kingdom or the United States of America.”

The US owned underwriters argued that they were not liable to pay the claim, as they were at risk of being sanctioned by the US authorities, and were therefore “exposed” to sanctions.

The judge construed the sanctions clause as requiring it to be shown that payment would actually be a breach of sanctions. This the underwriters were unable to do, and so they were liable to pay the claim.

Accordingly, the court did not have to consider the impact of the EU Blocking Regulation on the sanctions

clause, a matter which remains alive.

Article 5 of the Blocking Regulation provides that no EU person “shall comply..., actively or by deliberate omission, with any requirement or prohibition in specified laws, including some US sanctions… based on or resulting, directly or indirectly, from [specified] laws…”

The sanctions clause responds to sanctions from four different sources: The United Nations; the European Union; the United Kingdom; and, the United States of America.

As a matter of English law there is an alignment between most of these regimes, the US being the exception.

English law gives effect (through legislation) to UN sanctions, and until recently there was no difference between EU and UK sanctions law.

Even post-Brexit, UK and EU sanctions law in practice remains aligned, at least for the present. US sanctions law, however, has no force in English law and would be irrelevant to a policy governed by English law where performance would not take place in the US. The sanctions clause first provides that no insurer “shall be deemed to provide cover”. The word “deemed” is a little awkward. This is because sometimes it has connotations of the position being treated as if it were something other than what it really

This cannot be construed as a limit on cover, since it plainly assumes that there is a valid claim. In Mamancochet, the judge decided that the sanctions clause only suspended the obligation to pay, and did not extinguish it.

The effect of the clause was therefore that, for the duration of the US sanctions, underwriters would not be liable to pay, but, upon the sanctions ending, the payment obligation would once again be effective.

The insured argued that failing to pay was contrary to public policy because of the Blocking Regulation.

Underwriters responded that, if the sanctions clause applied, there is no liability that insurers are declining to discharge in prohibited compliance with sanctions.

The judge was attracted to this short answer on the basis that the underwriter is not complying with the extraterritorial sanctions, but, is simply relying on the terms of the policy. This seems to be too quick an answer. The sanctions clause is an agreement in advance that the parties’ rights and obligations will be suspended in accordance with US sanctions.

If the blocking regulation would otherwise have made it unlawful not to pay a claim, it is difficult to see why an agreement in advance that payment would not be made is not also caught. If so, the sanctions clause would be unenforceable as contrary to public policy. In Mamancochet, underwriters were found not to be at risk of US sanctions, but, if underwriters do find themselves at risk, the sanctions clause is not likely to provide them with much comfort.

The Marine Insurer | March 2020

60

MARINE | DRUG TRAFFICKING In association with North P&I Club

Ships are attractive to drug traffickers. Security is generally lighter than the airline industry and they travel the world. Smuggling by sea has been a problem for years, but, in recent years there have been some high-profile cases and evidence that the methods used are constantly evolving. Mark Smith, North P&I Club’s Loss Prevention Executive , explores this evolving challenge and ways to tackle this big problem.

Focus on loss prevention to crack

drug smuggling As ever, we seem to be playing catchup with the criminals. They have good reason to stay one step ahead and to keep innovating – there is big money involved. Conservative estimates suggest that currently the annual illicit drug market is worth over $400bn.

Cocaine, for example, is cheaper to produce in Colombia per gram than coffee. It is essentially a low-cost, high-risk and potentially high-reward business model.

RECENT BUSTS Drug finds on vessels have hit the news in 2019. Recent cases include a ton of cocaine found in a shipping container that was loaded in South America and bound for Europe. It had estimated street value of $66m.

At least four bulk carriers have The Marine Insurer | March 2020

been detained in Mexican ports since June 2019 and drugs were found in cargo. This has had a huge impact on the crew of these implicated vessels.

Upon finding concealed drugs, the Mexican authorities arrest the crew placing the responsibility squarely on them.

Masters and crew have been (and some remain) held in local high security prisons for long periods of time.

Secondary to the plight of these innocent seafarers, there is of course the commercial impact on the vessel.

When drugs are found on board, vessels have been detained in excess of six months.

ORGANISED CRIME A $400 billion industry clearly isn’t being run by amateurs. The high

profits from source to sale attracts major international criminal organisations and terrorists.

It is also safe to say that those at the top of the tree are not the ones transporting the illicit goods. So, who is?

If a vessel is being used to smuggle drugs, it is very plausible that the crew have no idea whatsoever that drugs are on board. In such cases, it is possible that port staff may be involved, such as a stevedore who has access to parts of the vessel and can move around without raising suspicion. Or smugglers can board the vessel (or attach drugs to the hull) from the seaside or at anchorage.

There are numerous opportunities.

Crew are, however, vulnerable.

Professional traffickers have been known to target crew, either by befriending them during shore leave or taking advantage of any money worries they might have or indeed a

MARINE | DRUG TRAFFICKING In association with North P&I Club

drug addiction. Blackmail might also be a factor.

It makes sense for traffickers to target crew. They have specific access to suitable hiding places on board, for example tanks, enclosed spaces and storerooms. Machinery spaces are ideal for secreting illicit material. Even if the crew member is not the actual courier, they can facilitate the passage of drugs on and off the ship.

In some cases, a courier might not be aware of the presence of a ‘minder’, whose purpose is to ensure nothing prevents the courier from doing their job even if it means interrupting the operation of the ship.

OVER 90% OF GOODS ARE TRANSPORTED GLOBALLY BY SEA AND CONSTANTLY CHANGING TRADING PATTERNS BETWEEN EMERGING AND DEVELOPING COUNTRIES CREATE NEW WAYS OF MAKING PROFITS THROUGH SHIFTING ILLICIT GOODS. Mark Smith, North P&I Club

PORTS AND PASSAGES Over 90% of goods are transported globally by sea and constantly changing trading patterns between emerging and developing countries create new ways of making profits through shifting illicit goods.

The huge number of ports and trade routes works to a trafficker’s advantage. As certain drug routes become known and therefore targeted by the authorities, the route can be switched, using indirect routes and ports with weaker enforcement, sometimes in a different country.

If you want to try and stop your vessel become a drug mule, it’s important to know what methods are being used. Some of the more common means of getting the drugs on board include: Concealment in bulk cargo: Packages are hidden within the stow of a bulk cargo, which could be a clean grain cargo or a dirty one such as coal or ore. Drugs have been found close to ladders within the hold; l Containers: Common methods include breaking into the container (and replacing the security seal afterwards) and secreting the drugs with the cargo within. Reefer containers are targeted because the technical space that houses the refrigeration l

equipment can prove to be a handy hiding place; l Ro-Ro: Drugs can be hidden in the cargo of cars, freight vehicles, trailers or coaches; l Carry-on: Visitors or crew can simply walk on board and leave a package behind; l External: Drugs can be attached to ship’s hull. Typically, the rudder trunk and in some cases divers stash drugs on to the underwater area of the hull of a stationary vessel; and, l On the move: Speedboats are sometimes used to attach drugs to moving vessels.

RISK PREVENTION Trading in certain parts of the world will put a vessel and its crew at risk of being victims of drug trafficking.

There is no silver bullet that will keep a determined trafficker at bay.

But, this doesn’t mean that nothing should be done about it. There are measures that can be taken to keep safe.

The measures employed by a shipowner and the crew depend on the risk. A voyage from certain South American countries to North America or Europe is clearly higher risk.

However, there are plenty of other drug routes around the globe and this

61

check should be part of a vessel’s voyage risk assessment.

This also depends on the level of port security. If it is lax, then the onus is on the ship to up their game. This requires close co-operation between the ship’s security officer and the port security officer so that an increase in vessel security can be arranged.

There are dozens of measures that can be taken, and full books have been written on the subject.

We can’t look at them all here, but, some simple ones include the following.

A strong security presence on the gangway is paramount. A vessel that looks like it takes security seriously is a less attractive proposition to a smuggler.

Restricting access around the vessel and maintaining good lighting on deck are good effective measures. Locking doors that lead into the accommodation, storerooms and technical spaces takes away an easy opportunity to hide packages. If CCTV is fitted on your vessel then make sure it works and covers the right areas.

Monitor all around the vessel including the seaside for any suspicious behaviour or approaches.

If a port has a history of smugglers attaching drugs to the propeller, turn the engine every so often.

Searching a vessel for small packages of drugs is a huge undertaking for a small number of crew. But high-risk easily accessible areas can be checked before sailing.

ONE-STEP AHEAD When the rewards are so high, it’s a given that traffickers will become more innovative and find new ways to use shipping for smuggling.

For example, cyber attacks can cause disruption, particularly with cargo operations, and create new opportunities for bringing drugs on board.

We must try hard to keep up.

The Marine Insurer | March 2020

62

MARINE | PEOPLE MOVES

On the move We look back over the past three months and catalogue, at time of going to press, those individuals within the marine insurance community who have moved companies or changed roles. Taken from our sister daily e-bulletin service Insurance Marine News. l Mike Jarrett steps down

as CEO of Thomas Miller Americas

After 40 years at Thomas Miller, including 27 years in the New York and New Jersey offices leading Thomas Miller Americas, Mike Jarrett has retired as CEO. He will be succeeded by Leo Kirchner.

As President/CEO, Kirchner will direct and manage the full range of operations for Thomas Miller Americas. He will also retain his role leading the TT Club’s Americas operations.

Leanne O’Loughlin will take over Mr Jarrett’s Regional Director role for the UK P&I Club.

l UK P&I Club appoints senior

claims executive

UK P&I Club has named Tom Starr as a Senior Claims Executive, to be based in the Thomas Miller London offices. Mr Starr is a solicitor and Master Mariner.

l Britannia P&I opens branch

office In Copenhagen

Britannia P&I’s exclusive correspondent in Denmark (B Denmark P&I), will become a full branch office of Britannia Club on January 1 and will be renamed TR(B) Denmark.

The new branch office will continue to be headed by Michael Boje-Larsen, a lawyer with considerable experience in maritime law, including P&I and FD&D cover. He will be supported by Rishi Choudhury, an Associate Director of Britannia P&I, an FD&D specialist who has been working with the Club since 2006.

Britannia said that further expansion of the team is planned for early 2020.

The Marine Insurer | March 2020

l West of England expands New

York office

West of England Club’s senior claims manager Emily McCulloch transferred to West of England’s New York office from London at the beginning of the year and will be joined by Alton Peralta, a locally-qualified claims adjuster with extensive experience of dealing with US liabilities, particularly crew claims under the Jones Act.

l Aon appoints global super

yacht leader

London-based global professional services firm Aon has named Emma Carpenter to the role of global super yacht leader. She will join Aon in London in early March and will drive the development of Aon’s super yacht insurance broking business globally.

l Gard names new head of

Defence team in London

Marine insurer Gard has appointed Marie Kelly as Vice President, Defence, with the role of heading up the Defence team in London.

presence and started up a dedicated UK-wide marine practice, as well as undertaking marine construction, regulatory and insurance work.

Andrew Yarwood has been appointed as a partner to the London marine cargo group.

Mr Yarwood joined from Kennedys, where he specialised in marine insurance, advising cargo insurers including Lloyd’s syndicates and the company market on disputes arising out of the carriage of goods by sea.

Nicholas Lum has rejoined Clyde & Co’s Shanghai office as a partner. Lum is a leading dispute resolution specialist with a deep understanding of the Chinese market.

He specialises in dispute resolution, with particular focus on international trade and commodities, shipping and shipbuilding, and general commercial disputes.

Maritime, commodities and transport lawyer Ernie van Buuren has joined Clyde as a partner. He joins from Norton Rose, where he was Head of Transport for Asia Pacific and the Head of Shipping for Australia.

l RKH Specialty builds marine

team with SSL Endeavour’s Martin

Hyperion-owned RKH Specialty has added Gillian Martin as a director in its marine division, following six months’ gardening leave.

Ms Martin was previously managing director, marine at SSL Endeavour.

l IGI appoints Vickie Fox to

London Marine team

Specialist commercial insurer and reinsurer International General Insurance (IGI) has named Vickie Fox as Underwriter, Ports and Terminals, to strengthen its London Marine team.

l Markel International names

l Clyde & Co adds four marine

cargo, specie & terrorism underwriter

Law firm Clyde & Co has been expanding its global marine team, with the appointment of four new partners in Glasgow, London, Sydney and Shanghai.

Stefanie Johnston has been appointed as a Glasgow-based partner in the marine and insurance teams. She joined from Keoghs where she helped establish its Scottish

Specialist insurer Markel International has appointed Brook Styles as cargo, specie and terrorism underwriter, working from its London office.

Mr Styles has more than 13 years’ experience in marine underwriting, beginning his career at Markel. He rejoins Markel from Pioneer Underwriting, where he was most recently head of marine specialty.

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