Shipping Losses Down in 2014 But New Threats Loom: Allianz

March 26, 2015

Shipping losses declined to 75 during 2014, a 32 percent drop from the previous year and well below the 10-year loss average of 127, according to Allianz Global Corporate & Specialty SE’s (AGCS) third annual Safety and Shipping Review 2015.

Although shipping losses have declined by 50 percent since 2005, new threats loom for the maritime sector, such as cyber attacks and mega ships, said the report, which analyzes shipping losses of over 100 gross tons.

More than a third of 2014’s total losses were in two maritime regions. South China, Indo China, Indonesia and the Philippines (17 ships) and Japan, Korea and North China (12 ships). Cargo and fishing vessels accounted for over 50 percent of all losses, the review said.

The most common cause of total losses is foundering (sinking/submerging), accounting for 65 percent of losses in 2014 (49). With 13 ships wrecked or stranded, grounding was the second most common cause with fires/explosions (4) third, but significantly down year-on-year.

Hacker Targets

Cyber risks are representing a new threat for a shipping sector which is highly interconnected and increasingly reliant on automation the AGCS review said.

“Cyber risk may be in its infancy in the sector today, but ships and ports could become enticing targets for hackers in future. Companies must simulate potential scenarios and identify appropriate mitigation strategies,” said Captain Rahul Khanna, global head of Marine Risk Consulting, AGCS.

“A cyber attack targeting technology on board, in particular electronic navigation systems, could possibly lead to a total loss or even involve several vessels from one company,” said Sven Gerhard, global product leader, Hull & Marine Liabilities, AGCS.

Other potential scenarios include cyber criminals targeting a major port, closing terminals, or interfering with containers or confidential data. Such attacks could also result in significant business interruption costs, notwithstanding liability or reputational losses.

Larger Ships, Larger Losses

Container ship safety is also under the spotlight with ever-increasing ship sizes, as evidenced by the January 2015 inauguration of the world’s largest container ship, the MSC Oscar, which is 19,224 twenty-foot equivalent units (teu). The length of four football pitches, it can carry 19,000 containers, the review noted.

Yet ships as large as 22,000 teu are expected to be in service soon. “Larger ships can also mean larger losses. The industry should prepare for a loss exceeding $1 billion in future featuring a container vessel or even a specialized floating offshore facility,” Gerhard said. Maximum exposure would not necessarily be limited to vessel and cargo value but could also include environmental or business interruption backlash. This raises concerns about whether risk management needs reviewing after an 80 percent plus container ship capacity increase in a decade.

Risk Concentration

AGCS sees a number of risks for such mega ships including the fact that operation is limited to a small number of deep water ports, meaning an increased concentration of risk. There is also a world-wide shortage of qualified seaman.

In addition, the review pointed to the challenges of salvage and removal. As the wreck removal of the Costa Concordia passenger ship demonstrated, such costs can easily be a multiple of the hull value.

“The shipping industry should think long and hard before making the leap to the next ship size,” adds Khanna.

Passenger Ship Safety

While the long-term downward trend in shipping losses is encouraging, the review said, recent casualties such as Sewol and Norman Atlantic have once again raised significant concerns over training and emergency preparedness on passenger ships three years after the Costa Concordia disaster. Seven passenger ships were lost during 2014, accounting for almost 10 percent of total losses.

“In many cases construction of the vessel is not the only weak point. These two incidents underline a worrying gap in crew training when it comes to emergency operations on ro-ro ferries or passenger ships,” says Gerhard.

The general shipping trend for smaller crews means seafarers are being asked to do more with less. Minimum manning levels reduce the ability to train people onboard, which can provide invaluable insight and should not become the normal day-to-day level for safe operations.

Polar Code

The shipping industry has welcomed the recent arrival of the Polar Code which aims to curb risks from increased traffic in the Arctic and Antarctica. Analysis shows there were 55 reported shipping incidents in Arctic Circle waters during 2014 including one total loss, the review said, noting that there were just three in 2005.

While the code addresses many safety issues, questions remain, particularly around crew training, vessel suitability and potential clean-up. The Polar Code will need constant revision, according to AGCS. Any shipping problems encountered and best practices to employ should be outlined at the end of each season.

Further Risk Challenges

Other risks identified in AGCS’ 2015 Safety & Shipping Review include:

  • Over-reliance on electronic navigation: The collision of the cargo ship Rickmers Dubai with an unmanned crane barge in 2014 is an example of the perils of overreliance on e-navigation. Training standards around systems such as Electronic Chart Display and Information System (ECDIS) are mixed. “Officers need robust training in order to avoid misinterpretation of ECDIS and operating mistakes that could lead to expensive disasters. Beyond that manual navigation aids and skills are still crucial,” says Khanna.
  • Rise in geopolitical uncertainty: The recent rise in geo-political tension around the world is concerning. The increase in human trafficking of refugees by sea creates search and rescue issues. More than 207,000 migrants crossed the Mediterranean in 2014, driven by the civil war in Syria. The International Maritime Organization estimates at least 600 merchant ships were diverted in 2014 to rescue people, stretching resources and rescue infrastructure. Conflicts in the Middle East also put increasing pressure on the supply chain. Ships should not underestimate the security risks.
  • Piracy risks move from Africa to Asia: There has been good progress tackling attacks in Somalia and the Gulf of Guinea, which brought global attacks (2451) down for a fourth year in a row. However, piracy thrives elsewhere, the review said, pointing to attacks in South East Asian waters, which are up from 2013, as are incidents in the Indian subcontinent, with Bangladesh a new hotspot.

Source: Allianz Global Corporate & Specialty SE’s (AGCS)

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