Filed Under:Agent Broker, E&S/Specialty Business

Super-Sized Risk Sets Sail

A new fleet of mammoth container ships presents multiple combinations of loss scenarios

Just how big is a ship capable of transporting 18,000 containers filled with everything from kitchen appliances to toys?

Well, try imagining a below-deck area large enough to comfortably house a basketball court, a football field and an ice hockey arena—each with thousands of cheering spectators. That’s big.

Now imagine the insurance risks associated with the voyages these mega-ships make—and both the amount and types of coverages involved with transporting enough containers to haul the equivalent of 111 million pairs of sneakers or nearly one billion bananas.

Twenty of these monster ships—which will be the world’s largest—are currently being built by Korea’s Daewoo Shipbuilding & Marine Engineering Co. under a multibillion-dollar contract with Denmark’s Maersk Line.

The 437-yard-long ships will comprise what Maersk is calling its “Triple-E” class, which the company says stands for economy of scale, energy efficiency and environmentally improved. The first 10 are expected to be delivered sometime in 2013.

“Maersk is, and has been, looking to change the cargo-shipping industry,” says Donald Harrell, senior vice president of marine for Liberty International Underwriters. “We’ve been seeing bigger and bigger ships. It’s all about reducing shipping costs.

“But as insurers, we’re interested in the billions of dollars of risk on these ships,” he adds.

Nigel Fitzgerald, marine and energy practice leader for P&C insurance group Crum & Forster, observes, “With the promise of fewer trips back and forth, you might assume the frequency of loss diminishes with the arrival of these new ships. But the catastrophic loss could significantly increase.”

CHARTING LOSSES

According to Harrell, one insurer could hypothetically have a dozen clients—perhaps even 100—transporting goods on a single, Triple-E ship.

Think of the amount of policies floating with one shipment from China to Spain (the Triple-E class will ply the Asia-Europe route): The ship, its crew, the value of the goods, business interruption, contractual liability—all covered by dozens, if not more, insurers and backed up by reinsurers.

“Insuring the vessel is the easy part,” explains Fitzgerald. “However, it is conceivable to have any number of clients on one ship—it’s difficult to quantify that aggregate exposure when you have the accumulated value of 18,000 containers.”

Fitzgerald says Marine underwriters will need to look at the clients they have in Europe and Asia and assume that any one of them—in multiple combinations—could be transporting goods on the ship.

“That’s the unknown—the accumulation issue,” adds Harrell. “With these new ships, there are going to be more containers in a given area, each exposed to the same potential for catastrophe.”

It isn’t difficult to come up with a scenario, for instance, in which one insurer would have to pay dozens of business-interruption claims if an incident happens on one of these ships.

“Part of this change in shipping is the just-in-time aspect of getting goods,” Harrell says. “And with these new sizes, the load headed to retailers could be much more than they would normally be able to ship today.”

So one disruption in transport could mean a potential loss of millions of dollars for retailers.

The accumulation of risk could potentially be even worse for reinsurers. Though one insurer might have 10 clients on one vessel, reinsurers could be backing up multiple insurers—each with 10 clients.

The risk isn’t new—it’s just potentially so much larger, says Fitzgerald: “This is an evolution of an issue we’ve already been grappling with.”

To date, the market hasn’t really been tested: There have thus far been no catastrophic events for the 15,500-container-sized ships that are the largest currently cruising oceans today. And the prospect of these even larger ships hitting the waves has not yet put any pressure on pricing.

While insurers may scale down capacity to avoid overexposure, both Fitzgerald and Harrell believe the multiple markets involved in Marine insurance will be ready, willing and able to handle all  the risks that come with sending 18,000 containers across stormy seas.

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