When the Panama Canal officially opened 100 years ago, itforever changed the face of world maritime commerce andshipbuilding. Today, nearly $9 trillion in seaborne commercetransits the canal, with more than 12,000 vessels making the tripeach year. Of them, some 3,100 are container ships, another 2,900are dry bulk ships, and around 2,500 are tankers.

The canal is 51 miles long and takes 8-10 hours to transit, butthe big limitation is its width. Today, the canal can admit shipsup to 4,400 teu (twenty-foot equivalent). The teu is basically thesize of a standard, 20-foot-long cargo container. With globalshipping on the rise, the pressure has been on to make the canalmuch bigger, to admit more ships, and to admit larger ships.

An effort to widen the canal began in 2007, and it will becomplete in 2015. Once it's widened, the canal will be able toadmit New Panamax vessels of up to a mind-boggling 12,600 teu(nearly triple the current vessel size limit). The wider canal willalso be able to admit 12-14 larger vessels a day, representing asignificant increase in total canal traffic.

All of these improvements bring with them a host of newinsurable risks that have carriers such as Allianz Global Corporate& Specialty (AGCS) working hard to craft risk managementsolutions for their clients. AGCS is a leading insurer of oceanmarine and cargo, and it recently released a report on the risksthe canal presents, which you can download here.

(Click on infographic below for highresolution.)

The Panama Canal is the safest of the world's majorcanals.

There is a shipping incident in the Panama Canal about 1 inevery 4,000 ships that go through. That might not sound great, butit compares very favorably to the Suez Canal, where there is anincident for every 1,100 ships. The Kiel Canal has an incident forevery 830 ships.

The Panama Canal has seen 180 shipping casualties over the last20 years, for an average of about nine a year. Recent efforts toimprove safety, however, have significantly improved things in thelast 10 years. There have only been 30 casualties in the lastdecade.

More than three-quarters of all shipping incidents in the PanamaCanal involve bulk carriers, cargo ships and container ships. Themost common cause of incidents are contact with the walls of thecanal (53 incidents), and collisions (50 incidents) with othervessels – together, these account for almost 60% of all incidents.Machinery damage/failure (41 incidents) counts for another 20% ofall incidents.

There were only three casualties in 2013: one involving acontainer ship, one a cargo ship, and one a tugboat.

The bigger canal means bigger ships, which means biggerrisks.

The expanded capacity of the canal will mean that the amount ofinsured goods passing through will rise by $1.25 billion or more,according to Allianz. This is to say nothing of the hull riskinvolved. The “fully cellular” cargo vessels used to transit thecanal back in the 1970s carried 1,000-2,500 teu and had a hullworth of about $8M to $12M. The Panamax vessels that came after inthe 1980s are 3,000-3,400 teu and worth about $62M. In 1988, we sawthe Post Panamax vessels, with 4,000-5,000 teu and worth around$49M. Post Panamax-Plus vessels hit the scene in 2000, carrying8,000 teu and worth around $98M. The New Panamax vessels hittingthe vessels in 2014 are 12,000-13,000 teu and their hull valuealone tops $100M.

These are not the largest ships on the water, however. Triple Ecargo ships can carry 18,000 teu and are worth some $140M. Theseships pose considerable ocean marine risk simply because so muchvalue is concentrated on a single ship. One of those Triple Es goesdown and you are not just looking at the loss of a very expensivehull, but you've got an Omega-class headache as you must deal withso much lost cargo. For insurers, this gets especially hairybecause they might have numerous clients all on the same vessel,but not otherwise correlated with each other. This is the kind ofexposure concentration no underwriter in his or her right mindwould be happy about.

Triple E ships cannot transit the Panama Canal, however; theyare meant for the Suez Canal. But their mere existence is alreadyhaving an impact on ocean marine risk and insurance in general.

We are facing Peak Cargo.

The trouble with the Triple E ships is that they are alreadymaking the expanded Panama Canal obsolete before it even opens. Andthat is a curious inversion of things. “The Panama Canal has beeninfluencing shipbuilding for 100 years,” said Captain AndrewKinsey, a 23-year veteran of the Maersk Line with more than a fewyears of experience on Panamax vessels. But as global shippingappetites have grown in recent years, shipbuilders have raced tokeep up with demand, hence the deployment of the Triple E ships.But at the same time, the infrastructure has failed to keep pace,Kinsey says, which means that for the time being, Triple E is aboutas big as cargo ships can get without causing serious logisiticalproblems.

As it is, there are only a handful of ports in the United Statesthat are deep enough to handle such large vessels. Most major WestCoast ports can handle them, but on the East Coast, only Baltimoreand Norfolk are at 50 feet. Miami is dredging from 42 to 55 feet.The dredging in New York is complete, Kinsey says, but the BayonneBridge still has to be raised to it can accommodate the increasedair draft of the larger ships.

Then there is the issue of having sufficient cranes, containerhandling yards and other infrastructure in place to properlyservice such ships. Most ports simply are not ready to offload thevolume of cargo that the Triple E and New Panamax vessels bring, sowhat is developing is a hub system wherein the biggest ships dockat the biggest ports, and smaller “feeder ships” from smaller portshandle partial cargo deliveries to and from the large ports. It isall a bit like how Fed Ex delivers from its national HQ to regionaldistribution centers to local distribution centers to actualdelivery sites. Ocean cargo is going in the same direction.

On the negative side, this means that the largest vessels canget stuck waiting for their turn in port, which exposes them toadditional storm risk and other maritime risk. On the plus side, ahub system actually would decrease the number of times acontainer is handled in transit, believe it or not, and handling isthe number one cause of damage to cargo. (This is especially truefor refrigerated containers or containers with a controlledenvironment; you don't want those getting unplugged accidentally orbanged up.) So the tradeoff is worth it, ultimately.

A more complicated canal.

Another piece of good news/bad news coming out of the PanamaCanal's expansion is that the locks used to raise and lower thelevel of the water throughout the canal are going to be replacedwith much more complicated mechanisms.

The upside of this is pretty significant – the canal isn't justan artificial river from the Atlantic to the Pacific. It runs intoand out of Gatun Lake, a massive artificial lake created to makethe canal's initial excavation easier. The new locks will recycle60% of the water used to raise and lower the ships, and reduce theoverall amount of water needed to run the canal by 7%,post-expansion. This is big because during dry seasons or el Ninos,the level of Gatun Lake can drop, which might prohibit the passageof larger ships. The new locks will reduce that exposure, which issubstantial when you consider that the lake has no tides to helpgrounded ships get going again.

On the flip side, the more complicated locks mean that there aremore components that can fail, and if any of the locks malfunction,break or otherwise fail to operate properly, then the trafficbackup this could cause on the Canal would be significant. Rememberthe traffic lineup we talked about a few slides ago, and how shipswaiting to go through the canal increases maritime risk? That'swhen the canal is working properly. The last thing it really needsis a traffic jam thanks to a lock having a bad day.

To fully grasp the idea of what kind of traffic goes through theCanal, go to Google Earth sometime and look at the Canal. You cansee ship after ship after ship queued up on either side, justwaiting to go through.

There are no fender-benders with supermassive cargoships.

Those $100+M hull values we mentioned before? They really becomeimportant when masters are trying to stay out of each others' waywhile waiting their turn to enter the canal, and when lined up onGatun Lake. You'd think that the oceans being as big as they are,that ship captains could easily stay out of each other's way. Butthe increased traffic volume the widened canal will bring meansthat collisions between ships are likely to become the #1 risk forvessels transiting the canal, Captain Kinsey said. (Currently the#1 risk is colliding with the canal itself.) He added that mostincidents happen on the coastal waters, usually by crews that arealready fatigued from their transit across the ocean.

Interestingly, Kinsey noted that between Baloa, Panama andColon, Panama, the traffic separation system in place is much lesschaotic than it is for the Suez Canal, which is a one-way canal,and creates much more intense traffic patterns as ships are “liningup on the northbound leg at zero-dark-thirty.”

Since 1993, there have been 50 collisions involving vessels ator in the Canal. The worst year was 1998, when there were 10collisions. Things have gotten much safer in recent years, however.There were four collisions in 2004, none in 2005-6, one in 2007,none in 2008-2011, and two in 2013.

It's easier to drive into the canal than youthink.

Since 1993, there have been 53 incidents where ships madecontact with the canal itself. Like ship collisions ,these numbershave gone down considerably since the late 1990s, when new safetyinitiatives took hold, but it is still a major risk.

As a Panamax vessel enters a lock, Captain Kinsey explains, itis displacing a huge amount of water. There are tractors (called“mules”) on the lock walls helping to pull the ships in, but theship itself has to throttle up to about half to get into the lock.Kinsey likened it to putting on a shoe that is a half-size toosmall, and with massive ships that are far easier to speed up thanto slow down. This means the ships need to be lined up perfectlybefore they begin their approach, and they need to maintain thatperfect alignment throughout the maneuver.

If a ship gets off its heading, or if the winch on one of themules gets twisted, the ship can turn and create a “bank cushion”where in the interaction between the ship's propeller and the watercreates a low-pressure area that will actually suck the ship intothe canal wall. Captain Kinsey says this happens more frequently onthe Suez Canal, where there are shoalings that increase the lowpressure areas. In ferry crossings and the like, when ships havelow pressure problems, they can simply veer off. But in the canal,there is nowhere to veer off to.

This makes the interaction between the ship's master and thecanal pilot crucial, which brings us to our final point…

…this is not a job for amateurs.

In most canals, there are canal pilots who enter the wheelhouseand advise the masters on how to get through the canal withoutincident. On the Panama Canal, however, the canal pilots actuallytake over the vessel and drive it through themselves. Since everyvessel handles differently, this calls for the utmost training,skill and experience.

Thankfully, Captain Kinsey notes, one does not simply become aCanal Pilot easily. It is a very specialized job that requires agreat deal of prior experience and training that never ends.Panama's canal pilots undergo constant training to ensure that theyare at the height of their skills when they pilot ships through thecanal. Panama is itself is a signatory of the internationalStandards of Training, Certification & Watchkeeping, the globalstandard for maritime safety and training certification.

Those same pilots are undergoing intensive training right now sothat when the widened canal opens for business, the pilots will beready. The pilots are already training on ship simulators and thereare plans to charter post-Panamax ships for the pilots to practiceon well before they start guiding customers through thewaterway.