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Larger Ships Mean Higher Risks for Marine Underwriters, Brokers

Friday, 21 October 2011 | 21:00

Marine underwriters and brokers are facing greater challenges today as both cargo and cruise ships are being built larger, according to experts speaking at an A.M. Best Co. webinar. The size of cargo ships continues to expand, with some newer ships

able to carry 1,800 cargo containers, also called 20-foot equivalent units, which are roughly half the size of a tractor trailer, said Sean Dalton, head of marine for Zurich Global Corporate in North America.

"You can have cargo up to $1 billion in value," Dalton said during the "Bigger, Faster, Riskier: Advances in Sea Transportation Open Up New Coverage Needs" webinar.
While frequency is down, "when there's a loss, they tend to be quite severe," he said.
One factor driving the move to build bigger ships is the expansion of the Panama Canal, said Stavros Costarangos, executive vice president of broker Padeco Seguros in Panama. The original canal, which opened in 1914, was only large enough to handle ships carrying about 5,000 containers. A current $5.25 billion expansion expected to be finished in 2014 would allow container ships that are large enough to carry 12,000 containers.
"Underwriters will have to adapt to what will come in the future," including new container ships of even larger size, Costarangos said.
One concern is the maritime principle of "general average." General average is based on the idea that everyone shares the risk when their cargo is in transit. If the operator of a vessel encounters a severe difficulty -- for instance, they are forced to jettison some cargo to save the ship in a storm -- they can declare general average and then all cargo owners will share in the lost cargo, even if it wasn't their cargo that went overboard. Typically, the cargo owner must pay an assessment when the cargo is delivered, and if insured, their insurer would settle the assessment.
A recent court case found the court can declare general average even if the ship operator did not, said Tom Denniston, executive vice president of broker Lockton.
"This is significant given the size of the new ships coming on line," Denniston said.
The largest general average claim to date was $70 million "and that GA record probably won't stand long in the future," he said.
Underwriters need to consider not only an individual client's exposure, but the possibility that they may have more than one insured at the same site, said Robert V. Huffert, senior vice president and manager of ocean marine for Munich Reinsurance America.
The probable maximum loss would be if two of the largest container vessels collided at sea, and both sank. "Think of the unexpected clash of coverage," Huffert said. "Business interruption and contingent business interruption could far outstrip the loss of the hull."
Oil tankers, which are also being built to larger sizes, can have $4 billion in cargo, said Huffert.
A new type of tanker, the largest to date at 450 meters by 70 meters, would carry liquified natural gas. "It's the largest footprint of any vessel to date," Huffert said.
As ships are built bigger, not only can one handle more cargo, but the value of the ship itself also grows.
"We still have capacity available. The real issue is not so much whether we can cover a vessel that is in the $2 billion range ... it's the details of the coverage, the terms and conditions, that are the most important to deal with," said Denniston. "Larger values require higher limits of insurance. One size does not fit all. Each type of vessel requires different terms and conditions, and that's a key in negotiations. You need a good marine broker sitting down with a good marine underwriter."
Underwriters need to sit down with ship owners to discuss factors such as maintenance for the ship, and how experienced the crew is. "These are the factors that affect insurance availability," he said.
Cruise ships have also gotten larger. For instance, the Royal Caribbean's Oasis of the Seas, which is valued at $1.4 billion, can carry 6,000 passengers plus 3,000 crew members, Denniston said.
"They are floating cities," he said.
And, ships this size have to deal with the same issues that cities on land have to contend with, including crowd control, medical issues and even mortuary services, Denniston said.
With piracy an ever-increasing threat, he wondered if passenger ships would take a page from cargo ships and begin to carry armed guards on board.
"Then you'd have to worry about an accidental discharge of a weapon," Denniston said.
Dalton said year-to-date, pirates had attacked 163 vessels, hijacked 21 vessels and had taken more than 300 seafarers hostage.
Zurich American Insurance Co. and Munich Reinsurance America both currently have Best's Financial Strength Ratings of A+ (Superior).
Source: AM Best Company Inc.

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