Risky business

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Toby Sizeland: Value of goods being shipped to the region rising

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Scanning: By avoiding the need to open containers the integrity of the supply chain is maintained and shipments remain secure

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Hyundai Fortune: The disaster highlights the aggregate risks involved in the new generation of ships which are three times larger

The sending of a ship with a possible value in excess of US$100m, laden with cargo conceivably worth five times that amount, out into the world’s oceans, is one where risk is inherent. Rough seas, piracy, theft, and portside damage are all possibilities that combine to make the arrival of goods at their rightful destination less than guaranteed. Marine insurance is a highly specialised discipline due to the nature of calculating risk in a field where a huge number of variables can converge to create total losses on a phenomenal scale.

With operations in Bahrain, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, AXA Gulf is one of the largest cargo insurers in the Middle East, writing about $15 billion worth of cargo each year.

“Our customer base is primarily the consignors and consignees trading in and out of the region. The UAE is now such a trading hub that we cover a huge amount of goods for re-export to Africa, Iran, Iraq and, of course the GCC,” explains Toby Sizeland, regional marine manager, AXA Gulf.

“Far from dealing simply with goods flowing into the region, about 25% of our book is made up of exports from the Middle East – there’s a great deal of downstream manufacturing in the petrochemical industry in Saudi Arabia, for example,” he adds.

The value of goods being insured in the Gulf sea freight business has exploded in recent years. The most significant factor in explaining this is the economic boom associated with the recent high oil revenues.

“2006 was a year of growth and increased trade for us as a cargo insurer. The boom associated with the oil price has meant more goods coming into the Gulf, whether they be project cargo for the burgeoning construction industry, or more general cargo driven by higher disposable incomes,” says Sizeland.

2006 was indeed a boom year in global shipping, and the increase in world trade, especially exports from Asia to North America, Europe and the Middle East, has led to the construction of the first container ships capable of carrying in excess of 14,000 TEU, such as the Emma Maersk. Such economies of scale help reduce shipping costs, and expedite the delivery of goods from factories in Asia. “However, from an insurers perspective, this new breed of ship concentrates risk on an unprecedented scale,” explains Sizeland.

The well-documented fire aboard the Hyundai Fortune in March 2006 serves to illustrate the potential losses that could be involved. The 5500 TEU ship was 60 miles off the coast of Yemen when a huge explosion of unknown origin sent 90 containers tumbling into the Gulf. The explosion triggered a massive blaze that spread through the stern of the ship, and secondary explosions followed as seven containers full of fireworks ignited above deck on the stern. General average was declared, and the combined loss is estimated at over $300 million. The vessel was eventually towed to Salalah in Oman.

This example was not a total loss, and a mere one-third the capacity of the new generation of larger vessel. The aggregate loss from an incident involving a 14,000 TEU container ship would be astronomical. It is becoming increasingly common that containers carrying electrical goods can exceed $1 million in value, and 18,000 TEU capacity Mallacamax vessels are on the drawing board, which will pose even greater aggregate value concerns for insurers.

Such an example is obviously the worst case scenario. “More generally, the concerns are that there’s capacity for goods to become damaged, or go missing at critical points in the supply chain, so the stock throughput product we offer is very popular, which covers goods from the factory at point of origin, right up to final delivery at the retail outlet or construction site,” says Sizeland.

Changes in handling and delivery techniques are said to be improving as the logistics industry matures, but it is factors outside this realm that are impacting the insurance market most.

The continuing global security situation has had an impact on the insurance market for several years since the 9/11 attacks. “Immediately post 9/11 there was a quick succession of wars, in Afghanistan and Iraq, and the marine market acted by doubling the war and terrorism rate – and to this day that’s remained the same,” explains Sizeland. Originally set at 0.0275% of the total value of cargo, it jumped to 0.05% in the wake of military action, and although not always quoted as a separate premium, this figure is factored into the overall premium charged.

Security standards vary widely across the globe, and the destination ports have a considerable impact on the assessed risk when calculating insurance premiums. “In terms of the security of cargo, African ports are rather problematic. Rather than terrorism being the watchword, it’s more the case that the primary concern is theft of goods when in storage or awaiting customs clearance,” says Sizeland.

However, there are excellent facilities too. “The GCC is generally very good in this regard, and a lot of the ports here had many of the control measures that have had light thrown upon them in the wake of the International Ship and Port Facility Security Code (ISPS), and Secure Freight Initiative (SFI), were actually already in place here,” he adds.

For manufacturers, freight forwarders and insurers alike, the new security provisions being thrust upon ports and customs authorities across the globe will have a hugely beneficial effect. Under the SFI it will eventually become compulsory for all goods destined for American ports to be scanned at their port of origin prior to departure. “Scanners are ultimately there to detect goods unwanted at port of destination – but they will also pick up goods that may have been purposefully mislabelled, such as fireworks, that could jeopardise the whole adventure,” explains Sizeland.

“As a by-product of this initiative, the scanners will, in many cases, eliminate the need for containers to be opened up, which has always been a problem for us. Often when customs authorities open a container for inspection, the goods are not re-packed in such a secure manner,” explains Sizeland. Every possible space inside containers is used to maximise the sea freight, and this involves careful packing. It has not been unknown for goods to be lashed to the roof of a container after an inspection, which not only jeopardises the safety of the goods on the roof, but also leaves the remaining cargo with more room inside to rock about or fall over.

There is also the additional factor that once a container has been opened, there is a tendency for stevedores and various people who have access to port facilities to pilfer from these soft targets. “Particularly these days, with individual cargo items being small and so valuable, such as laptops, iPods and digital cameras. The problem of theft is greatly increased because the items are small, light and easily concealable. Ultimately any industry activity that ensures the integrity of the container throughout its journey is a good thing for shippers.”

The role insurance companies play goes beyond offering coverage and writing a cheque when something goes wrong. “We get involved in the supply chain analysis with our customers. In this respect we would work alongside the client examining the integrity of the supply chain, helping them overcome specific problems, and work to minimise losses,” says Sizeland. “We also have insurance surveyors who could be deployed – occasionally at our insistence. For example, with project cargo, port operators may not always have the expertise for certain loads, so a surveyor would go down and assess and advise on the lashing and trim of the barge.”

Outside of human control, climate change may also be having an impact on the way insurance premiums will be affected for goods travelling by sea. “What we believe global warming might have contributed to is rogue waves, which can be as much as 30 metres high and several hundred metres wide. A rogue wave would be likely to crash straight over the bow of a ship, flooding the contents, and with a container ship it could quite conceivably take containers with it. In the worst case scenario the wave may force a capsizing.”

The notion that ‘bigger is better’ in the containership market will pose new challenges and record levels of aggregated risk for cargo underwriters, but global security initiatives and technology will play their part in balancing these risks. The rapid development as a world leading transhipment centre is continuing to offer opportunities for insurers and marine businesses alike choosing the UAE as a base. “From a regional perspective, Axa is very excited and interested by the development of Dubai Logistics City, and from a cargo underwriting perspective Dubai really has established itself as the regional hub, it’s where the main opportunities are,” concludes Sizeland.

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