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Regional Practice Leader Marine – Continental Europe,Middle East & Africa,XL Catlin and by Pascal Matthey,Head Specialty Lines Risk Engineering,XL Catlin

How has the maritime shipping industry evolved in the face of globalization?

Bert: “The volume of material transported by ships has increased tremendously as a result of globalization; from 1990 to 2013, the volume of seaborne trade more than doubled from 4.1 million metric tons to 9.9 million metric tons. The reduction in trade barriers and the opening of China’s economy played a big part in spurring global trade; the shipping industry responded with bigger, faster ships.

“Bigger ships offer economies of scale so shipping costs have declined considerably. Shipping companies have also benefited from the move to open registry shipping where ships are registered under flags of convenience – for example, Liberia or Panama – to reduce regulatory and labor costs. Open registry ships have operating costs as much as 25% less than traditional registry ships.

“However, perhaps the most significant development was the introduction of standardized shipping containers starting in the mid-1960s. It is not an overstatement to say that the ubiquitous shipping container has played a starring role in transforming the global economy. The idea behind containerization is “intermodalism”; an integrated transport system where cargo can be transported in the same container for the duration of the journey via different transport modes – ship, train, truck or barge. A simple idea that had profound implications for the global economy.

“Before containers, a dock crew could move about 1.7 tons per hour; with containers a crew can move upwards of 30 tons per hour. And because the containers are packed and sealed at the point of origin, theft is a much less significant problem. “On one level, the development of standardized shipping containers can be seen as a fairly mundane process innovation. But the impact of ‘the box’ is truly remarkable. As the subtitle of a book published several years ago put it, ‘how the shipping container made the world smaller and the world economy bigger’”.[1]

What about ports? How have they been affected by these developments?

Pascal: “Containerization had a major impact on ports. Loading and unloading a container ship requires a much smaller workforce and a different type of infrastructure. As shipping companies moved quickly to embrace containerization, and it did happen very quickly, some ports followed suit and upgraded their operations and infrastructures to handle container ships. Other ports didn’t.

“Containerization favored those ports with well-established intermodal networks providing easy linkages to other transport networks. It also favored ports that could change their workforces to match the requirements of container ships; not always an easy feat in a heavily unionized industry that has historically employed a large number of people.

“Today, there are a relatively small number of big, specialized ports supporting container ships. Many of the largest ports are in Asia including Shanghai, Singapore, Hong Kong and Busan, South Korea. In Europe, the major container ports are Rotterdam, Hamburg and Antwerp. For North America, the list includes Los Angeles, Long Beach, and New York / New Jersey.”

How is the risk landscape in the maritime shipping industry changing?

Bert: “Marine insurance is the earliest class of insurance to be written; its origins can be traced as far back as Genoa and Palermo in the 13th century. The basic premise remains the same: to cover losses or damages to ships, cargo and terminals. And in some ways, the risks haven’t really changed: ships can sink; cargo can get damaged or stolen; fires and explosions can destroy port facilities. However, the risk landscape today is certainly more complex, and also includes some new risks that have emerged in the past few years.

“I recently visited a new container ship that’s currently the largest in the world in terms of capacity. It can carry more than 19,000 TEU[2]. But if something happened while this ship was docking and access to the port was blocked, the economic impacts would be enormous.”

Pascal: “As ship sizes increase, the potential for accidents can also increase. Risk assessments show that about 2%-3% of containers are mislabeled; the weight and/or contents of a container don’t match the bill-of-lading. So a 15,000 TEU ship is most likely carrying 350-400 containers that are wrongly declared. And perhaps one of them contains dangerous materials, and based on incorrect information, is placed deep in a row in the middle of a ship. If the materials ignited, controlling the fire in such a large ship would be very difficult.

“It could also be the weight. If a container weighing much more than what is declared is stacked on top of a row made up of lighter containers, it could collapse the row.

“Smaller, older vessels that are still in operation can also present a risk. A lot of big, new ships were commissioned before 2008 when the global economy was quite strong, and then delivered in a very weak economy. The combination of a slow economy and over capacity caused shipping rates to plummet. So when prices fell, ship owners had to find ways to cut costs. One way to do that is to sell older ships. The major shipping companies can’t afford to have a reputation for bad maintenance, but they did sell a lot of older ships to smaller companies that don’t spend as much on maintenance. This was more the case with bulk carriers than containers; in that sector there are a lot of very old ships still sailing around, especially as feeder ships between mega ports and smaller, regional ports.”

Bert: “Cyber risks are a new category of risk for both ships and ports. Like the self-driving car that was recently hacked, the autopilot systems on ships could be hacked and over-ridden. The hackers could be pirates who direct the ship to a port they control, or terrorists who aim to wreak havoc by sending the ship into, say, a liquefied natural gas (LNG) terminal, similar in a way to the 9/11 terrorist attacks.

“Cyber-crime is also a major concern for ports. Their operations are computerized, and the systems control the loading and unloading of the containers. If someone were to hack into the system and erase all of the details about the contents of the containers, that could cause the whole port to shut down.

“There is already one example of hackers gaining access to a port’s control system. In Antwerp a couple of years ago, some drug smugglers were able to get into the port’s control system and access secure data on the location of containers. Armed with this information, they sent their own drivers to pick up the containers where the drugs were hidden before the “real” drivers arrived.”

How does this changing risk landscape affect companies that are benefitting from globalization?

Pascal: “The greatest risk for companies that benefit from globalization is an incident that disrupts their global supply chains. And the most exposed link is the port; everything goes through this small place, so that’s a big exposure. If a big ship goes down, the costs to the ship owner, cargo owners and insurers would be significant, but the impact on individual companies or industries probably would be limited.

“However, as we’ve seen in the past, when a major port is shut down, even for just a few days, the economic impacts are widespread and significant. Many companies today are bound to complex global supply chains, and a disruption in one link can ripple quickly across the overall enterprise. Given the volume of material moving through ports today, a port shutdown could harm many companies and potentially entire industries.”

What does the future hold for the maritime shipping industry?

Bert: “Bigger ships calling on mega ports is leading to a hub-and-spoke model with more trans-shipments. Some ports can’t handle these bigger ships, so now there are more feeder vessels serving the smaller ports; hence, more handling and trans-shipments.

“There is also considerable work underway on alternative propulsion systems. Although fuel costs are currently low, they still represent a significant proportion of a ship’s operating costs, and the diesel engines used on ships are among the dirtiest in the world. Alternatives that are being looked at include LNG, gas turbines, biofuels and fuel cells. Solar and wind, yes wind, could also play a role in augmenting the main propulsion system and in providing auxiliary power.

“Finally, there is a lot of interest in new routes across the Arctic region. These offer the possibility of significantly shortening shipping distances between Europe and Asia, as well as between Europe and the west coast of North America. However, these routes are also much riskier than current routes. For example, the costs of mounting a salvage operation in the Arctic region would probably dwarf any operation conducted to date, including the Costa Concordia salvage effort.

“I also expect the industry to remain largely invisible. Generally speaking, people can perceive how globalization is reshaping the global economy and impacting our lives. But outside the industry, most people are unaware of the role the maritime shipping industry plays in this process. One of the reasons for this is because the industry is highly efficient; people would be more aware of the shipping industry if it were slow and inefficient. I don’t think this will change. The maritime shipping industry is likely to remain a vital, if largely unnoticed, part of the global economy.”Bert is XL Catlin’s Regional Practice Leader Marine – Continental Europe, Middle East & Africa. He has been passionate about the marine industry since his childhood. Bert has a Masters in law with a specialization in Maritime law, and has spent his career as a Marine insurance broker and underwriter.

Pascal is Head Specialty Lines Risk Engineering. He provides industrial customers throughout the world with risk assessment tools and solutions to enhance supply chain security. He also conducts risk assessments on large storage exposures, including container transport. Pascal is from Neuchatel in the heart of the Swiss watchmaking industry, and has previous experience as a Marine underwriter and corporate risk manager.[1] Marc Levinson, The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger, Princeton University Press, 2008.[2] TEU, or Twenty-foot Equivalent Unit, refers to the industry standard for container dimensions. As set by the International Organization for Standardization (ISO), a 20-foot container is 6.09m long, 2.4m wide and 2.6m high. A container ship’s capacity is commonly described in terms of how many TEUs it can carry.

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