Post-pandemic world brings heightened risks for shipping

While the Covid-19 pandemic resulted in few direct claims for the marine insurance sector, the impact on the welfare of crews and the boom in shipping and port congestion, exacerbated by the Ukraine invasion, raises potential safety concerns.

Demand for crew is currently high with the shipping boom, yet following the Covid-19 pandemic many skilled and experienced crew are leaving the industry, having endured many months, and in some cases, years, stuck on vessels. For those that choose to remain, commercial pressures are running high, which can lead to mistakes and shortcuts.

High demand for shipping is also affecting the risk profile of certain sub-sectors, including container shipping. The global fleet is ageing, yet values and exposures are rising. High freight rates are also leading some operators to carry containers on bulk carriers, where crews are not trained or experienced in handling containers, while such vessels are not designed to carry them. 

Crew crisis – a skill shortage in the making

Seafarers were the unsung heroes of the pandemic, keeping the world supplied with food, energy, raw materials and manufactured goods. Yet, Covid-19, and now Russia’s invasion of the Ukraine, has taken its toll on the industry’s workforce.

Covid-19 restrictions and travel bans meant hundreds of thousands of crew members were stranded on ships, some for years. At its peak in 2020, it was thought that up to 400,000 [1] seafarers were unable to be repatriated, falling to 200,000 in 2021. The Covid-19 crew crisis is now largely over, but the experience is likely to have long-lasting effects.

“The health and wellbeing of crew has always been a critical factor in safety,” says Captain Rahul Khanna, Global Head of Marine Risk Consulting at Allianz Global Corporate & Specialty (AGCS). “However, morale among seafarers is currently low and the pandemic has had an impact on the mental health and well-being of crew. Now crews face a rising workload, while the ever-growing burden of compliance is making the job less attractive.”

In what has been termed the ‘great resignation’, the pandemic prompted many workers to rethink their work life balance, with some choosing to retire or switch careers. The combination of the pandemic and current working conditions risks a future skill shortage for the shipping industry, according to Captain Nitin Chopra, Senior Marine Risk Consultant at AGCS. 

“During the pandemic hundreds of thousands of seafarers were unable to leave their vessels or see their families for a prolonged period. What they have endured will have a lasting impact, and it is likely many seafarers will not return. Ship owners in some segments could feel the pinch. We do not want to see dispensations or special considerations being given by flag states,” says Chopra.

During March and April 2022, a number of vessels owned by ferry operator P&O Ferries were detained by UK authorities over safety concerns [2], including crew familiarization and training. The operator had previously made over 800 crew redundant and replaced them with lower paid workers.

Crew welfare and retention rate is a risk factor considered in underwriting, explains Justus Heinrich, Global Product Leader Marine Hull at AGCS. “Our major clients have crew retention programs and we see a lot of investment in attracting and retaining crew, as well as welfare management,” says Heinrich. “From the perspective of our risk assessment, we like to see high levels of crew retention and evidence of good people risk management. Particularly with more modern vessels and technology, the ability to attract and retain experienced crew is critical.”

Russia’s invasion of Ukraine has further ramifications for a global maritime workforce already facing shortages. Russian seafarers account for just over 10% of the world’s 1.89 million seafarers, while around 4% are from Ukraine [3].

With many direct flights to Russia suspended, and with fewer vessels calling at Russian and Ukrainian ports, seafarers from these countries may struggle to return home or re-join ships at the end of the current contracts. Ultimately, seafarers in the Black Sea are in a perilous situation, stuck onboard vessels or in ports with dwindling supplies and under fire, which is yet another blow for the industry and global supply chains, given crew levels have not yet returned to normal levels.

Regular crew changes are required across the world to ensure the flow of manpower is maintained. Last year, the International Chamber of Shipping and shipping trade association BIMCO [4] warned there could be a “serious shortage” of officers within five years if action is not taken to increase training and recruitment levels. The report predicted that there will be a need for an additional 89,510 officers by 2026, yet there was a shortfall of 26,240 certified officers in 2021.

Higher values, conversions and older vessels increase exposures

The economic rebound from Covid-19 lockdowns has created a boom time for shipping, with huge increases in charter and freight rates. While higher rates are a positive for many in the industry’s finances, changing the use of vessels to take advantage of this, and extending the working life of ships raises warning flags for underwriters.

High demand for container and bulk shipping has seen the value of vessels rise dramatically, while charter and freight rates have skyrocketed. Charter rates in the container and LNG markets hit an all-time high last year, and a decade high in the dry bulk market, while values remain well above historical averages, according to VesselsValue [5].

The value of a five-year old Panamax boxship more than tripled from $22mn in January 2020 to $82mn a year later. Charter rates for a Panamax have increased 274% over the same period. Last year also saw record values for bulkers, with a five-year old Supramax increasing in price by 46% from $19mn to $27mn [6].

In addition, the International Monetary Fund [7] has warned that the invasion of Ukraine by Russia in February will exacerbate already high shipping costs and keep them – and their inflationary effects – higher for longer.

“Rising values and charter rates have created a mismatch for insurers,” explains Captain Anastasios Leonburg, Senior Marine Risk Consultant at AGCS. “Older vessels now command higher values, while the accumulation risks have increased with larger vessels and more value on board. This results in a significant increase in the risk profile, which is not necessarily reflected in premium.”

At the same time, the impact of inflation resulting in rising claims costs adds to this challenging environment. Higher freight rates and a shortage of container ship capacity has tempted some operators to use bulk and product carriers to transport containers. It has also led some tanker operators to explore the possibility of converting vessels. Swedish tanker shipping company Concordia Maritime and ship designer Stena Teknik have announced a feasibility study into converting tankers into container vessels [8].

The use of non-container vessels to carry containers can raise questions around stability, firefighting and the securing of cargo, according to Captain Nitin Chopra, Senior Marine Risk Consultant at AGCS: “Bulk carriers and tankers are not designed to carry containers. Crews may not be trained or experienced enough to handle containers or respond appropriately to an incident at sea. Carrying containers could also change the maneuvering characteristics of a vessel and affect how it behaves in bad weather and strong winds. Converting a vessel or changing its use would likely be viewed as a material change in risk profile and could be categorized by underwriters as a higher risk.”

With demand for shipping high, owners are also extending the working life of vessels. Even before the pandemic, the average age of vessels in the global merchant fleet was rising – 21.75 years in 2021, or 14.7 years for vessels greater than 2,000 gross tonnage (GT). This compares with around 19 years a decade ago, and 13 years for vessels greater than 2,000 GT, according to the IUMI Stats Report 2021 [9].

Analysis has shown older container and cargo vessels (aged between 15 and 25 years old) are more likely to result in a claim, says Justus Heinrich, Global Product Leader Marine Hull at AGCS. “Newer ships need less maintenance and have the latest technology, which typically translates to a lower risk. Older ships are more likely to suffer from corrosion, while systems and machinery are more prone to failure and breakdown. Of course, that is not to say we don't also see well-managed and maintained fleets composed of older vessels as well."

Port congestion and commercial pressures heighten risk

Covid-19 measures in China, a surge in consumer demand and the invasion of Ukraine have all been factors in ongoing unprecedented port congestion.

Congestion at the US ports of Los Angeles and Long Beach reached record levels in November 2021, with 116 container ships either in port or at anchor, while in March 2022, Los Angeles recorded its third-busiest month ever [10] as work continued to clear marine terminals of cargo and reduce the number of ships waiting at sea. At the same time, repeated outbreaks in China, resulting in the staggered lockdown of Shanghai in March/April 2022 for example, and Russia’s invasion of Ukraine is compounding ongoing supply/ demand pressures for shipping, which have resulted in port congestion, higher freight fees and longer transit times. Overall, port congestion globally is running above the levels seen last year, with specific container fleet congestion trending towards previous highs, Clarksons Research [11] noted in March 2022, while the impacts of the invasion are likely to create further inefficiencies across the maritime transport system. 

Port congestion puts crews, port handlers and facilities under additional pressure, increasing risk at a critical stage of a ship’s journey, according to Captain Anastasios Leonburg, Senior Marine Risk Consultant at AGCS.

“Loading and unloading vessels is a particularly risky operation, where small mistakes can have big consequences,” says Leonburg. “Busy container ports have little space while the experienced labor required to handle the containers properly is in short supply. When you add in fast turnaround times and port congestion, this may result in a significantly heightened risk environment.” 

Port risks are already increasing with larger ships, which concentrates large volumes of trade into the fewer larger ports that have specialist infrastructure. Accumulations of cargo exposures at mega ports have been rising, while commercial pressures increase the risks of mistakes and accidents. Ports are also increasingly reliant on technology, where an outage or cyber-attack could effectively close a port.

“Commercial pressures are already a contributing factor in many losses that resulted from poor decision-making,” says Captain Nitin Chopra, Senior Marine Risk Consultant at AGCS. “The pressure on vessels and crew is currently very high. The reality is that some may be tempted to ignore issues or take shortcuts, which could result in future losses.”

AGCS analysis shows that 75% of shipping incidents involve human error.

Ports and shipping face heightened cyber threat

As geopolitical risks rise, so does the prospect of malicious digital disruption.

The shipping industry continues to fall victim to cyber-attacks. In February 2022, a container terminal at Jawaharlal Nehru Port Trust, India’s busiest container port [12], was hit by a ransomware attack. It is just the latest to be affected, following ransomware incidents at US and South African ports in recent years. Earlier this year, a number of European oil terminals were also affected by a cyber-attack.

Cyber criminals have also targeted shipping and logistics companies. US-based freight forwarder Expeditors was hacked in February, 2022 [13], while Hellmann Worldwide Logistics [14] suffered a ransomware attack in December last year that disrupted operations for weeks. In recent years, some of the world’s largest shipping companies – Maersk, Mediterranean Shipping Company, COSCO and CMA CGM have all been targeted.

According to a recent industry survey [15] just under half (44%) of maritime professionals reported that their organization has been the subject of a cyber-attack in the last three years. Of these, 3% agreed to pay a ransom, which averaged at around $3mn. It also found 32% of organizations do not conduct regular cyber security training while 38% do not have a cyber response plan.

“Cyber risk is a major concern and we do see more and more incidents involving non-marine operations, such as ports,” says Régis Broudin, Global Head of Marine Claims at AGCS. “As the industry becomes more reliant on technology and automation, the potential for disruption from a cyber-attack or technical failure increases. And with the increased connectivity of ships, it is only a matter of time before it will also affect vessels.”

Security agencies have warned of a heightened cyber risk due to the conflict in Ukraine. NATO warned vessels in the Black Sea faced the threat of GPS jamming, Automatic Identification System (AIS) spoofing (prior to the Ukraine invasion there had already been a number of these incidents, reported in the Middle East and China), communications jamming and electronic interference. The US Cybersecurity and Infrastructure Security Agency also warned the maritime transportation sector could be a target for foreign adversaries.

“There is concern that shipping assets and ports could become collateral damage if the conflict in Ukraine results in an increase in cyber activity,” says Captain Rahul Khanna, Global Head of Marine Risk Consulting, AGCS.

Courtesy - Allianz Global Corporate & Specialty (AGCS).

References

[1] Covid-19 crew change crisis still a challenge - IMO Secretary-General, March 19, 2021
[2] BBC, P&O ferry detained at Dover fails second safety check, April 13, 2021
[3] International Chamber of Shipping, Supply chain issues will be compounded by lack of Ukrainian and Russian seafarers, says global body representing international shipping, March 10, 2022
[4] BIMCO, New BIMCO/ICS Seafarer workforce report warns of serious potential officer shortage
[5] VesselsValue, Trade Report 2021
[6] VesselsValue, Insurance market braces itself for post pandemic value changes
[7] International Union of Marine Insurance, Disruption to global logistics and supply chains remains widespread: Clarksons
[8] Concordia Maritime, Technical design study on conversion launched, February 8, 2022
[9] International Union of Marine Insurance, Public Statistics, Autumn 2021
[10] The Port of Los Angeles, Port of Los Angeles posts record March, best first quarter, April 12, 2022
[11] International Union of Marine Insurance, Disruption to global logistics and supply chains remains widespread: Clarksons
[12] The Maritime Executive, Indian container terminal diverts ships due to ransomware attack, February 22, 2022
[13] The Stack. $16bn freight forwarder "Expeditors" hit by crippling hack
[14] Security Week, Ransomware operators leak data stolen from logistics giant Hellmann, December 2020, 2021
[15] Safety4Sea, Report: Shipowners pay average of $3.1mn as ransoms due to cyber-attacks, March 22, 2022