Decarbonisation

Decarbonising shipping: the challenges for marine insurers

The Marine Insurer examines how measures to transform the shipping sector will impact marine underwriters.

While the headlines have covered the increasing number of vessels on the Northern Route from Asia to Europe, of equal significance is the far larger number of cruise vessels taking passengers to – for the moment – unspoilt waters, as well as the increase in the number of fishing boats exploiting the changing habits of North Atlantic fish stocks.

Shipping plays a pivotal role in the global economy with up to 90% of global trade carried by sea each year.

This means the sector has a critical role to play in global efforts to mitigate the impact of climate change.

The maritime sector generates more than 2% of annual global CO2 emissions, according to the most recent survey by the International Maritime Organisation (IMO), the industry’s regulator.

With other sectors acting to reduce their own emissions and the shipping sector continuing to grow, some forecasts suggest this could increase to 10% by the middle of the century.

recognise the need to evolve. With marine insurers and their parent companies seeking to drive improvements to underwriting performance, there has been a greater willingness to explore the opportunities presented by new technologies.

Efforts to decarbonise the maritime industry will increase the need for innovation within the marine insurance market.

The big challenge for underwriters as the shipping industry moves to decarbonise is that it will be asked to insure new technologies that are relatively unproven.

Given underwriters’ traditional reliance on historical data for calculating premiums, calculating an appropriate rate for largely untested technologies will be a major hurdle for the marine insurance sector to overcome.

As the risk evolves, marine insurers will need to take steps to become more comfortable with the exposures they are asked to cover.

Enhanced dialogue with the shipping sector will be critical as the industry works to adapt its product suite to become fit for purpose for modern vessels.

The dialogue between marine underwriters and their insureds needs to begin now, if it hasn’t already, if the insurance sector is to develop a thorough understanding of the changes it can expect to see over the coming years.

To meet the IMO’s carbon-reduction targets, insurance broker Marsh has said commercially viable, zero-emission vessels must start entering the global fleet by 2030, with their numbers radically scaled through the 2030s and 2040s.

The shipping sector’s insurance needs will likely extend beyond traditional marine covers as it moves away from carbon-intensive activity. Marine underwriters will potentially need to collaborate with peers from other classes to bring an appropriate product suite to their clients.

Taking these steps can help marine insurers be part of the solution as the maritime sector transitions towards a lowcarbon industry. NEW FUELS One of the big challenges facing marine underwriters as the maritime sector moves to reduce its greenhouse gas emissions will be understanding the quality of new types of fuel.

The introduction of new fuel types will present a significant challenge, given the relatively short time period in which these fuels will need to be developed and tested.

Fuel problems can lead to engine failure which can in turn trigger claims for hull and machinery insurers, with further costs from salvors if towing is needed. As environmental lobbyists take aim at the sector, there is a clear need for action to make shipping more energy efficient and reduce its environmental impact.

The IMO has recognised the need to decarbonise and set out its long-term vision for change in 2018.

The IMO2050 strategy aims to cut international shipping emissions at least by half by 2050, with the ultimate goal of zero carbon shipping at some point during the current century. EFFICIENT DESIGNS Within this strategy the IMO has called for the strengthening of energy efficient designs within ships as well as collaboration with ports to help reduce emissions from shipping.

The introduction of new fuel types, which could include electric and hybrid power, hydrogen as well as the potential use of biofuels, is also central to the planned transformation.

Through the IMO’s Energy Efficiency Design Index (EEDI), introduced in 2013, the regulator has created mandatory design requirements to improve the energy efficiency of new ships.

The IMO hopes future phases of the EEDI will deliver a 30% reduction in the carbon intensity of new ships by 2030, with a further interim target to reduce carbon intensity as an average across international shipping by at least 40% by 2030.

Awareness is growing within the shipping industry of the need to act and the decarbonisation of shipping is expected to be one of the most significant challenges facing the sector during the next decade.

In the Global Maritime Forum’s most recent survey of the sector, decarbonisation and new environmental regulation were ranked within the top three concerns facing the maritime industry during the 2020s.

The decarbonisation of the maritime sector will come at a financial cost. A study released in January by University Maritime Advisory Services and the Getting to Zero Coalition suggested at least $1trn of capital investment will be needed. While substantial investment will be needed to build new ships and retrofit the existing fleet, much of the estimated $1trn needed will be for investments on land, particularly for the production of low carbon fuels and fuel storage. INSURANCE IMPACTS Investment on such a scale will have inevitable consequences for marine insurers, bringing both opportunities and risks for the sector.

Marine is perhaps the most traditional of insurance classes and has historically been resistant to radical change.

Recent years has seen a shift in the sector’s willingness to Hideaki Saito, IMO “In terms of climate change issues, I am convinced that IMO can develop a robust and effective regulatory framework in the global context,’’

“Shipping is one of the largest emitters of sulphur among all sectors, responsible for between 5% and 10% of annual emissions.’’ The way in which IMO2050 is enforced will also have implications for marine insurers. Protection and indemnity clubs may be liable for any fines imposed on their owners for failing to comply with regulations.

Regulatory uncertainty is viewed by respondents to the Global Maritime Forum survey as the biggest potential barrier to shipping’s decarbonisation over the next decade.

However, Hideaki Saito, chairman of the Marine Environment Protection Committee at the IMO, said he is confident the body can take the necessary regulatory measures to facilitate decarbonisation.

“In terms of climate change issues, I am convinced that IMO can develop a robust and effective regulatory framework in the global context,” he said.

Marine insurers will need to monitor developments closely as this framework is developed.

The introduction of new regulations limiting sulphur oxide emissions from the start of this year – IMO2020 – provides some guidance as to the issues marine insurers may face as the maritime sector works to decarbonise.

Shipping is one of the largest emitters of sulphur among all sectors, responsible for between 5% and 10% of annual emissions.

IMO2020 has sought to address this, prompting the development of compliant fuel types. MACHINERY DAMAGE In its most recent Safety and Shipping Review, Allianz Global Corporate & Specialty warned of the industry’s concern over the potential for increased machinery damage due to the risks associated with these fuel types.

Machinery damage is one of the most common causes of loss in marine insurance.

“The worry is that we could see an increase in the frequency and cost of machinery breakdown claims related to IMO 2020,” said Justus Heinrich, chief underwriter for marine hull in Central and Eastern Europe at AGCS.

“The increased cost of fuel and the extent to which this can be passed on via higher freight costs, may also influence cost-saving in other areas, like crew training or maintenance.”

Amid the concerns about the introduction of measures to improve the environmental impact of shipping, there are several potential benefits for marine insurers.

The transition will encourage the development of a younger, cleaner fleet which should bring better efficiency and an improved safety record. Retrofitting the existing fleet should also lead to better maintenance which in turn will bring an improved loss record.

As older vessels head to scrapyards, demand for demolition voyage insurance and other associated covers may increase. A failure to make the transition towards a zero-carbon industry will leave the shipping sector facing considerable reputational risk. This risk may extend to marine insurers if they are seen to be facilitating a sector which is a major contributor to climate change.

While the short-term financial cost to the shipping sector will be significant, the long-term impact on the environment of the sector failing to adapt will be far costlier.

Marine insurers have a key role to play in ensuring appropriate cover is available to help facilitate the shipping industry’s move towards a cleaner and more efficient future. WHAT NEXT? The IMO is scheduled to complete its fourth Greenhouse Gas Emissions study by October this year, which will include an inventory of current global emissions as well as scenarios for future international shipping emissions until 2050.

The Marine Environment Protection Committee is expected to establish its own working group on the reduction of greenhouse gas emissions from ships.

A draft MEPC resolution has been agreed on national action plans to encourage member states to put in place the legal, policy and institutional frameworks necessary to facilitate emission reduction from ships.

The IMO Intersessional Working Group on Reduction of GHG Emissions from Ships has been tasked with developing a plan for follow-up actions to begin delivering on the IMO’s initial strategy. A final IMO plan detailing the transition is due to be finalised in 2023.