Risk up North

Neil Roberts, Head of Marine and Aviation at the Lloyd’s Market Association (LMA), explains the key risk management and reputational considerations that insurers need to be aware of when writing business in the Polar regions

The Arctic is self-evidently a challenging environment. So much so that insurers consider it to be at the frontier of risk. Polar risks are only written on a special acceptance basis as, quite literally, they are off the insurance coverage map.

POLAR PROBLEMS

For any voyages in the High North or indeed in Antarctica, insurers will seek to establish that prospective clients are acting with professionalism, the voyage is carefully planned, the ship and crew are adequately equipped and that all reasonable loss mitigation measures have been taken.

The concerns include floating and static ice, shifting ice channels, and crew being exposed to a hostile and unpredictable environment in restricted visibility, with fog and/or darkness up to 90% of the time. Weather reports are often inadequate and violent storms can occur at any time.

The extreme cold can cause engine problems, affect equipment and there is reduced coverage for navigational aids such as GPS which is serious when charts are frequently inaccurate and the earth’s magnetic field disrupts compasses.

A sharp look-out is needed. Disintegrating icebergs can spawn bergy bits and growlers that may not show up on the radar, very concerning when salvage facilities remain almost non-existent. Tugs are expensive and a relatively minor incident in these remote regions can easily escalate into a life-threatening problem and a very large claim.

With all these factors at play, insurers must be cautious when they accept risks and will ask questions to give themselves comfort that any given voyage will be conducted with sufficient attention to safety. This is simply common sense.

MITIGATION

On the plus side, the comparative information vacuum of 10 years ago has been much improved by the Arctic Council’s web-based PAME Portal designed to help with the effective implementation of the International Maritime Organization’s International Code for Ships Operating in Polar Waters (Polar Code). This is a very significant resource based on truly international co-operation.

There is more guidance on the necessary vessel preparation than there was. The Polar Code requires operators to carry a Polar Waters Operational Manual to demonstrate that they have catered for a worst-case scenario in the planned voyage or operations that the ship is intended for.

The insurance market added the POLARIS evaluation grid to provide a standard approach for assessing risks to the ship in the ice conditions expected.

Things have therefore improved in terms of a risk management tool-kit, but insurers still need to ensure that the shipowners are undertaking their due diligence depending on the specifics of the voyage.

TRANSITION FROM CARBON

The UN ban on heavy fuel oil in the Arctic attracted attention and some criticism but demonstrated a heightened awareness around the problems related to Arctic pollution whether caused by the obvious and visible oil or the less obvious grey water and micro plastics.

“The UN ban on heavy fuel oil in the Arctic attracted attention and some

criticism but demonstrated a heightened awareness around the problems related to Arctic pollution whether caused by the obvious and visible oil or the less obvious grey water and micro plastics.’’

Neil Roberts, Lloyd’s Market Association

Climate change conference COP26 has recently provided a clear exhibition of the shared international concerns around the environment and, for business. There is undoubtedly a growing emphasis on reputational risk in this regard.

The UN has turned its attention to insurers as facilitators of decarbonization, having identified $30 trillion of assets held by them. While that cannot be entirely deployed in the service of nature, shareholders will be looking for actions that clearly support stated government policy ambitions.

Concerns over carbon cannot be ignored but equally, while the world depends on global interconnectivity, nor can shipping or trade be stopped. An acceptance of a transition process across multiple sectors is therefore needed.

Underwriters will clearly be under increased scrutiny to understand and quantify their carbon involvements and to demonstrate how they will support that transition away from carbon.

BUILDING A PICTURE

The linkages between climate change and insured losses have become ever clearer. Not only are insurers footing the rising bills for more frequent storms but increasingly, and at the same time, are being asked to justify the coverage they write from a moral perspective. Doing nothing is not an option. On top of this, the regulators are gearing up. In the UK, both the regulator, the Financial Conduct Authority, and Lloyd’s are sending very strong signals.

The commercial C-Suite therefore face several challenges to meet the requirements for progress to the goal of net zero, against a conflicting range of dates.

It is recognized that there will need to be measurement, so prospective insureds can expect to be asked questions around how they measure their greenhouse gas emissions and how they plan to reduce them. How will that transition be monitored? Will an independent third party verify the transition process? Is the plan aligned with the Paris Agreement and if not, why not? Is there an allocated budget for transition and what is this as a percentage of CAPEX? Which board member is responsible for transition progress? Is the company strategy aligned with the transition goals and what progress has been made?

Those are illustrative generic questions, but, from the answers given, a picture can be assembled and a comparison can be made between year on year renewals.

Without being able to show progress in the risks they cover, insurers are unlikely to retain or attract investors and could struggle to survive. Measurement is therefore crucial, however subjective it might be to begin with.

ANSWERS NEEDED

Insurers are also being asked to look at the Poseidon principles on green financing, a framework for assessing and disclosing the climate alignment of ship finance portfolios, adopted by the major global banks in the sector.

It is helpful that the regulators have already appreciated the complications of unharmonized terms and models. One pragmatic approach would be that if a risk has been financed by a bank adopting those principles, there would be no need for insurers to replicate that process in full.

Nonetheless, each insurance entity will be expected to have clear plans in the sustainability field. For those operations wishing to trade in the Arctic in the future, they will necessarily have to provide extra information to gain insurance cover. The regulators are now adding rigour to the early voluntary schemes around carbon reporting so insurers will have to be in a position to comply. The various drives toward net zero are a new reality for everyone and clients will need to do their own thinking and have answers to hand.