Too big to handle

Too big to handle

Mega-sized container ships like the Ever Given offer economies of scale for cargo companies, but for insurers they’re a mega-sized problem

By Bernice Han

Weeks after the container ship Ever Given was freed from the sandy banks of the Suez Canal, the financial fallout from its blockage of the crucial shipping route is still being counted.

Until it is, the ship, its crew and its cargo remain in limbo. Egyptian authorities seized the Ultra Large Container Vessel (ULCV) after it was refloated, initially demanding $US916 million from its Japanese owner, Shoei Kisen and its insurer, protection and indemnity (third party) liabilities insurer UK P&I Club, as a condition for its release.

The Suez Canal Authority says the compensation it is seeking is to cover it for “loss of reputation”, the rescue operation, transit fees lost during the holdup and other costs. It has since reportedly reduced its demand to $US550 million.

But the financial dispute does not appear likely to be headed for a swift settlement. The most recent update from UK P&I as this issue went to print says “the owners of the Ever Given and their insurers have been committed to an amicable and fair resolution of this matter and remain so.” The matter is before the Ismailia Economic Court of First Instance, which adjourned proceedings until June 20 to “allow further settlement discussions to take place between the parties,” the UK P&I update says.

Shoei Kisen has declared General Average. Under international maritime law, when the loss mitigation convention is triggered, all cargo owners with goods on a ship will contribute to the costs of any loss even if they have not suffered any damage. For insured cargo on the Ever Given part of these costs may be absorbed by the insurance industry, depending on how the policies are arranged.

The Ever Given saga may therefore drag on in courts for years.

It has reignited the insurance industry’s nightmares about incidents involving ULCVs like the Ever Given. (Container ships are classified by the number of 20foot container units (TEUs) they can carry. It’s worth noting that at 20,000 TEUs the Ever Given is not even in the “top 10” of ULCVs. The largest such ship at present, the Algericas, carries 24,000 TEUs.)

Loaded with a vast assortment of everyday goods, the Ever Given and its 18,000 containers were en route from Asia to the port of Rotterdam when calamity struck.

The ship was moving through the Suez Canal on March 23 when it became jammed at an angle across a narrow section of the man-made waterway, its bow driving into the sandbank and its stern lodging against the other side.

Initial reports suggested the grounding happened amid poor visibility and high winds from a sandstorm, although human error has not been ruled out. An investigation into the incident is ongoing.

It took six days and seven hours for engineers and salvage crews, aided by a flotilla of tugboats and dredging equipment, to dislodge the vessel from the banks of the canal.

The Ever Given accident reveals yet again the complexity of marine insurance when ships carrying cargoes insured by myriad insurers from many countries suffer a mishap. It is not unusual for claims including third-party insurers to take a very long time to finalise.

The Ever Given grounding is the first major incident involving a ULCV in the Suez Canal, a confined and strategically vital trading route through which passes roughly 12% of global commerce and 7% of the world’s oil. It is also a chokepoint for world trade, which increasingly operates to tight supply schedules.

The grounding could not have happened at a worse time, with logistics chains already stretched to the limit after more than a year of pandemic disruptions.

The Ever Given blockage severely disrupted the supply arteries that keep the global economy humming, holding up about $US10 billion in trade for each day that Suez Canal traffic was stalled.

Built in 2018, the 400-metre-long Ever Given can carry the equivalent of 20,000 20-foot containers. It is 20 metres longer than the Empire State Building in New York is high.

The insurance industry foresaw the deployment of increasingly long container ships and resultant complexity.

In 2013 Lloyd’s warned in a report that increasing ship sizes and growing cargo volumes were driving up wreck removal costs. At that time the largest container ship in service had a carrying capacity of 16,000 TEUs. A mere decade earlier, in the 1990s, container ships carrying 5000 TEUs were considered large.

“A large vessel is generally harder to salve and a large wreck will typically carry more cargo, which will take longer to deal with and therefore be more expensive to remove,” the report said. “Furthermore, large-scale equipment will be required which may not be readily available.”

Allianz Global Corporate & Specialty (AGCS) says container-carrying capacity on ships has increased by 1500% over the past 50 years and has doubled over the past decade. With plans to build more 24,000-TEU vessels underway, clearly something needs to change.

“Such ships generate economies of scale for ship owners but also a disproportionately greater cost when things go wrong,” the corporate arm of Allianz says. “Dealing with incidents involving large ships, such as fires, groundings and collisions, are becoming more complex and expensive.

“It is clear that in some shipping segments, loss prevention measures have not kept pace with the upscaling of vessels. This is something that needs to be addressed from the design stage onwards.”

AGCS says fires aboard large container ships are now a regular occurrence, with such incidents resulting in large claims in the hundreds of millions of dollars. Insurers and reinsurers shoulder most of the financial burden.

London-based Peter Townsend, who now runs his own marine advisory firm, Ensign Consultancy, helped prepare the Lloyd’s report when he was with Swiss Re. He tells Insurance News he was not at all surprised by the Ever Given incident and the resulting ordeal it has created for insurers and the global economy.

He says a similar incident in the Suez Canal in 2016 also involved a container ship, the Fabiola, which went aground after experiencing engine problems. It blocked traffic for several days.

He says the insurers involved in the Ever Given grounding have “dodged a bullet” because the grounding did not affect the stability of the 18,000 containers stacked on the vessel.

“Let’s face it we’ve had a near miss here,” Mr Townsend tells Insurance News. “That could have been an incredibly expensive operation if the containers needed to be discharged from the vessel where it grounded.”

Will the lessons learned lead to changes? “I am sceptical,” he says.

A pressing concern for the insurance industry right now is the lack of available tools for handling salvage and recovery operations of ultra large container vessels.

“You’re not going to stop accidents happening, but we need to be able to respond expediently to any accidents,” Mr Townsend said. “The problem that we have at the moment is that there are very few cranes and equipment to manage the size of these ships.

“I think the industry will just continue to sleepwalk into the next big container incident.”

The International Union of Marine Insurance (IUMI) has long been working on safety-related issues concerning ships of the size of the Ever Given. Incorrect declaration of dangerous cargo and insufficient fire-fighting capabilities are currently two of the main challenges that must be resolved.

Another worrying trend is the “seemingly increasing number of container spills” coming from super-sized ships. IUMI Secretary General Lars Lange says figures from the World Shipping Council put the average number of containers lost overboard each year in the period from 2008 to 2019 at 1382.

Mr Lange says there has been a “massive increase” in the number of such losses in recent months. The causes of such losses are complex, but he believes “the fact that our weather patterns are becoming more severe is most probably a significant factor”.

“There appears to be a heightened issue with the integrity and stability of onboard container stacks, particularly in heavy weather,” Mr Lange tells Insurance News. “The very fact that these vessels are growing larger in size and are therefore able to carry more [containers] exacerbates the risk in terms of sheer numbers of boxes lost overboard.

“Physical forces endured by the ship going through rough weather, such as rolling, are passed through the container stacks, creating enormous momentum and often resulting in collapse or loss.”

As long as they are commercially viable, the mega-ships are here to stay. The onus is on underwriters to fully understand the risk and develop products to mitigate that risk, Mr Lange says.

RedSky Insurance, a marine-focused underwriting agency in Sydney, says it is important for the industry to stay abreast of significant claims impacting the marine spectrum globally and understand how costs may spike from incidents involving gigantic container carriers.

A company spokesman says the Ever Given incident has demonstrated that even if no cargo was lost at sea, there is still a knock-on effect within the global supply chain.

“As a result of their sheer size and the immense quantity of cargo carried, when in distress mega-ships are clearly more vulnerable than their smaller cousins,” the spokesman tells Insurance News.

“This in turn increases the overall risk of shipping cargo via containerised ocean freight and is something underwriters must be conscious of when applying cover terms that are both reasonable and appropriate.”