Insurers face uncharted risks as new sea routes open in Arctic

A convoy transits the Northern Sea Route

A convoy transits the Northern Sea Route in 2018. Commercial shippers are taking advantage as the waters of the Arctic lose ice, but little data is available to insurers to gauge the risks.

Providing insurance coverage for ships in inhospitable and remote waters remains a dicey proposition at best, as the cost of claims from a grounding, spill or other incident can run hundreds of millions of dollars.

As the warming global climate has opened new sea routes through the Arctic and shipping companies are taking advantage of new opportunities and cost savings, insurers are still reluctant to write policies to cover potential problems because of numerous risks associated with operating in these areas. Those risks run the gamut: routes constantly shift amid the melting ice and are poorly mapped, extreme cold causes engine and systems problems, search-and-rescue resources often aren’t readily available, spotty satellite coverage results in less accurate positional information, weather reports often are inaccurate, and so on.

Quantifying these risks and assigning a dollar value to them is very challenging, said Helle Hammer, managing director of the Nordic Association of Marine Insurers (Cefor) and chairman of a policy forum for the International Union of Marine Insurance (IUMI), a nonprofit association representing insurers.

“We have limited loss statistics for these sailings, which means we are currently not able to specify the impact based on data. This poses one of the challenges to insurers, along with the remoteness,” he said. “Certain areas are consequently either conditional or excluded from (coverage), which means each sailing needs to be considered on a case-by-case basis. What we generally do know is that even a small incident in these waters could potentially lead to a large claim due to the sensitive area weather conditions and lack of infrastructure.”

The IUMI is an active supporter of the International Maritime Organization’s International Code for Ships Operating in Polar Waters, more simply known as the Polar Code. It lowers risks by ensuring that shipowners are better prepared for operating in the Arctic and by preventing trips that don’t meet safety standards. Hammer said vessels found to be in breach of these standards, which went into effect four years ago, may not be covered if there is a claim.

The code requires operators planning a polar voyage to undergo a vessel assessment and train masters, chief mates and officers in charge of navigational watch-standing to be eligible for a polar ship certificate. Proven enforcement of these standards is needed for insurance companies to feel more comfortable taking on the risk of providing coverage, said Capt. Rahul Khanna, global head of marine risk consulting for Allianz Global Corporate & Specialty.

“There are various risks associated with Arctic navigation. These need to be identified and measured so as to develop comprehensive assessments for the same,” he said. “We would like to see that the vessels are fully equipped to navigate the harsh environments.”

Khanna said insurers also like to see detailed risk assessments completed before such trips are undertaken, and access to a greater volume of data would allow insurers to develop ways to more accurately estimate pricing.

Much more needs to be done, but some strides have been made toward better understanding and assessing risks. Khanna pointed to creation of an international database (www.pame.is) two years ago by the Arctic Council’s Protection of the Arctic Maritime Environment working group to better coordinate, compile and assess live and historical shipping data for Arctic voyages.

Neil Roberts, head of marine and aviation for the Lloyd’s Market Association, a member group for insurers at Lloyd’s, referred to the Arctic as being “at the frontier of risk for underwriters.” He lauded the “excellent cooperation in recent years between the Arctic Council and industry” that has produced a best-practice web portal containing “an invaluable archive of information.”

“For insurers, it’s about assessing the risk. This is done on individual voyages and will look at the characteristics of the ship and cargo, what ice classification the vessel has, what crew training can be evidenced and whether there is adherence to the Polar Code,” Roberts said. “In the past, inquiries tended to be speculative, but there is a clear growth in interest, and both Russia and the U.S. have formal plans for their involvement in the high north. Underwriters are prepared to take on such risks but will require quite a lot of comfort that sufficient care has been taken, as no one wants a problem which could be hundreds of miles from help.”      

Patricia McCarthy

Categories: Industry News