With the first quarter of 2024 now behind us, we continue to keep a close eye on the issues affecting the global marine sector. Here, we will provide some analysis of the current economic and geopolitical environment, what it’s likely to mean for marine claims and related insurance, and steps organizations can take to help control costs in these tumultuous times.
Disruptions in key locations
A number of factors are notably impeding cargo traffic around the world. With continued tensions in the Middle East and the threat of more attacks on ships in the Red Sea, the cost of coverage for vessels sailing through the region — including the Suez Canal, which normally carries about 30% of all global trade — has skyrocketed. Due to safety risks and rising insurance premiums, many shippers are instead routing ships around Africa. However, this makes the trip between Europe and Asia about 4,000 miles longer.
The extended war between Russia and Ukraine has also disrupted international trade. Dozens of ships were stuck in port in Ukraine and neighboring countries for months following the escalation of attacks in February 2022. Much like the situation in the Middle East, many shippers are now avoiding the Black Sea, another critical waterway for transport between Europe and Asia. Sanctions against Russia and Ukraine’s limited ability to export its agricultural products in wartime are interfering with global supply chains.
Maritime traffic to and from the Americas has been heavily impacted by the record-breaking drought causing low water levels in the Panama Canal. For months now, authorities have reduced the number of ships allowed to pass through the canal each day by about one-third. The drought, which many attribute to climate change, has resulted in more shipping backlogs.
The true impact of the March 26 tragedy in Baltimore, where a major downtown bridge collapsed due to a container ship crash, remains to be seen. Many expect the Baltimore loss to be among the largest in the history of marine insurance. The city’s port, which remains partially closed (as of the time of this writing) on account of the accident, is America’s ninth-busiest for foreign cargo and the nation’s leading handler of cars, heavy farm and construction machinery and imported sugar and gypsum. In the absence of the bridge, commercial trucks driving through Baltimore — part of the busy East Coast I-95 corridor — must use alternate routes.
Economic pressures
Compounding the challenges of marine transportation and trade are the tough conditions in today’s global economy. Overall inflation continues to be a significant concern as the price of vessel fuel and shipping containers, among other things, continues to rise. Marine insurance premiums are going up in tandem. Many large companies are increasing their retentions, while smaller companies are handling their own marine claims below certain thresholds because of retention limits. We see some organizations trying to cut costs by not disclosing the true value of goods being transported; however, if (and when) losses occur, they will find themselves with grossly insufficient insurance coverage.
Post-COVID talent shortages are still plaguing various fields that affect the marine sector. Many warehouses and shipyards are understaffed, and gaps in skilled labor for roles like forklift operators, truck drivers and logistics specialists continue to grow. Insufficient security presence — especially at warehouses, distribution centers, railyards and truck stops — is contributing to the ongoing rise of cargo theft. A report from CargoNet found a 430% year-over-year increase in documented strategic cargo theft events as of the third quarter of 2023.
The overall impact of these stormy conditions is further delays and greater risk in the transport of goods, as well as increased costs for shippers, insureds and, ultimately, consumers.
In pursuit of smoother sailing
Marine industry stakeholders are exploring various approaches to navigating this difficult operating environment. One strategy involves greater adoption of technology to promote efficiency in the face of labor shortages. Some ports are experimenting with self-driving cranes, trucks and other vehicles not requiring constant human intervention, and warehouses are implementing automation tactics to move goods faster.
A strategy we recommend for buyers and shippers of goods is to make sure strong logistics plans are in place. They should pay close attention to who they are using for freight and other arrangements throughout the supply chain; this due diligence can help in reducing unexpected expenses and keeping delays to a minimum. Extending the delivery timeline at any point in the process leads to higher costs. including possible penalties for not meeting deadlines. Doubling down on contingency plans in-house or with reliable outsourced partners can go a long way in lowering risks in the face of uncertainty.
Another area on which insureds and their underwriters should be focusing is the “control of goods” clause found in cargo policies. Under this clause, if damage occurs en route, the cargo owner decides what happens to the goods — and this often means full disposal. But oftentimes, some of the goods or their components can be salvaged or repurposed; reducing the amount of waste not only lowers the cost of the loss (and the resulting increase in premium) but also reduces its negative impact on the environment. We see a lot of damaged steel products being salvaged in this way, but many other materials are simply thrown away. It’s our belief that the control of goods clause is often used incorrectly, and we encourage underwriters to talk to their insureds about rethinking their approach to disposal of damaged cargo.
Along with our expert colleagues from Sedgwick’s global marine team, we continue to monitor trends and opportunities in the marine sector. For the latest updates, keep an eye on the Sedgwick website and our Connect 2024 thought leadership platform for more insights and ongoing developments in this space.
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Tags: boating, cargo, Claims, Geopolitical tensions, Global marine, international, Labor shortage, marine, marine and transportation, marine exposures, Marine liability, maritime, Property, Restoring property, shipping, Technology, transportation