By: Hollard Marine
Sea ports are exposed to a wide range of ever-changing risks. The catastrophic explosion in August in Beirut, Lebanon, killed 190 people, injured about 6 500 and paralysed an already struggling economy. A massive blast in 2015 in the port of Tianjin, China, caused 173 deaths, hundreds of injuries and enormous losses for society and industry.
In the past, major explosions have devastated storage terminals and ports in Hertfordshire in the United Kingdom (2005), Chicago in the United States (1944) and Halifax in Canada (1917). Today, several major harbours around the globe have large cargo facilities co-located with assets with large insured values.
Where will disaster strike next? How can risk and future threats be identified and managed? And how can the insurance costs of such events be quantified? Will these explosions be a wake-up call to the rest of the supply chain to take dangerous goods handling more seriously, both at sea and in ports?
These were some of the questions posed in a recent webinar for South African Marine insurance brokers, addressed by international experts in strategic advisory services and marine underwriting.
“The risk landscape has evolved to include an increasing number of unforeseen man-made hazards that are proving to be as complex and costly as natural catastrophes,” said Cynthia Nanthalall, Head of Hollard Marine, which organised the event.
South African insurers have borne the brunt of the culling of underperforming portfolios by syndicate underwriters at global insurance and reinsurance market Lloyd’s two years ago – at the reinsurance treaties’ renewal this year, it was difficult to secure capacity for certain types of risks, she noted.
Major insurance challenges
Port accumulations – ever greater concentrations of goods stored in ports – and catastrophe modelling – which generates simulated events and estimates their magnitude, location and damage to calculate the amount of insured loss – are major challenges for the insurance industry, the webinar audience heard.
As container ships get bigger, the accumulation risk on large and mega vessels is top of mind for reinsurers in their exposure modelling, including in South Africa. In Durban harbour, for example, there are plans to redesign berths to be able to receive larger container vessels, said Nanthalall.
The scale of events such as the Beirut and Tianjin explosions affects international insurance markets, sometimes resulting in reduced capacity and pricing implications for the supply of reinsurance, agreed Hollard Marine’s Estelle Bond.
London-based Stephen Hudson of risk and reinsurance firm Guy Carpenter said, from the damage observed, he estimated the Beirut explosion to have been in the order of 100 tonnes TNT equivalent (a convention describing the energy released in an explosion).
“From an insurance perspective, it’s best to look at it from an observed damage, so that we can then replicate it and simulate it,” he said.
Simulations then enable experts to estimate where similar explosions may take place in future, what the exposure might be and how it can be tracked.
Tianjin and Beirut are not unique in having large cargo facilities in close proximity to other assets that could have an insurance loss, said Hudson. Of course, factors such as government regulations and mitigation measures could prevent accidents from happening, but overlaying insurance exposure against port assets is one way of assessing risk elsewhere in the world.
Constantly updated scenarios
The Beirut explosion was just another reminder of how a chain of wrong decisions and mishandling of cargo can lead to a tragic disaster, affecting entire supply chains, cities and economies, senior marine underwriter Simon Wegmann of reinsurance giant Swiss Re told the webinar audience.
“The disaster showed the possibility of such catastrophic events needs to be included in insurance and reinsurance pricing.”
An investigation following the Tianjin incident showed 10 violations by the owner of the warehouse where the blast occurred, illegal construction and operating issues, risk control failures, and violations of national or industry standards. Losses amounted to about US$3.5-billion.
Costing large catastrophic events involves various steps and data analysis, including port rankings, whether goods are stored in containers or open spaces (such as vehicles), and typical dwell time in the harbour.
Because Swiss Re has been applying sophisticated costing methods for many years, events such as the Tianjin explosion did not materially change its modelling, said Wegmann – but scenarios are constantly updated and adjusted to reality.
“New data sources such as satellite imagery help the insurance industry get a better understanding of port accumulation, but this can only work when combined with trade data.”
It is important to consider that major overseas disasters, such as the one in Tianjin, might not only affect Chinese insurers – a South African insurer might have goods insured in the Asian country and suffer losses, too.
All parties in the global supply chain should be aware of the issues around port accumulations, Wegmann concluded.