Coronavirus Intensifies Global Shipping Risks

The global shipping industry is responsible for transporting as much as 90 percent of world trade. The number of reported total shipping losses of vessels over 100 gross tons (GT) declined in 2019 to 41 – the lowest total this century and a nearly 70 percent decline over 10 years. 

Although the number of vessel losses is at a record low, coronavirus has struck at a difficult time for the maritime industry as it implements IMO 2020 (reduction of sulphur emissions), navigates issues such as climate change, political risks and piracy, and deals with ongoing problems such as fires on board large ships. Now the sector also faces the task of operating in a very different world, with the uncertain public health and economic implications of the pandemic. While risks from perils of the sea are reduced for vessels waiting at anchorage or in lay-up, new challenges have evolved which were not present in historical situations involving global economic slowdowns.

Economic fallout

One of the biggest impacts of coronavirus on the shipping industry is likely to be the economic fallout of lockdowns and containment measures, which are disrupting production and supply chains, and damaging consumer and business confidence.

The pandemic has already started to affect maritime trade, which had already been slowing, weighed down by trade tensions and weakening economic growth. The WTO Goods Trade Barometer showed a sharp contraction in the second quarter of 2020, falling to its lowest value on record. The biggest falls were in automotive products and container shipping, reflecting weak demand for goods as well as supply-side constraints.

The first half of 2020 could see a 25 percent fall in shipping traffic, with a 10 percent drop for the year overall, according to maritime analysis firm Sea-Intelligence. Many of the world’s largest ports have reported reductions in volumes and AP Moller-Maersk, the world’s largest container shipping company, says container volumes are expected to be as much as 25 percent lower in the second quarter of 2020.

Cruise ships face increased liability

The cruise industry, which generates more than $150 billion in global economic activity and supports over one million jobs worldwide, effectively went into hibernation as a result of the pandemic. Before the outbreak, the industry had enjoyed impressive growth, with some 32 million passengers forecast to sail on cruise ships worldwide in 2020, up from 30 million in 2019.

However, large coronavirus outbreaks on board a number of cruise ships, travel restrictions, port closures and a “no-sail order” from the U.S. Centers for Disease Control (CDC) in March put the industry on hold.

Cruise operators face an uncertain future with vessels laid-up and questions over how they can operate during the pandemic. However, many cruise lines are reporting strong demand for cruises in late 2020 and into next year, and some are hoping to resume operations this summer, albeit with new safety measures and new routes.

When the cruise ship industry does return, vessels will need to operate with much more stringent levels of protections for outbreaks than in the past. In this new environment, cruise operators will face uncertain liabilities. A number of cruise lines face coronavirus-related legal action from crew, passengers and investors, while the owners of the Ruby Princess faced a criminal investigation after disembarked passengers were linked to an outbreak in Sydney, Australia.

Laid-up cruise ships present sizable risk accumulation

As of April 2020, some 95 percent of the global cruise fleet was in lay-up, with almost half in and around the Americas, according to Lloyd’s List Intelligence. Satellite imagery shows large clusters of vessels in the seas around Florida and the Caribbean, raising concerns about accumulations of risk for ship-owners and insurers alike, given the arrival of the Atlantic hurricane season. Similarly, at the end of May 2020, more than 20 cruise ships were at anchor in Manila Bay in the Philippines, ahead of the start of what is typically the most active period of the Pacific typhoon season. 

Emerging from lay-up poses another challenge for cruise operators. The monthly cost of cruise ship lay-up can be between $1-3 million, but the extent of upkeep and crewing will affect the speed with which a vessel can be brought back into service.

Floating oil storage boom brings potential exposures

As the price of oil plummeted amid growing concerns for the coronavirus economy, demand for floating storage hit record levels, causing tanker rates to hit new highs. In mid-May, there was more than 200 million barrels of oil and products on floating storage in tankers, around five percent of global carrying capacity, according to data from S&P Global Platts.

Many tankers are idling around major oil ports and terminals in the US, Europe and Africa, with potential exposures to extreme weather, piracy and political risks. Tankers are also being chartered for use as floating storage, which will need to be subject to certain maintenance and contractual requirements.

Oil products stored for long periods are at risk of degradation and cargo loss. The quality of refined products can degrade over time or spoil with bacterial contamination, while some products are known to evaporate, resulting in cargo shortfalls.

Crew welfare

Many of the 100,000 crew members that leave their ships each and every month have been unable to do so during the pandemic. Most major ports have imposed restrictions on vessels and crew — some 120 countries implemented restrictions, while 92 prohibited crew changes entirely, according to data from Inchcape Shipping Services.

Extended periods of working onboard a vessel can lead to crew fatigue, which is known to be one of the underlying causes of human error, estimated to be a contributing factor in 75-96 percent of marine incidents.

Where crew are able to leave and join vessels, ship-owners will need to ensure they take steps to avoid introducing or spreading the virus onboard. The International Maritime Organization has issued recommended protocols for crew joining or leaving a ship, ensuring safe ship crew changes and travel during the coronavirus outbreak.

Cargo damage

The coronavirus pandemic has brought about sudden changes for cargo transportation, impacting shippers, air freight and transport companies around the world. Although cargo transportation is widely recognized as an essential activity, a number of cargo handling companies shut down operations during the outbreak while ports have been operating under restrictions.

Cargo stored in high-risk areas without appropriate security controls or protective safeguards runs the risk of large losses from fire or extreme weather events, while delays may also result in cargo damage to perishable or temperature-sensitive goods. Damaged goods and containers is one of the most frequent causes of insurance industry claims in the shipping industry, accounting for more than one in five claims, according to AGCS analysis.

Captain Andrew Kinsey is senior marine risk consultant at Allianz Risk Consulting.