Marine Insurance And Arctic Risk

English

The retreat of Arctic ice has opened new possibilities for tourism, resource exploration, development and marine transport. For example, over the past decade alone, cruise ship activity in Svalbard, an archipelago between mainland Norway and the North Pole, has doubled. At the same time, oil shipments from the Russian Arctic jumped from insignificance to ten million tonnes per year. “Wherever there is industrial activity, there is risk, and nowhere more so than in the Arctic,” reminds Steven Sawhill, Discipline Leader, Cold Climate Advisory Services at DNV GL – Maritime. “Imagine if an accident – be it a cruise ship or an oil tanker – occurred in polar waters,” he says.

“Marine insurers certainly acknowledge the risks, but perhaps have not fully appreciated the difficulty and costs of arranging rescue, salvage and environmental clean-up operations in these waters.” Sawhill, who has spent most of his career studying shipping in the High North, notes that in some areas, the harsh environment increases the likelihood of accidents and, given the pristine state of many of the region’s marine ecosystems, the environmental consequences of an accident could be catastrophic. “Increased shipping activity, combined with harsh weather, pervasive ice, limited hydrographical and bathymetric charting, and the scarcity of land-based emergency response infrastructure, all contribute to higher risk,” he says. “Assessing these risks properly is critical to ensuring safety and preserving the environment.”

A comprehensive study

In 2015 DNV GL was approached by the Americabased Gordon and Betty Moore Foundation with the request to prepare a study identifying mechanisms that the marine insurance and reinsurance sectors (I&RS) currently use to reduce risks to Arctic marine ecosystems and coastal communities from vessel traffic. Over the next year, DNV GL organized the study around a literature review, online questionnaires, workshops with non-governmental organizations with interests in Arctic environmental protection, and in-depth interviews with a small, targeted set of marine insurance professionals. “We soon discovered that there was very little published material on the subject, and when we began to analyse our surveys, we saw that while marine insurers understand Arctic shipping is risky, many did not feel they had sufficient information to adequately assess these risks,” says Sawhill. “Many look to regulators, class, owners and even, to a lesser degree, flag states, to assess risk. Furthermore, their exposure to Arctic risk is minimal, leading to some ambivalence among marine insurers. As one interviewee said, ‘We do not want to spook our members by being too reactionary, but neither do we want to give them a false sense of security.”

Knowledge gap

This lack of knowledge also makes it difficult for marine insurers to calculate Arctic risks and set payouts. As one insurer put it: “The amount of trade in the Arctic and the number of incidents is too low for us to get a handle on the loss severity side of the equation. We have too little experience on the cost of dealing with an incident in these waters.” Sawhill notes that this lack of experience may lead some insurers to overlook ways in which the terms of their coverage might be amended to encourage safer operations in Arctic waters. For example, the survey showed that insurers don’t consider routing as a factor in underwriting. “We do not instruct, ask or advise our insured on minimizing routing impacts,” explained one insurer. “We do not have any measures or instructions on avoiding essential marine habitat or designated areas. This is very operationally related and is not a mandatory requirement.”

At the same time, others acknowledged that if good information on such areas and best practice is readily available, it could be incorporated in the underwriting and loss prevention process. Sawhill is careful to point out that marine insurers understand that operation in polar waters represents a new risk picture and have shown a willingness to learn more, but that many don’t know where to turn. “It is in everyone’s interest that marine insurers get involved and work more closely with owners, class and relevant organizations to share knowledge,” says Sawhill. “Fortunately, marine insurers see themselves as part of the solution and are willing to take measures to improve safety – and remain competitive.”

Indeed, the marine insurance sector has not been idle. In 2012, marine insurer Lloyd’s of London commissioned a comprehensive study (“Arctic Opening: Opportunity and Risk in the High North”) that detailed the challenges of operating in the Arctic. Other reports followed, and their findings helped shape the IMO’s International Code for Ships Operating in Polar Waters (the Polar Code), which went into force on 1 January 2017. Critically, the Polar Code includes POLARIS, an operational risk assessment tool to help operators evaluate whether a ship of a given ice class can safely operate in a given ice condition.

A collaborative approach

In May 2017, the Arctic Council (made up of eight countries with interests in the Arctic) launched the “Arctic Shipping Best Practice Information Forum”. Michael Kingston, a UK-based maritime lawyer who is assisting the Arctic Council’s Shipping Expert Group in the development of the forum and represented the International Union of Marine Insurance (IUMI) at the IMO, says this work will be critical going forward. “The aim of the forum is to raise awareness of all those involved and might be potentially affected by Arctic marine operations, and to facilitate the exchange of information between the forum members,” he explains. “By bringing together all stakeholders, including marine insurers, to share information and best practices, we can take a big step toward to minimize Arctic risk.”

Kingston adds that the forum members will soon have access to a web-based knowledge-sharing portal, which will be launched in February 2018. Kingston also worked with Sawhill to analyse the Gordon and Betty Moore Foundation DNV GL report (see page 25). He notes that while its findings are useful in identifying specific knowledge and perception gaps, the report also serves as a call to action. “While directed at marine insurers, I encourage all stakeholders to review this report,” he says. “Everyone understands the opportunities of Arctic shipping and drilling, but not well enough the risks. As the report notes, the risk management resources are there – but they aren’t much good unless people use them.”

Shared responsibility

For Sawhill, minimizing risk in the Arctic cannot be achieved with the passage of some regulation, industry guideline or class notation – all industry stakeholders must play an active role. And considering the level of risk in polar waters, the alternative is almost unthinkable. “There is a tendency in our industry to wait for a disaster before making changes, then expressing dissatisfaction after the legislation comes into force,” says Sawhill. “Regulations rushed into force under these conditions do not address underlying causes but public outrage, often generated by shocking images: victims in a lifeboat, a soiled beach, an oil-covered seabird. Our goal is to encourage the industry to take a more proactive, collaborative and transparent approach to managing polar risk. After all, if the industry plans to operate in these waters, we have an obligation to show the world we can do it safely with minimal impact on the environment.”

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