Marine market report
2023 in review
Peaks, plateaus, or troughs: what lies on the horizon for the marine insurance market?
The Only Way is Up, a 1988 single by Yazz [and the Plastic Population], spent five weeks at number one in the UK charts. Perhaps an appropriate anthem for the marine insurance market, following more than 26 successive quarters of premium increases. (Apologies, as for many readers of this report, The Only Way is Up will be in their heads for the rest of the day).
Is up the only way for 2024, however? The cost of capital to include reinsurance costs remains in the cross hairs, a scenario that we have previously dubbed ‘the reinsurance tail wagging the insurance dog’. The 2023/2024 reinsurance market renewal season appears to be, as described by one observer, an “orderly” renewal, with pricing remaining broadly flat. Coupled with remedial action in the direct market and claims trends falling within estimates, the only possible hiccup appears to be that of economic and social inflation.
We would arguably see this baked into underwriter model pricing already, and although the market has attracted some new capital, since capacity is currently under the microscope market-wide, competition around pricing is unlikely.
The corollary of over 26 quarters of successive premium increases portrays the financial strength of the insurance market currently. As a result, new entrants into the market have enjoyed a buoyant atmosphere, with some longer-standing insurers having taken the opportunity to bolster reserves - a case of ‘mending the roof whilst the sun is shining’. The insurance market is now stronger, better capitalised, and more able to manage catastrophes such as climate change-related extreme weather events and human conflicts in regions like Ukraine and the Middle East.
Lloyd’s reported an 85% combined ratio for the first half of 2023, allied to 22% top line growth – a result driven by significantly lower major claims. Standard and Poors (S&P), on 13 December 2023, announced the upgrading of the financial strength rating (FSR) of Lloyd’s from A+ to AA- with a stable outlook, the highest rating the marketplace has ever received. This follows AM Best upgrading its outlook on Lloyd’s from stable to positive in July of the same year.
A raincloud now sits above the market as a result of the current outlook, with stable pricing causing a knock-on effect on insurance participant share prices. Allied to the Federal Reserve in the US signalling unchanged interest rates, but with a potential rate cut ahead, that in itself makes the insurance market slightly less attractive.
With share prices being a function of dividend and potential earnings, any perceived stagnation, or worse, affects future prospects and may result in some noticeable share price decreases for major insurers and brokers.
What may be great for one party, is a problem for a counter-party
All the barometers in the marine market microcosm show that hull insurance continues to shed its Decile 10 reputation (which it had for over a decade prior to 2017). But what is good news for the underwriters, is bad news for the salvors. The International Salvage Union (ISU) stated in its salvage industry statistics for 2022, (reported in 2023) that the frequency of loss was down, thereby making the complex cases more impactful.
Gross revenue for ISU members in 2022 reached USD241m, down from USD391m the previous year. There were 149 services provided in 2022, down from 189 in 2021, and wreck removal income was USD55m from 32 services, down from USD108m from 56 services in 2021. Notably, Lloyd’s Open Form (LOF) cases were numbered at just 26 for ISU members, generating income of USD66m.
President of the ISU, Captain Nicholas Sloane reported that 2022 ISU statistics show a 38% decrease in member income compared to 2022, in addition to wreck removal income nearly halving. The above figures do not include non-ISU member revenue and are therefore, only a partial view of whole salvage landscape. As these figures provide the only formal measure of the marine salvage industry, they alone spell bad news, yet the future potential for reduced investment in this sector as a result of falling income, could turn into a much larger problem in the long-term.
Due to the basis of salvage remuneration, the salvage industry is starved of investment with no casualties. In the short-term, this is positive, but when catastrophic casualties do occur, the salvage industry is arguably not as well-positioned to handle the fall-out.
2023 has certainly proven that car carriers can be relied upon to provide salvors with work. The Fremantle Highway fire of July 2023 in the North Sea, with almost 3,800 cars and construction vehicles on board, is a costly reminder of complacency for hull underwriters. This vessel casualty currently tops the total loss of the US 3382-gt fishing vessel, Kodiak Enterprise (built 1977) in a fire in Tacoma, April 2023. That loss is expected to cost insurers over USD100m in total.
Chokepoints
The current drought affecting the Panama Canal reflects how climate change is altering global trade flows. The disruption management to date has so far prevented any noticeable impacts on the supply chain; however, when combined with the volatile geopolitical landscape faced by Suez currently, there are likely to be ramifications felt by both canal authorities.
The Suez Canal route was, prior to late November 2023, being employed as a short-term solution to the Panama canal’s reduced capacity. Dependent upon the embarkation and disembarkation ports, the average voyage from the east coast of the US to Asia, via the Panama Canal, takes approximately 58 days. By diverting through the Suez Canal instead of Panama, the voyage is likely to be extended to around 80 days. If required to round the Cape of Good Hope in addition to the Suez re-route, an extension of up to 88 days could also be expected.
The impact of both the Panama and Suez Canal disruption is likely to have wide ranging global consequences. Diversion away from the Red Sea adds approximately 4000 nautical miles to a voyage from Asia to Europe (approximately ten days sailing). Journeys from west to east coast ports of the US via Cape Horn could add 6-8000 nautical miles, dependent on start and finish points. The biggest impact can be felt on the transit from Asia to the Mediterranean (Genoa), where additional transit time is up to 15 days (57%) longer. This is likely to create delays and problems for Mediterranean importers and exporters.
In 2022, when Donald Rumsfeld, former United States Secretary of Defence was questioned regarding intelligence reports that failed to support his assertion on Iraq and weapons of mass destruction, he famously stated “there are known knowns, [things we know we know]. There are known unknowns [things we know that we do not know]. There are unknown unknowns [things we don’t know we don’t know]”.
To paraphrase the above in regard to the disruption of two primary world shipping chokepoints (for two very different reasons), the disruption is likely to have wide ranging ramifications to the global economy.
Known knowns
Suez Canal
We are well versed in the impacts the six-day blockage of the Suez Canal by the Ever Given in March 2021 had on the global supply chain. South Africa’s Cape of Good Hope diversion, avoiding the Suez Canal around Africa, is made regularly by VLCCs and capesize bulkers which cannot fit through the canal waterway, but is almost never used by container ships with their valuable and time-sensitive cargoes. This diversion by container ships is resulting in subsequent port delays, container shortages, container misplacement, increases in dwell time for collection of boxes, and increases in service times - each individually adding to the strain on the supply chain.
Major shipping companies have declared Force Majeure, suspending transit through the Red Sea citing safety reasons. The Japanese Ocean Network Express (ONE) ‘alliance’ has announced an emergency peak season surcharge for all container types on the Asia-Europe trade route from 1 January 2024, of USD500 per twenty-foot equivalent unit (TEU) – perhaps indicative of their view that the disruption will not be resolved any time soon, even with the presence of naval escorts. It is estimated that half of the container ship fleet that regularly transits the Red Sea and Suez Canal is currently avoiding the route due to threat of attacks. As of 25 December 2023, this equated to 286 container ships alone, with a capacity of 4.1 million TEU, that had diverted by the Cape of Good Hope. This may be an anomaly, as both Maersk and CMA CGM indicated that they were planning to gradually resume voyages through the Red Sea after receiving confirmation that US military-lead Operation Prosperity Guardian was underway, although subsequent attacks have since stalled that plan.
Operation Prosperity Guardian is a US-led military operation by a multinational coalition, under the umbrella of the Combined Maritime Forces, formed in December 2023 to respond to Houthi-led attacks on shipping vessels in the Red Sea. Together, the United Kingdom, Bahrain, Canada, France, Italy, Netherlands, Norway, Seychelles, and Spain jointly address security challenges in the southern Red Sea and the Gulf of Aden, to ensure freedom of navigation for all countries and bolster regional security.
Panama Canal
The gradually receding water line of the Panama Canal has played out like a slow-motion car crash. By October 2023, there had been on average, a 41% reduction in rainfall compared to the previous year. Likely exacerbated by the El Niño weather phenomenon, 2023 has also produced the driest year on record since 1950, leaving the Gatun Lake that feeds the canal (and approximately half of Panama’s population) with limited water. The Panama Canal Authority (ACP) said it was implementing procedures to improve water efficiency in its operations, and that studies were being undertaken to identify long-term solutions, but unfortunately the current problem appears to be increasing in severity. These conditions have forced the ACP to cut the number of daily transits, as every use of the locks loses about 50 million gallons of fresh water to the sea.
Vessels have been faced with the choice of waiting, of paying an additional toll, or diverting. An ACP advisory said that “vessels without a reservation may experience indefinite delays”. Starting on 25 November 2023, the ACP have begun offering extra transit slot auctions for vessels that have become trapped in queues, in order to accelerate their way through the canal’s locks. The ‘special’ auctions began on Saturday 25th, for a transit three days later. Some of these slots have been priced at values approaching USD4m – meaning that the auctions are attracting container ship and gas carrier owners who deem the price to be more economically viable than the continued delays.
In July 2023, the ongoing water problem was once again highlighted by the Ever Max incident. She arrived at Balboa on the Pacific side of the canal at the beginning of the week, with 14745 TEU aboard. The vessel had to offload 1400 TEU in Balboa for transshipment across the isthmus via train prior to the transit, therefore, she transited with just 13345 TEU aboard. The Panama Canal required the Ever Max to reduce its load further to meet the reduced 44-foot maximum permitted draft, which according to the ACP, is required by 70% of the ships transiting the canal. (Note: the standard operating maximum draft is 50-foot).
In many ways, draft restrictions cause more issues than the reduced number of transits. The number of transits in the last quarter of the year was reduced from around 40 a day to approximately 32 per day, with only ten transits through the larger Neopanamx locks and 22 through the older, original locks, which can only accommodate smaller ships. Following the release of the Canal’s fiscal year 2024 update in early October 2023, the number of transits was further reduced from 32 to 31. While this number may seem inconsequential, it reflects the first time the reduction was taken from the bigger Neopanamax locks - an unsuspecting yet extremely significant occurrence, as the Neopanamax locks serve the largest and most profitable ships (primarily container vessels and gas carriers).
The draft restrictions spell disaster for gas carriers, with rates being well below previous years’ transit numbers. It has been predicted that unless the situational changes drastically, the total transit number will fall even further – to a predicted 18 per day from February 2024.
To date, the container carrier sector has not been severely affected, although draft restrictions have reduced the Neopanamaxes’ carrying capacity to around 85% of normal rates. As a result, many containers are being offloaded and taken via train across the Isthmus. This knock-on effect will become more apparent if and when the number of slots at the Neopanamax locks are further reduced to only five slots per day (also predicted from February 2024).
The downturn in world economic health can be evidenced by the lack of sudden impact felt by the disruption experienced at the Panama Canal. At the start of December 2023, there were just under 100 vessels in queue for transit - only a few more than the average of the previous seven years, and greatly decreased from the more than 160 recorded in August 2023. Arguably, smaller queue numbers could be a result of alternative shipping routes, including the use of arrival ports in the US that eliminate the need to use the Panama Canal, and utilising rail and road within the US.
Known unknowns
Since the end of November 2023, container spot-rates have increased by over 30% - the increases exacerbated by a build-up in cargo ahead of China’s Lunar New Year, which falls on 10 February in 2024. Peter Sand, Chief Analyst at benchmarking and market analytics platform Xeneta stated, “depending on the scale and duration (of the Red Sea attacks), we could see ocean freight prices increase by up to 100%”.
One person’s issue is another person’s opportunity, however. It arguably could have been worse had there not been excess capacity in the current market, as it is reported that global load factors have been as low as circa 60% for most of 2023. Alphaliner reported that capacity marked as ‘inactive’ reached 315 ships as of 9 October 2023, totaling 1.18 million TEU, representing 4.3% of the total container ship fleet.
The first-half 2023 throughput figures at Rotterdam, the busiest container hub in northern Europe, were down 8.1% compared with the previous year, to 6.7 million TEU. Impacted by the decrease in imports from Asia and termination of cargo volumes to Russia, the surplus capacity is being sucked-up, with an increase in freight rates expected.
In an otherwise tepid, loss-making market, the increased demand for vessels to maintain any semblance of scheduling has increased freight rates and is now providing a sliver of profitability for container carriers. Share prices for some shipping companies have risen over the past few weeks, including the likes of NYK, MOL and K Line - all up by about 5-6% since the start of the disruption. Maersk, which was among the first lines to announce plans to divert away from the Suez Canal, has seen its share price jump by 20% at the end of 2023.
Drewry shipping consultants estimate that more than 822 ships representing about 10 million TEUs, or approximately one-third of the world’s container ship capacity, are affected by the re-routings around the Cape of Good Hope. Freight rate increases are already evident, with some container rates increasing by 100%. It is estimated that every week there is approximately 390,000 TEU (full and empty) loaded from Europe and the east coast of the US bound for Asia. The impact of diversion means that 780,000 TEU fewer containers will arrive in Asia for the beginning of the Chinese New Year. The supply chain crunch will become very much a matter of scarcity of equipment due to the increased number of boxes required to maintain shipments. There is already some clustering at ports with increased port congestion.
In short, freight rates are likely to keep increasing so long as the crisis continues, and this will eventually be priced into the commodities themselves. For the consumers, it’s unlikely to have a major impact in the near-term price, since increases in raw materials can take months or years to hit the shelves of the supermarket. “Fuel markets may hit quicker,” according to one analyst.
Unknown unknowns
Mr Rumsfeld’s “unknown unknowns” is by definition, impossible to really assess. For these to become “known”, much would depend upon the intensity and longevity of any disruption to the Suez Canal and/or the Panama Canal. Currently, there is capacity in the world fleet that is masking the true impact of the disruption.
With the Red Sea not being a major route for VLCCs and tensions not impacting the largest crude carriers, BP has introduced temporary suspension of all shipments of oil through the Red Sea. This has naturally resulted in oil price hikes, which may continue to increase, especially if disruption is prolonged and BP’s peers follow suit. Other companies that have made changes to their itineraries include Equinor, Euronav, Frontline and Yang Ming. As a result, the APC have predicted that the Panama Canal’s revenues could decline by as much as USD200m in the year that began on 1 October 2023 due to the restrictions.
The International Monetary Fund’s (IMF) PortWatch system, designed to explore how global supply chains are exposed to present and future disruptions, is labelling the Suez Canal as a “notable chokepoint” following the dramatic fall off in traffic through the Canal. In the second half of December 2023, according to IMF data, overall volume is down by a quarter. Whilst bulker and tanker transits have remained overall at similar to pre-December levels, Clarksons Research has reported that container ship transits through the Red Sea are down by 72% on average, while LPG carriers were down 60%, and car carriers down 49%, over five days from 28 December.
Iran seems to have concluded that the Houthi’s ‘experiment’ in the Red Sea has been so successful, that it bears repeating in the Mediterranean. “They shall soon await the closure of the Mediterranean Sea, [the Strait of] Gibraltar and other waterways”, Brigadier General Mohammad Reza Naqdi (the coordinating commander of Iran’s Islamic Revolution Guard Corps) told Iranian media on December 23 2023. Whether this perceived threat is real, or whether vessels may be attacked by air or sea drones hundreds of miles from the Red Sea by Iranian-backed military remains a real risk, although ultimately, an unknown unknown.
Additionally, there could also be a knock-on effect on air cargo, as exporters and importers fearing significant transit delays turn to aircraft to get goods to market. For Egypt, impacts felt could be due to shipment diversions, loss of economic earnings, and possible increased instability to the region. How long this situation persists will ultimately drive the number of unknown unknowns to manifest.
What the disruption has brought into sharp focus once again is how geopolitical tensions and climate impacts can disrupt global supply chains quite monumentally. The pressing need for shippers to build and implement risk management capabilities to improve response and resiliency has also been increased in light of such exceptional events. These latest matters may well result in more companies considering ‘near-shoring’ methods to reduce links in the supply chain, and to help mitigate that risk.
Shipowners are faced with the challenge of renewing their fleets yet struggle with a lack of clarity regarding alternative fuels, green technology, and regulatory regimes. This also poses a challenge for port terminals making vital investment decisions. Add to this already heady cocktail the restricted usage of the canals, combined with previous over-supply of new tonnage, and the unknown unknown has resulted in a reduction in the purchase of new buildings (although there has been some evidence of record new building orders recently placed).
According to the Baltic and International Maritime Council (BIMCO), the container fleet has reached its highest average age since 2010, now having an average age of 14.2 years, with nearly 70% of containerships over 10 years old. This 14.2 years average age makes container ships the most aged fleet, when compared to an average age of 11.9 years for bulk carriers and 12.8 years for tankers.
A further unknown unknown is the ongoing threat of a China-Taiwan dispute. In 2021, China enacted the Marine Transport Safety Legislation (MTSL), a law requiring foreign vessels, both military and commercial, to submit to Chinese supervision in “Chinese territorial waters”. Vessels that “endanger the maritime traffic safety of China” will be required to report their name, call sign, current position and next port of call and estimated time of arrival. The name of shipborne dangerous goods and cargo deadweight will also be required.
Under the auspice of safety legislation, this appears to be a ‘sea grab’ as “Chinese territorial waters”, as claimed by the People’s Republic of China, includes most of the South China Sea, including Taiwanese straits. This extends far beyond the United Nations Convention on the Law of the Sea (UNCLOS) definition of territorial seas. Said definition being a belt of coastal water, extending at most, 12 nautical miles from the baseline (usually the mean low-water mark) of a coastal state.
With already heightened tensions in this region, there is a concern that firmer enforcement could spill into conflict.
Like London buses (which come along all at once), another problem emerges
We can see from 2022 emissions data provided by Hecla Emissions Management (a company founded by Wilhelm Ship Management and Affinity Shipping), that operators in European Union (EU) waters will be hit with a EUR3.1bn bill in 2024. As the shipping industry will be included in the Emissions Trading System (ETS) in 2024, this bill is estimated to rise to EUR8.4bn in 2026 thanks to regulations and fines. In its Review of Maritime Transport 2023 report, the United Nations Conference on Trade and Development (UNCTAD) stated that an additional USD8bn to USD28bn will be required annually to decarbonise ships by 2050, and even more substantial investments, ranging from USD28bn to USD90bn annually, will be needed to develop infrastructure for 100% carbon-neutral fuels by 2050. Full decarbonisation could elevate annual fuel costs by 70% to 100%, potentially affecting small island developing states (SIDS) and least developed countries (LDCs) that heavily rely on maritime transport.
As it currently stands, there is a two-speed regulatory race towards decarbonisation. The EU, running with the implementation of the ETS, appears to have taken the moral high ground by already imposing regulations. Today, the EU accounts for approximately 15% of world trade, but is miles ahead of the International Maritime Organisation (IMO) in ambitious goals. The IMO is somewhat handicapped insofar as the pace of decarbonisation is largely dictated by the pace of its slowest member. Even the target of 50% reduction of net carbon emissions by 2050 was challenged by China, who demanded the date be moved forward to 2060. Thus, we have a proposed regional solution to a global problem. To ensure an equitable transition, UNCTAD has called for a universal regulatory framework applicable to all ships, irrespective of their registration flags, ownership, or operational areas, thereby avoiding that two-speed decarbonisation process and maintaining a level playing field. If the standard becomes the IMO position, that would ultimately be unpalatable to too many interests.
With effect from January 1 2024, the ETS covers CO2 emissions from ships of 5,000 gt and above, calling at EU ports, regardless of flag. Ships engaged in voyages between two EU ports, and voyages between the EU and a third country, will be covered by the ETS. BIMCO’s Documentary Committee has adopted a new Emission Trading Scheme Allowances Clause for BIMCO’s ship management agreement, SHIPMAN, and three ETS clauses for Voyage Charter Parties. The clauses aim to facilitate collaboration and provide clarity and certainty between parties as the new regulations come into force. There will no doubt be an increase in disputes between owners and managers, and between managers and charterers. BIMCO’s new ETS clauses have been developed for use with any applicable emission scheme, including but not limited to, the EU ETS in particular, to future proof the clause which may then be used with other schemes outside the EU.
The diversions caused by the Suez and Panama Canal restrictions may well be problematic. If the Cape transits persist well into 2024, then shipping emissions in the EU will likely rise in 2024. The shipping lines will have no choice but to pay more carbon tax, however given the current freight rate increases, this is unlikely to cause many problems. For some European governments on the other hand, this will present a political pain point in relation to environmental agendas, as the focus here is on the emissions themselves, and not the revenue such emissions generate.
Lest we forget
Ukraine
The previous front-page headlines appear to be consigned to inner pages of the virtual newspapers due to recent Gaza and Israel conflict, and perhaps reporting fatigue. Both conflicts are equally distressing, and we can only hope that peaceful resolutions can be achieved, and hostilities cease, no matter how long a road that may seem currently.
Since the repatriation of most vessels detained following the Russian incursion, shipping within the Black Sea and Sea of Azov has enjoyed a much lower profile. A salient reminder of the conflict though, it was reported by Reuters on 28 December 2024 that a Panama-flagged bulk carrier, The Vyssos, heading to the river Danube port to load grain, hit a Russian mine in the Black Sea. Two crew members were injured, with no fatalities recorded. Increased attacks on shipping and port infrastructure will no doubt be a constant reminder of the political dislocation du jour and its impact on shipping.
Sanctions
The strong warnings issued by the US Office of Foreign Asset Control (OFAC), a division of the US Department of Treasury, were coupled with the sanctioning of more companies that had failed to ensure oil carried by its ships was compliant with the USD60-a-barrel Russian oil price cap (according to the OFAC). Letters from the US Treasury were sent to approximately 30 firms, controlling around 100 oil tankers. A copy of one of the letters asked for wide-ranging information and documentation about the shipments and the entities involved in them. In addition, it threatened prison if the recipients did not comply in full.
In late 2023, Bloomberg reported that the number of Greek-owned tankers undertaking the journey to Russia was estimated to be down by a quarter in November, when compared to the previous month. It further shared that the number was down a monumental 60% from June of the same year, adding that a rapid fall of this level could ultimately disrupt the flow of Russia’s refined fuels.
As we reported in July 2023, the global insurance market continues to be de facto one of the policemen of sanctions. This places pressure on the International Group of P&I Clubs more than on property damage underwriters. A vessel can trade without property insurance however, it cannot trade (or finds it incredibly difficult to) with no pollution or removal of wreck coverage. Through the doctrine of strict liability, whereby the polluter pays, pollution from a vessel aground or as a result of ship to ship (STS) transfer, means that with no protection & indemnity (P&I) cover, coastal states could be left with no party to hold liable and ultimately, no recourse against the shipowner or an insurer in the case of an oil pollution incident.
An increasing proportion of Russian crude oil has been carried by the ‘shadow fleet’, with no financial connection to EU or G7 countries. A known shadow-fleet oil tanker, Liberty, a 23-year-old Cameroon-flagged vessel that had previously falsified its location to avoid detection on digital ship-tracking systems, ran aground on 3 December 2024 near Singapore. This event follows the explosion of the tanker Pablo in May 2023, off the coast of Malaysia (fortunately not fully laden). These elderly, and likely uninsured vessels, provide a stark reminder of the environmental risks that such vessels pose.
In December 2023, Jonathan Saul of Reuters reported that the IMO had adopted a resolution for the new year, targeting illicit shipping practices. This resolution called upon flag states to “adhere to measures which lawfully prohibit or regulate” STS transfers. There are approximately 11,500 STS transfers of clean and dirty oil products every year, at 250 locations in 85 countries around the world - two-thirds of them occurring in port, according to SafeSTS. The resolution also recommended that port states, when they become aware of any ships intentionally taking measures to avoid detection, such as switching off their tracking responders or concealing their actual identity, “should subject such ships to enhanced inspections”.
Perhaps the increased sanction requirements are starting to bite back? Perhaps it’s another unknown unknown.
2024
