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Changing tides on shipbreaking and insurance?

MNK Re Insights 25th January 2022

Changing tides on shipbreaking and insurance?

A version of this article by Gray Hewer, Associate Director for Marine at MNK Re, was first published in a January edition of Insurance Day.

Hundreds of ships are recycled every year, a process that often entails significant environmental pollution and presents major health risks, indeed shipbreaking has been called the most dangerous job in the world.

Due to the economies involved and the availability of scrappage there has historically been limited scope for involvement from the insurance markets, but things seem to be changing with the opportunity to look at this market afresh.  Could we now work harness to the new environmental regulations and crucially the changing attitudes about environmental responsibility to formulate an offer which leads to better outcomes?

The opportunity certainly seems to be there. Scrappage requirements are likely to grow in the years ahead. Expert bodies have been forecasting a significant increase in shipbreaking activity over the next few years and certainly we see that from the increased volume of enquiries we are receiving.

Ships built during the maritime freight boom in the 1970s-1980s are now coming to the end of their lives, fuel inefficient vessels are finding it harder to be employed and added to this, stricter environmental regulations are making older ships increasingly uncompetitive, leaving shipowners with the risk of stranded assets.

These combined trends offer us the opportunity to think about the role insurance could play in a market where traditionally we have tended to only play a minor role.

What is likely to be major a catalyst, is the increasing amount of environmental regulation that we expect to come into force in the near future which may have a knock-on effect in changing attitudes within the industry.

The 2009 Hong Kong Convention, while yet to enter into force, aims at ensuring that ships do not pose any unnecessary risk to human health and safety or to the environment when being recycled at the end of their operational lives.  It seeks to ensure that proper inventories are undertaken of Hazardous Materials on board and requires a ship recycling plan.

A big leap forward came at the end of 2019 when India, one of the world’s five major ship recycling countries and home to the largest yard in the world, acceded to the Convention.  The impact has already taken effect as it has been reported that 84 Indian recycling yards are now being refurbished to the Hong Kong standards, with some even surpassing the Convention’s requirements.

There is also the EU Ship Recycling Regulation, that requires EU-flag vessels to be recycled in yards on an EU-approved list. However, Turkey is the primary volume ship recycling country on the EU list, and reports suggest that its yards are currently focused mostly on cruise ships.

But the game changer is how attitudes and reputational considerations, as part of the growing environmental, sustainability and governance agenda (ESG), could force the hand of sector.  More and more we see shipping companies publishing their ESG ratings and recycling practices within their annual reports. Add to this, they are also feeling the pressure from a variety of stakeholders, including from campaigns such as the Sustainable Shipping Initiative, which looks to connect shipowners to ship-recycling policy good practice.

These growing expectations to be more transparent on what they are doing around the ESG agenda are fundamentally leading to conversations about what they need to do, to put in place proper solutions.

Enforcement action is also now being taken. In February 2020, Norwegian authorities opened an investigation into Teekay Shipping Norway over Shipbreaking. The previous year, the Dutch ship owner Holland Maas Scheepvaart Beheer II BV, paid a combined settlement of €3.4 million for having sold a ship for scrapping in India.

If firms start to face some level of risk from their poor ship-recycling practices then there could be scope for the insurance industry to play a bigger role and offer new products and services.

Once the criteria have been met for the Hong Kong Convention to come into force – currently an additional 10% of the tonnage and 0.4% of the recycling volumes are needed – this would help to establish one global standard for the recycling of ships.  At this point we can clearly see a role for insurance to cover the increased costs of a higher regulated recycling yard which guarantees that the ships are scrapped according to the standards required, guaranteeing that owners have disposed of them in a responsible way.

However, the competitiveness of the sector, added to the fact that the other major scrappage centres – Pakistan, Bangladesh and China – have not yet signed up to the Convention, means that we have to consider other options and more innovative approaches to provide incentives for shipowners to look at insurance products.

At MNK Re we’ve been exploring, with a number of underwriter partners, whether we can put together a London Market based solution for ship owners facing these new expectations.  Data will play a major role to inform risk management strategies for investments, lending and risk coverage of shipowners, allowing them to meet their growing ESG responsibilities and expectations.

It is also not beyond the realms of possibility that we could create incentives to drive more responsible ship recycling practice through the market and make better financing decisions.  This depends in part on how high underwriters will estimate the risk and the level at which an insurance premium would be set, something which we are currently working through. Cover would also need to take account of changing global steel prices, which is the major factor in the recycling costs.  However, managing these kinds of uncertainties and fluctuations is something that the London Market is adept at doing if you have access to the right expertise.

The tide definitely feels like it may be turning in this market. Just as other sectors have had to change practices and find new ways of working, shipowners can no longer ignore these growing pressures. It’s time for insurers to look again at what we could offer.

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