IB Talk

Taking an in-depth look into the marine insurance market

Looking back at 2021, it’s been a challenging time in marine insurance with climate change’s impact and a wave of supply chain issues. In this episode, #IBTalk dives into the biggest challenges of the marine space, effective strategies to enhance risk management, and the product innovations to look forward to this year. Sponsor CNA shares success stories from customers who have faced big challenges with climate and CAT-related losses.

 

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Narrator 1: [00:00:05] Welcome to IB Talk, the leading podcast for the insurance industry across Canada brought to you by Insurance Business.

Narrator 2: [00:00:13] This episode is presented in partnership with CNA Insurance 2021, presented a multitude of challenges in Marine with climate change impacts and supply chain issues. How has CNA Insurance navigated these times and provided support to customers? To discuss this and more, we are joined by Matthew Lewis, vice president and marine manager for Canada at CNA Insurance and Mike Randall, claims specialist at CNA.

Surina: [00:00:47] Hello and welcome back to another episode of IBC Talk, the Insurance Business Canada podcast. I'm Surina Nath, news editor here at Insurance Business. And today I have the pleasure of sitting down with Matthew Lewis, Vice President and Marine Manager at CNA Canada, and Mike Randall Claim Specialist at CNA Canada to chat about the marine sector and some strategies to drive profitable growth. Matthew, Mike, thanks so much for coming on the pod today. Welcome to IBC Talk.

Matt: [00:01:17] Thank you, Surina. It's good to be here.

Mike: [00:01:19] Thank you, Surina.

Surina: [00:01:21] So, gentlemen, I was wondering if you can give our listeners a general overview of the marine space in 2021. What were some of the biggest challenges faced and how were they overcome?

Matt: [00:01:32] So I've been in the industry for over 30 years and in that time shipping, logistics and marine insurance has been mostly invisible to the consumer. Store shelves and dealer lots were full. Nobody gave much thought to the complex supply chains that made their purchases possible. This really changed in 2020 and 2021. First due to the pandemic impacting manufacturing, closing ports and dislocating vessels and containers. Secondly, we saw a massive online purchasing spree by consumers, resulting in far more demand than the available supply for vessels, containers and port space. And then whilst the ports were so congested, vessels and containers were in short supply and everything was running at maximum speed and capacity and subsequently they were well documented accidents such as the ever given that got stuck in this Suez Canal. The one apus container ship losing containers overboard and the resultant general average losses. And more recently, the Zim Kingston off the coast of B.C., where which was one of the many container ships that were idling offshore due to the port congestion waiting for a space. And as a result, they got caught in a storm. They lost containers overboard. And there was a subsequent fire on the vessel. And then this was all capped off in Canada by the storms and flooding in British Columbia's Fraser Valley, effectively cutting off the west coast of Canada and its ports. The end result of all of this is increased shipping costs, short supply for certain products and inflationary pressure in the economy. And perhaps the best example of this is the automobile sector, where we're seeing plants shut downs due to a shortage of computer chips. Marine insurers have been at the forefront of this supply chain crunch and have paid the losses that have resulted. Mike, would you like to share some examples of how some of CNA's customers have been directly impacted?

Mike: [00:03:34] Thanks, Matt. We handle claims worldwide, so the impact of the pandemic, combined with natural disasters, has created situations we have never seen. By way of example, the Port of Kolkata was essentially shut down for three months. There were just no workers available to offload the cargo. It is a large port that serves arguably the world's second largest market for food India. If you're shipping grain to Nepal, the only way there is through India and Kolkata and Canada exports massive amounts of grain. We were ensuring many containers of grain that arrived at Port Kolkata just as it was shutting down. They sat there in 40 degrees Celsius temperatures for three months, just as operations were getting underway. Kolkata was then hit by the largest cyclone they have seen in many years, which caused massive flooding and impacted what was already a less than robust supply chain infrastructure. The end of that very long and sad story was the containers of what were by then, 20,000 kilo loaves of mouldy bread started showing up in Nepal almost a year after they were shipped. Noted that Nepal is a place that suffers from food anxiety as it is, which is why they have to import grain from halfway around the world. We've also had clients who had cargo and containers lost overboard. They had their claims paid quickly. I know that because I'm the one that paid them. But they still struggle to stay afloat as the wait time for the delivery of replacement products was double or triple what they would usually expect. And they just had nothing to put on the shelves or to feed their production lines.

Matt: [00:05:02] Thanks, Mike. I believe we're also seeing the impacts of claims inflation as well.

Mike: [00:05:08] Yes, Matt, we certainly are. The cost of shipping a 40 foot container from Asia to Canada has more than quadrupled over the past two years, as marine cargo policies tend to pay out on a CIF plus X percent basis the F being freight. We're starting to see claims where the freight costs were more than the cost of the product. Note of the uplift applies to the freight costs as well. The severity, i.e. the average amount of a claim has increased significantly. Another example would be due to the floods in B.C. and the subsequent closure of most of the road and rail links, which created a situation where we had clients paying $30,000 to have a single container hauled from British Columbia to either Ontario or Quebec. And that's on top of ocean freight costs of over 20,000. We do have a consequential loss. Add on to our Marine cargo policy, which was well used as a result, clients in the past who are very aggressive in mitigating their losses have in some instances been unable to do so. There have been various reasons for that, amongst them being the lack of available labour and at times the absence of interest from sellers in clearly salvageable products.

Matt: [00:06:16] So I think it's fair to say that our work is far more visible than than ever before. So while Marine insurance does not normally cover business interruption or losses due to delay or loss of market. There are some exceptions. For instance, most marine insurers will provide cover for deterioration to perishable products. CNA's policy can also provide some cover for consequential losses resulting from the delay and for the costs and expenses of rerouting cargo impacted by catastrophe losses, such as the floods in B.C. And I suspect these kinds of coverage extensions will be increasingly important to customers as these types of losses seem set to continue.

Surina: [00:06:57] I was wondering what were some strategies that were most effective to really enhance risk management in this sector?

Matt: [00:07:06] Yeah, it's a big topic. And when we talk about risk management, the temptation is to look at specifics such as a particular theft, risk or warehouse exposure. It's true that excellent work happens at this level, and we have our own in-house risk control consultants that provide such services free to our policyholders. We also use third party surveyors to assess the condition and value of vessels that we insure. But the real changes I'm seeing in the marine insurance space or at the portfolio management level risk appetite has been brought into sharp focus in many marine insurance operations. Climate change is definitely driving a need to take catastrophe exposures seriously and for companies to manage their aggregations. CNA pays very close attention to warehouse exposures, particularly relating to fire and flood. And if our risk is in an unprotected location where there are no fire hydrants, no nearby full time fire station, we consider this to be a high risk for a stock location. Similarly, if it's in a one in 50 flood zone, we would limit the capacity that we can put up or the limit we can provide on the policy, and we would charge premiums accordingly. But at the same time, rather than just looking at the the limit in the premium, we would raise these concerns with the broker. Perhaps the insured is leasing the location or perhaps they have other, less risky options for how they store their cargo. Certain cargo types are also carefully reviewed, with underwriting strategies developed to account for potentially large losses. A good example of this was earlier this month. The Felicity Ace car carrier caught fire and subsequently sank with 4000 luxury automobiles on board. Some estimates put the cargo loss at around 500 million USD, which doesn't include the vessel value as well. Unfortunately, this is just the latest in a string of significant losses for auto manufacturers in the delivery of their products to market. A particular challenge of reinsurance is that you don't always know where your cargo is at any given time. This is because it's continuously moving. There are new technologies coming with smart containers and and other GPS tracking devices that do provide some solutions to this. And I expect in the next ten years we will have real time data at our fingertips. And then when we look at risk management, we also have to look at the wider questions of risk management for the business. ESG or environmental, social and governance risk are increasingly at the forefront of decision making. Not ensuring shipments of coal is the obvious example, but climate impact on a broader basis is now very much a part of marine insurance. For instance, there's a new, new initiative backed by the International Maritime Organization and the International Union of Marine Insurers for vessel insurers to collect data and report on the carbon emissions of their whole fleets that they insure. There's also considerable amount of risk management that takes place after a loss occurs, both to reduce the impact of the loss on the individual insured, but also to learn the lessons from the claim to help reduce or prevent further losses. Mike, perhaps you could comment further on this.

Mike: [00:10:32] Thanks, Matt. A recent claims challenge is a marked increase in clients not having the means to effect proper risk management due to pandemic related issues and relying more on their insurance policy to make up for losses that would most likely have been either averted or minimised in the before times. That's comment about this being a massive topic is not overstated. The problem from a claims perspective is that if we're the ones talking about risk management, it's sometimes already too late for the particular shipment in question. The most we can do in those situations is to advise underwriters and work with them to provide information they can share with the broker, who in turn can work with the insurer to minimise the risk on future shipments. Whenever we can help affect risk management after a loss occurs, we work closely with whomever we need to to get the result we believe everyone wants, which is to reduce the impact of the loss on the insured while getting the claim resolved in a timely manner as possible.

Matt: [00:11:26] So in summary, a lot more attention is being paid both to risk management at the individual claim level, but also to portfolio aggregations, risk appetite and exposures to catastrophe losses and climate losses.

Surina: [00:11:41] And that is all extremely valuable advice. And so I was wondering if you can speak to the need of extended coverage for these clients and how that demand can really be met by the insurance industry?

Matt: [00:11:54] Yes, traditionally, cargo insurance develops very slowly. For instance, the underlying Marine Insurance Act dates back to 1906 and was only updated in 1993. But insurers do react to major events. For instance, in 2017, we had the Hanjin shipping company, the seventh largest container shipping line at the time declared bankrupt and as a result, that stranded cargo on its ships all over the world. And since then, most cargo insurance policies have adopted coverage to pay costs and expenses incurred by individual insureds in forwarding to destination any cargo impacted by such insolvency or financial default of shipping owners, charterers or managers of vessels. And as I look at the last couple of years and the current supply chain issues that have challenged cargo owners like never before, and not all of these challenges have been met by their insurance policies. The exclusion for delay is an example. Normal delays in transit are considered by insurers to be part of the normal business of transportation, something that can be expected to occur from time to time and should be allowed for. And as such, the exclusion makes sense for at least two insurers. However, the kinds of delays we've witnessed in the last 12 months, you could argue, could not be considered predictable. Mike, perhaps you could illustrate this with the timeline we're witnessing for cargo still not delivered or unloaded from the Zim Kingston.

Narrator 1: [00:13:33] Sure can, Matt, first a bit of background. The Zim Kingston is a medium sized container ship carrying approximately 4400 containers. It was caught in the storm that all the other vessels in the area managed to avoid and sustained damage to the container stack. Several hundred containers were lost overboard. Others caught fire. Hundreds of other containers sustained significant damage due to firefighting efforts where in millions of gallons of saltwater were sprayed on and into the ship. The date of loss was October 24th, 2021. Most of the cargo was destined for Canadian consignees and much of it was retail product to be sold over the holiday season. A handful of the obviously damaged containers were unloaded in the namo at the end of December. The obviously undamaged containers were eventually unloaded in Vancouver at the end of January. Port authorities in Vancouver declined to allow the offloading of 254 containers, deeming them unsafe. The Zim Kingston then left Vancouver with those 254 containers still on board and went back to Hong Kong. The vessel then left Hong Kong at the beginning of March. Heading back to Vancouver, some of the 254 containers are still on board. Zim is apparently hopeful that port authorities in Vancouver will now allow them to be offloaded when the ship is scheduled to arrive near the end of March. Shortly after the ship left Hong Kong, however, some of Zim clients were contacted by them using a do not reply email address and advised that their cargo had been removed from the ship and left behind in Hong Kong for, quote, further inspection and or rework, close quote. That correspondence invited cargo owners to contact Zim to arrange for joint inspection of the cargo and provide a generic customer service. Email Addresses Rzim's Montreal and Vancouver offices as points of contact. Keep in mind that the containers were originally loaded loaded onto the Zim Kingston on or about September 16th, 2021. So most of the cargo left factories at some point in July or August having been ordered well before then. So we have clients who placed orders up to a year ago who still do not know when it will be delivered. And taking into account the extraordinary delays and challenges in communicating with Zim, we've no way of knowing if it is damaged. We are anticipating at least some of it will be. The condition of some of the cargo that has been delivered has been such that it is unrecognizable as anything other than wet, moldy rubble.

Matt: [00:15:57] So, yes, my my personal view is that there comes a point where delay becomes a frustration of the voyage. And I think there is demand that marine insurers find a way to address this. Some policies like CNAs already provide some cover, but I think we will see more developments in this area. And it's quite similar to to other areas which traditionally weren't insured under marine policies like Marine cyber losses. And we're now starting to see some specialist products for those coverages as well. So I think brokers and insurers will demand broader cover. Many have been hit with unexpected delays during the last 12 months, and I would advise brokers to check their clients policy wordings. If there are no extensions for consequential losses resulting from delay or for additional expenses to pay for rerouting or forwarding cargo to a destination following an insolvency, a flood or windstorm or other large loss event. They should shop around because these extensions are increasingly available, albeit some with sub limits, and they can really help a client when the worst happens.

Surina: [00:17:09] Absolutely. And delays are certainly a huge pain point. But I was also curious to some examples of success stories over the last couple of years and the product innovation that might have been sparked learning from those events.

Matt: [00:17:23] Yes. Thank you, Surina, Mike, I think you are probably best placed to take this one.

Mike: [00:17:28] Thanks, Matt and Surina, every claim paid for us is a success story. You cannot succeed in the career Marine claims if you do not thrive on challenges. And there's never a shortage of those at the best of times. And the last couple of years has not been the best of times. We cannot, of course, share information that would identify specific claim or client, but we can certainly demonstrate areas where the challenges posed have been well met. In the winter of 2021, there were three major vessel incidents where in thousands of containers were lost overboard whilst in transit across the Pacific Ocean. We had claims of significant quantum on each incident and for each one of those we have examples of our insureds being paid within 48 hours of the notice of loss being provided to CNA. That was pretty satisfying. We have not historically contracted our claims out, i.e. we do not appoint IA's on cargo claims and only appoint surveyors where required. The rationale there is that we can often get a claim resolved quickly without having a vendor involved and getting claims paid swiftly is what our insurers care about the most. Pandemic related issues have provided us with the opportunity to further refine that approach, as we've had many situations over the last couple of years where the damaged cargo was simply unavailable to be inspected in person. But that can't stop the claims process. So we found other ways to proceed with resolving claims where we normally would have engaged the surveyor but could not. Another area of improvement is that payments get out the door even quicker than they did before the pandemic made the whole notion of issuing and sending cheques somewhat obsolete. And. Whereas, we have always provided clients with the option to receive funds electronically, we now pay most of our claims in this manner that required an entire rework of systems and processes involving several departments. And it was pretty impressive watching just how well everyone worked together, put all that in place. It was not a simple matter.

Surina: [00:19:18] Absolutely. Thanks so much, Mike. And I was wondering, looking ahead, Matthew, do you have any anticipated challenges that may arise?

Matt: [00:19:26] Yes. I mean, this year, it's a little hard to predict at the moment. Obviously, we're dealing with the invasion of Ukraine by Russia, and this is really dominated marine insurance concerns over the last few weeks. It's really hard to think beyond this current war at the present time. Marine Insurance is a global business and subject to global sanctions and restrictions. And currently all marine insurers are navigating sanctions, clearance and coverage for cargo that is stuck in transit either en route to or from Russia, Belarus and Ukraine. We're also going to see demand to ensure humanitarian aid shipments to Ukraine and no doubt surrounding countries as well as they assist with those fleeing the war zone. And then, of course, we hope there will soon be a rebuilding phase that reinsurers will be involved in as well. So aside from the war and the above mentioned supply chain issues, driving coverage changes, I think we will continue to see increased use of data and analytics to support underwriting decisions. Increasingly, insurers are tempted by technology companies solutions that allow vessel and cargo tracking. And there are developments on the horizon for smart containers that can provide real time data on positioning, temperature and shock clouds within the container. In time, these advances, I think, will allow insurers to provide more products specifically tailored to high value or highly sensitive cargoes. And we saw the first examples of this applied to COVID 19 vaccine shipments and their insurance, for example, where real time monitoring of very low temperatures was important to cargo integrity and hence also to whether a loss is being triggered.

Surina: [00:21:12] And Matthew, for those who are interested to get into the marine space, what are some things that should be kept top of mind?

Matt: [00:21:20] Yes, we work in a very collaborative market and I think reinsurance is one of those specialist areas where, you know, people generally know each other and enjoy working in the space. I think we're very fortunate in Canada we have two organizations that are devoted to fostering such collaborative collaboration through education and sharing of discussions on matters of marine insurance. And I think for anybody that's interested in the area, these are good resources to sort of find out some more about the industry, make some contacts and maybe join some of the seminars that are provided. And those organizations would be the Canadian Board of Marine Underwriters. And the Marine Insurance Association of British Columbia. And basically, they're both discussion forums and education, providing communities that can really help people get a greater insight into the business.

Surina: [00:22:23] Fantastic. Thank you so much for that, Matthew. Mike, it's been such a pleasure getting to chat with you today and hearing your views about the marine sector. Thanks for coming on the podcast today.

Matt: [00:22:36] Thank you, Surina.

Mike: [00:22:38] Thank you, Surina.

Surina: [00:22:40] And that wraps up another episode of IBC Talk. Thanks to our listeners for tuning in. I'm Surina Nath, news editor at Insurance Business. Until next time.

Narrator 2: [00:22:51] Thank you for listening to this episode of IBC talk. For more from Matthew, Mike and the team at CNA, visit them at cnacanada.ca that's cnacanada.ca for more. Thank you for listening to IB talk for the latest episodes be sure to follow us on SoundCloud, Stitcher and Apple Podcasts.