How might the new IMO 2020 fuel rules impact shipping firms' exposures?

How might the new IMO 2020 fuel rules impact shipping firms' exposures? | Insurance Business

How might the new IMO 2020 fuel rules impact shipping firms

The global maritime industry is heading full sail towards a new 0.5% global sulphur cap on fuel content, which will be imposed by the International Maritime Organization (IMO) on January 01, 2020. From that date onwards, shipowners and charterers around the world can only legally take on bunkers with a maximum sulphur content of 0.5%, down from the current level of 3.5%. If they’re found in breach of the IMO’s new regulation, they will face penalties and their vessels will be declared unseaworthy and therefore uninsurable.

There’s no silver bullet for how shipowners and charterers can become compliant with the IMO’s 0.5% sulphur cap regulation. The most straightforward options would be to switch to using low-sulphur marine gas oil or ultra-low sulphur fuel oil (ULSFO) of 0.1% maximum sulphur content, which is currently required in designated Emission Control Areas (ECA) like the coastal waters in North America.

“One of the key questions around the IMO 2020 sulphur cap regulation is whether refineries will be able to meet demand,” said Jorge Pecci, marine practice head at RSG Underwriting Managers (RSGUM). “Are there enough refineries around the world to supply these low-sulphur compliant fuels for vessels? Like the shipping industry, the refineries have known this regulation is coming since 2008. They’ve been working on a solution, but there’s definitely a question mark around availability, especially in less-developed countries.”

Another challenge for vessels currently operating on fuel with a 3.5% sulphur content is that they’re going to have to clean up their tanks, pipes and pumps before making a full transition towards 2020 compliant fuel. This is a costly and time-consuming process, which can take about six months, and it’s something shipowners and charterers need to initiate well in advance of January 01, 2020.

Any vessel failing to comply with the IMO’s new fuel spec will face fines, and those fines will depend on the laws and requirements of each country. Some jurisdictions like Hong Kong might go so far as to place criminal charges upon the captain of a non-compliant vessel, whereas others might be much more lenient. The enforcement of the regulation is going to “vary substantially,” according to Pecci.

“The most interesting issue related to insurance is that if a vessel fails to comply with fuel specifications, that vessel may be declared unseaworthy. If a vessel is declared unseaworthy, it will have no insurance coverage,” Pecci told Insurance Business. “If, after 2020, a vessel is operating on fuel with a sulphur content over 0.5% and it suffers a problem, that vessel may not have insurance because it’s technically unseaworthy. Seaworthiness is the absolute essence of marine insurance.”

As the global marine industry makes the transition to lower-sulphur fuels, the protection and indemnity (P&I) insurance industry is waiting and watching closely, explained John Hearn, managing director at Lodestar Marine. Until the IMO’s regulation comes into effect, “we’re not really going to know what the fallout will be,” he said.

“There are a number of different reasons why there might be issues moving forwards, not least the adequate supply of compliant fuels, but also how stringently each jurisdiction will enforce the regulations,” Hearn commented. “It’s very difficult to say how the changes will impact the P&I market, especially if there are seaworthiness issues and cargo delays as a result of all of this.”

The shipping industry has been moving piecemeal towards IMO 2020 since the 1960s, according to Pecci. Despite shipping being one of the most environmentally-friendly ways to move cargo (it’s much cleaner than road or air transit), the IMO has been persistent in its efforts to reduce harmful emissions from ships.   

Pecci noted: “When people talk about the 0.5% sulphur cap coming in 2020, there’s this feeling that the industry is approaching the change all of a sudden, and that before, there weren’t any restrictions at all. That’s simply not true. There’s been a 3.5% sulphur cap since 2005 and the industry has been talking about the 0.5% cap for a long, long time.”