Ambitious targets mean more exposure for companies
Decarbonization is the single most important challenge facing the global shipping industry in the next few decades, as companies adopt net-zero emissions targets by 2050. The transition to cleaner Energy sources open companies to many exposures that must be covered by the insurance industry.
According to Captain Rahul Khanna (pictured), global head of marine consulting at Allianz Global Corporate & Specialty (AGCS).
“There is a large amount of investment and modern technical development required to achieve the targets set by the IMO (International Maritime Organization),” he said in an interview with Insurance Business.
The price tag for the transition from carbon-based shipping is about $1.4 trillion, according to the Global Maritime Forum. Shipping contributes nearly 3% of global greenhouse gas emissions each year.
The IMO’s strategy is to reduce the carbon intensity of international shipping by 40% by 2030. But Khanna said individual organizations are setting more ambitious targets.
“Many ship owners have adopted themselves more stringent targets to be net-zero by 2050,” Khanna said. “That means we have to literally change the way we operate ships and design ships. We have to change how we train people and how we build the infrastructure around these ships.
“So, we are looking at a lot of changes in the industry. And any kind of change, in the beginning at least, carries a high risk because we do not understand the short-term and even the long-term risks of these changes.
How to decarbonize the shipping industry?
AGCS has just released its annual safety and shipping review, which outlines losses and trends in the maritime industry. This year’s report again highlights the risks posed by decarbonization efforts around the world.
According to AGCS, shipping companies and cargo operators are beginning to switch to vessels powered by liquefied natural gas and are experimenting with alternative fuels such as biofuels, methanol, ammonia, and hydrogen.
Other green technologies being adapted by the industry include solar and battery-powered all-electric vessels, wind-assisted propulsion systems, more efficient propellers, and bulbous bow designs.
The transition will take decades to complete, in the meantime, shipping companies will likely use a mix of fuels, posing challenges for ship owners, operators and ports.
What are the risks associated with decarbonization?
While the shipping industry has yet to see any major gains from decarbonization efforts, AGCS anticipates many issues that may arise as alternative technologies and fuels are rolled out to scale.
These innovations could speed up carbon transfer efforts but also expose shipping companies to risks, according to Khanna.
For one, companies must have well-trained, well-qualified crews operating new machines and equipment to prevent accidents.
“It is very important that the industry takes the time to understand the risks before we start using new technologies,” Khanna said. “Training is an important part of the transition, and we need crews that can keep up to speed with the changes that are coming.”
Decarbonization will also accelerate the trend for larger ships, AGCS said in its report. These ships already make up an outsized proportion of the container trade worldwide; approximately 65% of fleet growth in the next few years is expected to be centered on vessels larger than 15,000 teu (twenty equipment units, or twenty-foot containers) .
Larger ships can transport goods more efficiently, but they also have a greater risk of having more interests involved in an incident, which means potentially greater losses. The proliferation of larger vessels also leads to higher accumulation and exposure of container cargo.
In addition, the cost of salvage for large container ships is extremely high, AGCS says, with a limited number of ports and shipyards capable of servicing and repairing such ships.
Finally, alternative fuels such as hydrogen and ammonia are difficult to transport and handle, increasing the risk to ship owners.
What is the role of brokers in supporting the decarbonization of the shipping industry?
Collaboration is essential to mitigate carbon transfer risks, according to AGCS. Companies and insurers should work together and exchange information on the latest innovations and alternative technologies, and the risks they pose.
Brokers are a critical part of this information chain, Khanna emphasized.
“Insurance brokers are important because they play an important role in getting information from clients to insurers, and vice versa,” he said. “An insurer can price a risk if they fully understand its complexities. Therefore, the flow of information between the insurer and the client must be very good.
Khanna urged brokers and agents to be transparent about their clients’ decarbonization efforts.
“We understand that these are new technologies and new methods, and that there are some variables where we may not have a full explanation,” he said. “But as long as there is transparency and a flow of accurate information between the insurer and the client, there can be many partnerships.”
Like their clients, brokers will also be pushed to innovate insurance solutions for the new risks that come from the decarbonization effort.
“Brokers are in a unique position because they can bring the industry together to talk and create tailored solutions,” says Khanna.
What are your views on the decarbonization of the global shipping industry and the risks associated with the transition? Tell us in the comments below.
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