Cooperation needed to allay Arctic risks

Arctic Shipping, Insurance and Reinsurance, Marine Insurance — By on September 8, 2014 at 9:01 PM

DSC01847 (1)Monday 08 September 2014 – Interest in Arctic shipping is growing, although ship operators need to engage with their insurers to ensure that effective insurance cover continues to be made available, according to insurance broker Marsh. (source: Lloyd’s of London)

Commercial interest

The opening up of Arctic shipping routes is an attractive prospect for the shipping industry, offering faster and more cost effective transits between Asia, North America and Europe using routes such as the Northwest Passage and the Northern Sea Route (NSR).

Longer periods of ice free conditions brought about by climate change are making these routes a viable alternative to using the Suez and Panama canals, while discoveries of oil, gas and other commodities in Northern Russia and the Arctic are also a driver.

Tentative steps

Despite growing interest, it is still early days for these routes. The bulk carrier Nordic Orion made the first-ever successful commercial transit of the Northwest Passage in 2013, saving $80, 000 in fuel and shaving one week off the journey when compared with going via the Panama Canal.

The Northern Sea Route (NSR), which runs along the Russian Arctic coastline, offers even greater savings – two project carriers transited the NSR in 2009, saving an estimated US$300, 000 per vessel compared with the usual route through the Suez Canal. A vessel transiting from Europe to China can reduce the journey time by more than two weeks, rising to almost three weeks for ships traveling to Japan.

Ice conditions currently limit use of the Northwest Passage along the top of North America, but the NSR has seen an increase in traffic in recent years – in 2013, 71 vessels transited the NSR, up on 45 vessels in 2012, according to the Northern Sea Route Administration.

Unique risks

Arctic routes potentially offer cheaper and faster transit between Europe and Asia, but they do come with additional and often unique risks, according Marcus Baker, Chairman of Marsh’s Global Marine Practice.

“The extreme cold and ice can cause damage to vessels and engines, while the remoteness of the region would make search and rescue and salvage more difficult if a vessel were to get into trouble. There are also significant challenges around the reliability of navigational tools, global positioning systems, and the availability of accurate hydrological charts and surveys, ” says Baker.

Underwriting concerns

Insurers are already insuring vessels using Arctic routes, but underwriters do have a number of safety and navigational concerns, as well as those around wreck removal and pollution risks, according to Baker.

However, there are steps that ship operators can take to allay some of these fears. Underwriters will want to see operators have undertaken planning for Arctic conditions and that crews are appropriately trained, explains Baker.

“Risk presentation is critical. Only if shipping firms can present insurers with the information they require, and all parties concerned take a collaborative approach to calculating these risks, will insurance capacity be readily available to support the growth in Arctic navigation, ” says Baker.

Polar Code

New standards for shipping in the Arctic will also improve the operating environment in time, which should address some of the concerns underwriters, according to Baker. For example, a Polar Class of shipping introduced by the International Association of Classification Societies helps determine the suitability of vessels transiting Arctic waters, he says.

Proposals by the IMO to introduce a Polar Code, internationally binding rules for ships operating in Arctic waters, should also raise standards of navigation and safety once they are passed, according to Baker.

Ice regime

In March, Lloyd’s brought together some of the world’s leading ice experts, scientists, governments and the International Association of Classification societies to discuss the need for an ice regime top support the Polar Code. The initiative has since made good progress, according to Michael Kingston, a Partner at law firm DWF LLP, who has been working with the London market on the proposal.

“The recommendations that emanated from the discussions in March have resulted in a strong case being made for the inclusion of an ice regime in the Polar Code. Arctic States are now working hard on proposals for the next intercessional IMO meeting about the Polar Code in November, where is it hoped that some of the proposals will at least form part of the IMO guidelines, ” he explains.

Space watch

In another sign of progress a recent Sea Ice Focus Session organised by NASA at its Space Centre in Mississippi discussed upcoming satellite missions for the monitoring of ice.
According to Kingston, NASA believes that satellite data can be used with the Polar Class. A meeting of Arctic Government representatives, industry and scientists, including NASA will take place in London later in the autumn to assist in this process.

“Noting the work carried out by Lloyd’s and the London Market, NASA is hoping to achieve improvements in observations and measurements of sea ice that will contribute to safer navigation and planning of operations, ” says Kingston, who presented at the event.

Leadership position

Ship owners and operators will look to London when it comes to mitigating and transferring Arctic risk, according Baker.

“The London market is a centre of excellence for marine insurance and ship operators will look to underwriters in the city to drive the development of insurance for Arctic transits, as well as to push the insurance industry’s view on the topic on the global stage, ” he says.

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