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Costa Concordia Salvage Highlights Higher Risks to Maritime Insurers

Ships are getting bigger and bigger. Both cruise ships and cargo ships are constantly pushing the envelope of what’s considered prudent and possible on the high seas, but some of that daring is coming home to roost for maritime insurers. As the ships grow ever larger, so do potential losses for both insurers and reinsurers—something investors might want to keep in mind.

A case in point is the wreck and subsequent salvage operation that raised the Costa Concordia from the bottom of the sea off the coast of the Italian island of Giglio. The final tally is still not in, but it’s expected to be the most expensive insured maritime loss ever for the 30 or more insurers who had a piece of the action and top $1 billion. According to Allianz, overall losses may reach up to $1.7 billion, with $900 million of that chalked up to the salvage operation.

“The issue of salvage has been highlighted by both the Costa Concordia and the [container ship] MV Rena losses, which have provided complex salvage issues in the recovery of the vessels and, in the case of the Rena, the cargo on board,” according to Jon Guy, spokesman for the International Union of Marine Insurance. “Naturally the bigger the vessels, the more difficult the salvage operation.”

A recent Lloyd’s of London report, “The Challenges and Implications of Removing Shipwrecks in the 21st Century,” detailed a number of the reasons the cost of salvage is running so high: “a massive vessel wrecked at a difficult location, rocky ground above deeper water, combined with environmental concerns leading the authorities to require a complex, heavily engineered solution.”

 “Removal of [the] wreck following a maritime casualty has become a very costly problem for liability underwriters over the last decade,” according to Guy. “The International Group of Protection & Indemnity (P&I) Clubs representing over 90% of the tonnage underwritten worldwide has taken the brunt of this. However, the impact has also been felt by commercial underwriters as reinsurers of the International Group and other P&I insurers, as they ultimately pay the lion’s share of wreck claims for the major casualties.”

The 1989 loss of the Exxon Valdez, in contrast to the Costa Concordia, only cost insurers $500 million. The third most expensive insured loss in maritime history, which Guy referred to, was the sinking of the container ship MV Rena off the New Zealand coast in 2011. That also involved a massive oil spill, and was the target of a $300 million salvage operation by owners and insurers two years after its loss as they decided to remove the ship’s accommodation block from where the hulk had come to rest on the Astrolabe Reef.

The magnitude of the Costa Concordia loss is due to the size of the ship and the potential for environmental damage—the former requiring extraordinary measures for salvage, and the latter partly because when the Costa Concordia sank in January of 2012, it did so in an environmentally sensitive area.

At more than twice the size of the Titanic, the Costa Concordia was required by Italian law to be raised and hauled away in one piece to protect the environment—something that, with a ship that size, is risky business in and of itself. There was only one option: a process known as parbuckling, which was carried out just this past September and took 19 hours.

First on the agenda was the removal of some 500,000 gallons of fuel. That was delayed, as were other stages of the salvage operation, by rough seas and bad weather—factors that can compound the costs. Then it took a long time to prepare the operation that would raise the ship from its resting place in the shallower waters off the island’s coast, and in the meantime the ship began to collapse in on itself from sheer weight—something that would have raised environmental costs dramatically had it continued.

When the salvage operation itself, finally took place, the ship was rolled over onto a false bottom that is actually a stabilizing platform. It must remain on the platform for some time, where it will be stabilized for eventual flotation and then towed to its final destination. While it’s there, strand jacks are used to tighten cables that are attached to caissons—watertight platforms—so that the ship can finally be pulled out to sea. That too will be a time-consuming process.

In the case of cargo ships, of course, the increase in vessel size means that not only are insurers dealing with hazards from large and costly salvage operations in case of trouble, but also that far more cargo is at risk of loss. In fact, Maersk has a new ship, the Triple E, which can hold 18,000 TEU (twenty-foot equivalent units, the standard measure of cargo volume—think 18,000 of the sort of 20-foot containers you see in railyards or stacked up at ports, or, if you prefer, consider that that many containers can hold 36,000 cars). There is also the complication of whether the cargo itself presents an additional hazard, and whether it can be recovered.

Guy said of the trend, “One of the additional concerns for the insurance market is the rising aggregation risks which are apparent with the new breed of large container vessels. With the new vessels able to take 18,000 TEU the value of the cargo they are potentially able to carry will increase significantly and the market needs to look at the potential exposures this creates in the case of a loss and the ability to remove the cargo from and recover the vessel.”

With 163 cargo ships currently afloat with a capacity of more than 10,000 TEU each, and 120 more on the way, including 20 Maersk Triple Es, the risks are not going away—and neither is the cost.

 

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