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October 10, 2013 at 09:25 PM
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.
