Predicting the unpredictable: The analyst view on Strike & Delay during global disruption

in Marine Insurance P&I Club News 04/04/2023

When COVID hit in 2020, insurers found themselves in a new situation. “Ordinarily, the risk is on our radar,” said Nick Rowe. “In the case of the pandemic, we found ourselves insuring the impact of a risk, which had never really been contemplated on such a large scale, advising members and clients how to manage their exposure to it, and indemnifying them for their losses.”

“The whole framework that we were working with in the last 20 years or so, that’s been broken down, first economically by COVID and then geopolitically by Russia’s invasion of Ukraine,” said Columb Strack

Columb is Head of Global Cargo Risk at S&P Global Market Intelligence, which provides forward-looking actionable intelligence and risk quantification on political and security risks affecting marine and other sectors.

S&P Global uses an open-source intelligence infrastructure to undertake indicator-led forecasting. This involves collecting, structuring and analysing any information that might indicate a change in risk.

The impact of war on insurance

The war has significantly impacted shipping in both the Sea of Azov and the Black Sea, particularly at frontline ports like Kherson and Mykolaiv. According to Columb, about 60 vessels and 300 crew members have been stuck in Ukrainian ports since the start of the war.

Additionally, Columb outlines how there are potentially hundreds of mines floating freely in the Black Sea after breaking free from their anchors, which will threaten shipping in the area for years to come. Many have been discovered washed up in neighbouring countries and as far as Georgia, adding a new cause for concern for operations in the area.

Beyond initial expectations, Ukraine has so far kept Russia at bay. However, Columb explained that neither side currently has the military capability to achieve a definitive victory in the 12-month outlook.

“We’re expecting a war of attrition in the coming months with heavy losses on both sides,” he said. “That will probably get to a point where it just becomes politically unsustainable for both governments and eventually results in some sort of de facto ceasefire.”

The grain corridor initiative

The podcast guests also addressed the limited reopening of ports in Ukraine around Odesa for specific types of cargo. Primarily, these are grain and other agricultural products. However, all the vessels participating in the initiative must be screened by Russia, Ukraine and Turkey in the Bosphorus.

The initiative was extended as of 19 March. Ukraine’s infrastructure minister, Oleksandr Kubrakov, said the deal will continue for 120 days. Conversely, Russia has said the initiative will remain in place for at least another 60 days,

Columb explained that the industry doesn’t expect any severe disruption here. Much of the grain exported from there is destined for developing nations, which he believes Russia wants to keep on side or neutral.

“Secondly, if Russia attempted to stop the Ukrainian grain exports, that would invite retaliation, that would severely disrupt Russia’s exports from the Black Sea,” Columb said.

The Strike & Delay sector of NorthStandard has been monitoring the impact of the war on insurance cover and seeking to support members where possible, in line with the reinsurance market, in the grain corridor initiative.

The Middle East Gulf region

The return of military conflict to Europe was largely unexpected. However, instability has been baked into Middle Eastern operations for some time.

Primarily, there have been ongoing region-wide proxy, if not direct, hostilities between Iran on the one side and Saudi Arabia, Israel and the US on the other. The US and Israel have made it clear that they will not tolerate Tehran acquiring nuclear weapons.

While there have been incidents of vessel seizures and drone attacks, a regional war is currently unlikely, Columb explained.

Negotiations over Iranian enrichment have stalled but have not completely broken down.

“In the unlikely event that the US or Israel strikes Iranian nuclear sites, Iranian retaliation would likely be against Israel and the US military presence across the Gulf,” Columb Strack said.

However, if Iran suspected the US of seeking regime change, a much more serious response would likely occur.

In that extreme scenario, “Iran would likely target commercial assets and critical infrastructure in Saudi Arabia, the UAE and Bahrain, including major structural damage to ports and commercial vessels. Sea mines would probably also be deployed in the Strait of Hormuz to block commercial traffic,” Columb Strack added.

How this would impact insurance depends on how aware members are before and throughout a potential crisis. Developments in these zones are more closely monitored, enabling insurers to respond dynamically. Closer observation means the ability to deliver new insurance terms and solutions.

“If the Strait of Hormuz is attacked, we could assist our members by advising them on the challenges of trading in the area and tailoring insurance terms across multiple risk points in their business to provide at least a partial solution, which can assist them in deciding whether to continue to trade there,” Nick Rowe added.

Economic uncertainty

Alongside war-related risks, the experts also address how Europe is experiencing a period of protracted industrial action in response to double-digit inflation and the increasing cost of living following years of stagnant or below-inflation wage increases. As this hits home, the frequency of protests and strike action disrupting operations across the European continent is rising.

Nick Rowe highlighted how this had driven a much higher level of interest in the type of insurance product that NorthStandard provides.

Amid increasingly unstable economic circumstances, NorthStandard has offered solutions to help members manage this and provide assurance. This is done by indemnifying members when they suffer certain financial losses due to unpredictable disruptions.
Source: North Standard