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BY GRAHAM BUCK, who covers European risk management issues

The Gulf of Mexico oil spill has promoted BP to chief villain of the oil and gas sector, the offense compounded by poor handling of its public relations. BP's discomfiture no doubt comes as a relief to ExxonMobil, previous holder of this unwanted title after the Exxon Valdez spill of March 1989 when 11 million gallons of oil escaped into Prince William Sound. ExxonMobil has been a prime target ever since for action groups such as Greenpeace. However, for the marine insurance world the Deepwater Horizon disaster has diverted attention over the past four months from tanker spills to losses from mobile drill rigs. International Union of Marine Insurance (IUMI) data show losses reached $800 million last year, when 55 new rigs were delivered, against 41 in 2008 and a projected 65 this year. Could the latest disaster produce positive developments over time? If the Valdez episode produced any upside it was the subsequent outlawing of single-hull tankers from U.S. ports, and the advent of double-hull vessels which over two decades have proven much more resistant to spill incidents.

"Flag states are entitled to grant an extension beyond 2010 to 2015 subject to satisfactory results from the condition assessment scheme (CAS) or the date at which the ship reaches 25 years of age," said Simon Stonehouse, chief hull underwriter for BRIT Insurance. "Providing it meets the legal requirements of the flag states, a single-hull tanker is insurable." Meanwhile as the world's largest shipbuilders ceased production, the proportion of supertankers in the world fleet comprised of single-hulls has dwindled from 100 percent two decades ago to a little more than 20 percent. Only 53 single-hull very large crude carriers remain active in the global fleet, according to the 2010 Tanker Report issued by London-based ship broker Gibson. That number represents about 10 percent of the world's existing tanker fleet.

"It's obvious that the number of single hull tankers will diminish to almost zero over the next few years," said Brendan Flood, hull line underwriter for Hiscox in London. "From a hull and machinery underwriting perspective the important thing, whether ships are single or double skin, is that the different elements of risk are assessed properly and the price that is charged adequately reflects the risk being assumed."

Despite the decline of single-hull vessels, last year's 20th anniversary of the Valdez spill was marked by fresh criticisms of ExxonMobil. Reports suggested ExxonMobil was hampering progress by still using single-hulls while its nine main competitors had either sharply reduced or ended their reliance on the older vessels. However, the reports did note that Exxon's rentals are considerably less than those of carriers in Asia, where companies such as Indian Oil Corp and Thai Oil continue to use single-hulls because of the lower rates charged.

Despite the bad press they attract, we should maintain a degree of perspective on single-hulls said Neil Roberts, senior executive, underwriting at Lloyd's Market Association.

"Tankers are an undeniably efficient and costeffective way to deliver the oil the world requires at a price it wants to pay. Although time is against the single-hull design, it has actually served the world pretty well," he said.

"It's worth recalling that the number and volume of oils spills from ships has reduced dramatically and are now one eighth of the level reached in the 1970s. Operating standards have been raised through IMO and the industry together, and that has advanced both safety and the prevention of pollution." With this improved record--and with the cost of a double hull considerably more than a single hull--it's understandable that companies will continue to use single-hull ships for as long as countries will accept them, he added.

"Indeed, single-hull tankers can be just as well run as any other vessel and may represent a better risk return to underwriters in pure terms. As ever, much is down to the crew and the quality of the operation which employed them," Roberts said. Owners are taking on board the IMO directive by taking the opportunity to renew fleets with newer double-hull vessels, said Simon Cooper, marine specialist for insurer RSA.

"There is a definite trend of single-hull vessels falling out of favor, as demonstrated by the increased number of these vessels being scrapped and the number of vessel charters falling, which is regularly reported in the marine press," Cooper said. "Vessels will not require insurance once the single-hull phaseout is complete, as they will no longer be able to operate."

Already, the majority of insurance contracts in RSA's portfolio are on worldwide trading, Cooper also said. "Given that around 153 countries, including the United States and the European Union, do not allow single-hull tankers into their territorial waters, these vessels will only have very limited eligible trading areas in which to operate when carrying heavy fuel oil or crude oil," he said.

"The bigger issue is therefore where an owner can utilize the vessel, rather than obtaining insurance."

When underwriters are asked to insure a tanker, deciding factors include the operator's experience and loss record, who the charterer is and the duration of the charter.

"A quality charterer, such as one of the oil majors, would have their own people inspect the vessels and ensure high standards are met for transporting their products," Cooper said.

Iain Henstridge, leading class underwriter for marine hull at Lloyd's insurer Amlin, said the differences between single-hull and double-hull vessels are less marked than might be expected. He said that the shipowner/ manager's record and approach is the main consideration.

"The flagging, classification, age, value, machinery type and port state control (PSC) record offer a good guide to the quality of the offering. Details of the assured's crewing policy and the number of onshore superintendents employed are also crucial factors," Henstridge said. Underwriters will also review 'soft' information toward an informed judgment of the quality of an assured. These include:

--Who are the ships' mortgagees? This offers a good guide to the financial standing of an operator.

--Does he have sound long term charters? This provides an indication of their earnings stream.

--Which Protection & Indemnity (P&I) Club does the assured belong to? This is a further good guide to quality.

--Has he stayed loyal to his insurers over good times and bad, or would he transfer his custom elsewhere following a claim?

--What is the assured's crew retention rates and does he pay crew retention bonuses?

"Newer tankers will tend to pay cheaper hull and machinery rates as they are, subject to these criteria, a better risk, given that a vessel has a finite life expectancy," Henstridge said. "Double-hull vessels are by their design more expensive to repair than single-hulls, but underwriters do not penalize them as such. "Well-run, older ships can produce stronger underwriting returns than new build tonnage, as newer, high-valued tonnage tends to attract a greater number of underwriters and this level of competition feeds through to lower rates," he said.

Port state control record and trade patterns also reveal significant information. "There is a trickle-down of tonnage, from first world to third, when vessels change hands, with the older single-hull ships now tending to operate in the developing world," Henstridge said. "PSC reporting can be patchy in Africa and Asia and one has to dig deeper to get the whole picture, as PSC records can be of limited value."

Double-hull tankers generally prove a safer risk than single-hull tankers, said Fritz Stabinger, secretary general at the International Union of Marine Insurance. But there are always exceptions to the rule. For example, the space between the two hulls must be well designed to permit inspections, as corrosion may give owners and underwriters a false sense of security.

"It is certainly recommended that underwriters draft their underwriting strategy in a way which takes these characteristics into account," Stabinger said. "That strategy--and each underwriter will decide that for himself--may go from a strict 'no single-hull tankers' to a modified reaction which may be less strict." Underwriters must now also consider the effects of the Deepwater Horizon loss, Henstridge said. "Undoubtedly all operators will have to rethink their potential liabilities for a U.S. pollution event. Valdez was the last reference point for assessing the quantum of such a loss," he said.

"I suspect the costs BP now faces will be so vast that it will dissuade new players from entering the U.S. market. There may be other current players who will rethink their own U.S. strategy or the limits of insurance that are purchased."

September 1, 2010

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