Carnival to Test Cruise Line Industry Renewals

Was the incident on the Carnival Splendor more than cruise line risk managers, and their insurance brokers, can handle?

By CYRIL TUOHY, managing editor of Risk & Insurance®

The fire that broke out aboard Carnival Cruise Lines' 113,300-ton Carnival Splendor last week is likely to test insurance brokers as they huddle with risk managers from the cruise industry during the coming weeks to discuss 2011 insurance renewals.

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Though no one died in the Nov. 8 incident, the loss of power on the massive ship affected every one of the 3,299 passengers and 1,167 crew members aboard, as they found themselves without running water, electricity and air conditioning.

While the size of some of the industry's largest ships would appear to make them floating fortresses, last week's incident is a reminder of just how vulnerable they can be.

Still, the cruise-line industry is used to dealing with risk exposures from mishaps, unfortunate and sometimes tragic events. In 2002, an estimated 700 people became sick from a gastrointestinal illness on to different ships. In 2003 and 2004, two people died on cruises after contracting Legionnaire's disease. In 2005, a young honeymooner disappeared from a Royal Caribbean ship off the Turkish coast. In 2006, a cigarette was blamed for a fire aboard Princess Cruises' Star Princess, injuring passengers and contributing to the death of another.

The cause of the blaze on the Carnival Splendor is under investigation, but initial media reports said that the fire had been traced to a malfunction with the crankcase covering one of the massive ship's six diesel engines.

Carnival CEO Gerry Cahill called the mishap the worst in the company's 35-year history. The company also said canceled trips over the next two months and repairs would cost the company 7 cents per share in the fourth quarter. Analysts surveyed by Thomson Reuters were expecting the company to earn 35 cents per share.

No flooding was reported, and how a fire that initially erupted on or near one engine managed to shut down the entire ship's electrical nerve center has experts stumped.

Independent ship-design consultants have been quoted as saying the fire might have been be the results of flawed design. Teams of investigators from the U.S. Coast Guard, the National Transportation Safety Board, Panama (where the ship is registered), and Carnival's engineers and technicians are scouring the engine room for clues to the cause of the fire.

Miami-based Carnival, which pitches itself as the operator of "fun ships," owns a fleet of 22 ships. Two more ships are scheduled to set sail over the next two years to accommodate the increase in demand. Carnival isn't alone in planning to boost capacity.

Rival cruise line Royal Caribbean International, also based in Miami, this year launched the 220,000-ton Allure of the Seas, its second largest ship.

The industry has recorded steady growth as larger ships have been able to accommodate more people from a wider spectrum of the marketplace.

In 1970, an estimated 500,000 people went on a cruise, according to the Cruise Lines International Association, an industry trade group. As many as 14.3 million passengers are expected to set sail on a cruise in 2010, up from 13.5 million people who took a cruise vacation in 2009, the CLIA estimates.

By the end of 2009, more than 100 new ships had been introduced since 2000, and cruise lines have planned to launch 12 new ships this year alone.

Aon Corp. is the insurance broker for Carnival. A spokeswoman for Aon referred all calls to Carnival.

November 19, 2010

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