By CYRIL TUOHY,
managing editor of Risk & Insurance®.
In the South Korean shipyards of Daewoo Shipbuilding and Marine Engineering Co., blow torches and gantry cranes are doing double time as builders race to complete the largest container ships the world has ever seen: the so-called Triple-E class.
Ships of the Triple-E class, which stands for "economy of scale, energy efficiency and environmentally improved," are under construction for Denmark's Maersk Line, the largest shipping company in the world. These container ships are, quite literally, in a class of their own.
At 1,200 feet long, 180 feet wide and 219 feet high, each Triple-E class vessel will be capable of carrying 18,000 twenty-foot-equivalent units (TEU), or 18,000 twenty-foot-wide shipping containers.
Carrying 18,000 containers on any one ship represents a 16 percent jump in capacity per vessel over the 15,500-TEU Emma Maersk class, the largest container ships afloat since the mid-1990s.
Triple-Es, said Richard Decker, president of Chartis Global Marine, are "massive, massive ships."
Don Harrell, senior vice president of global marine for Liberty International Underwriters, called the Triple-Es "as big as aircraft carriers, often bigger." Only the largest of the oil tankers are larger.
The first 10 vessels are scheduled for delivery to Maersk in 2013-2014, and the next 10 in 2014-2015, Maersk Line said. The shipping company has the option of ordering another 10 Triple-E vessels by the end of December, Maersk said.
If Maersk exercises that option, it will have 30 Triple-E vessels piled high with containers, plowing the world's oceans within a decade.
Loaded with appliances, kitchenware, furniture, textiles, apparel, vehicles, auto parts, toys, games, prescription medicines and drywall, these ships will steam from Europe to Asia through the Suez Canal. There's nothing Triple-Es won't be able to carry.
Maersk's Triple-E orders signal a rebound in global shipping, which suffered from a slowdown during the Great Recession and the drop in world trade.
Good news for the economy, but for underwriters and other marine risk experts in the hubs of London, Oslo and Singapore, it means poring over waves of data and calculating how to price for the new concentration of risk that will soon be plying the high seas.
For two years, the size of these new ships has been the talk of marine experts attending the conferences hosted by the International Union of Marine Insurance.
The quandary for underwriters centers around determining exactly how much will fit aboard any one of these Triple-E ships and what it is all worth. Decker called the task an "ongoing challenge."
The probable maximum loss, or PML, of a ship at sea that sinks is 100 percent. For marine risk underwriters, that's the easy part. Figuring out how much the cargo aboard is worth is more difficult.
From the perspective of hull and protection and indemnity coverage, the risk concentrations on the Triple-Es are going to affect the reinsurance marketplace, Harrell said.
"We're direct underwriters so we'll put up capacity for our clients. So if we can put three times more clients on any one ship, are we going to have an issue with excess of loss over and above what we buy?" Harrell said.
Underwriters, however, have seen this kind of jump in the concentration of risk before, so the recalculations are not exactly new.
In 2006, when the 15,500-TEU Emma Maersk set sail, it was nearly twice as large as the 8,100-TEU Sovereign Maersk Class that came before.
Marine insurers also have experience underwriting the cargo carried by oil tankers. The Seawise Giant, renamed to the Knock Nevis, measured 1,504 feet. When it was built in 1979, it was 204 feet longer than Emma Maersk.
Marine reinsurers will have their say, of course, as they analyze cedents' marine exposures and stack and restack reinsurance towers using the latest analytics.
EFFECTS ON PRICING
As the Triple-Es move from dry dock into the world's waters, insurance pricing will be affected, Harrell said. It's important to keep in mind that the marine marketplace is still in the midst of a soft pricing environment and suffers from a declining premium base relative to the broader property/casualty sector. New marine underwriters entering the market are keeping downward pressure on pricing.
Shipping lines that own these Triple-E ships are going to require higher insurance limits, however, as more cargo on a ship equates to more value afloat, marine experts said.
With so many more containers on any one Triple-E vessel, an individual insured will need $100 million worth of cargo insurance, up from $50 million a decade ago, Harrell calculated.
"Right now, we put up a maximum limit for any one shipment," Harrell said. "If they need more, they will buy increased limits, so it's an increase in cost to the client but also an increase in exposure."
THE SUPPLY CHAIN TWIST
The huge ships don't just represent more concentrated exposures vis-a-vis cargo. They also increase the exposures in the ports and terminals where they offload that cargo.
For underwriters and reinsurers, this adds a twist.
Because the 18,000-TEU container vessels will be able to dock at very few ports, they will load and unload their cargo to and from smaller ships, which then ferry the goods ashore to a warehouse, the marine experts said.
It is a process known as transshipment, and it will increase the liability and the property-catastrophe exposures, along with the warehousing exposures to the port.
So, it doesn't take much to see how the Triple-Es will have more of an impact on just-in-time delivery and supply chain exposures than any vessel before it.
More goods awaiting shipment to their final destinations increases the exposures in the port, and it's just bad luck if a quake occurs or a cyclone washes ashore days before all that off-loaded cargo is due to be shipped from the warehouse.
For a distributor, a shipment delivered every quarter instead of every month means his or her business interruption costs go up, loss of income increases and contractual liability rises.
Indeed, Harrell said, the increase in the risk to the supply chain because of the enormous size of the new ships is "one of the top topics being discussed in the marine industry."
Jerry Theodorou, vice president of research and publications/industry analyst at Conning in Hartford, Conn., said marine risk managers are having to watch their accumulations as larger ships take to the water.
Risk managers need to realize that the potential losses they are covering--the loss of a car or truck, the disappearance of a batch of computers or tons of raw material being unaccounted for, damage to expensive power systems, for example--could all happen on the same ship, Theodoru said.
Underwriters will sometimes say, "I didn't know I had all that stuff on that ship," Theodoru said.
Tracking the location of products even once it is on a ship is important, Theodorou said.
The world's shipping companies have clearly considered the risk and believe they can profit from the efficiencies of scale offered by the giant Triple-E ships.
An 18,000-TEU container ship requires fewer voyages, less fuel and fewer manhours to move the same tonnage of goods, even if at anchor outside a port requires transshipment.
Maersk is investing in Triple-Es because the shipping company expects demand on the Asia-Europe trade to increase by 5 percent to 8 percent a year from now until 2015. Maersk also said it expects rapid growth in cargo patterns in east and north China.
More broadly, the world economy is forecast to grow from $35 trillion to $70 trillion over the next 20 years, according to some estimates, and the percentage of that trillion-dollar growth that is trade-related will triple over that period.
Depending on the economic forecast you look at, the Chinese economy is expected to surpass that of the United States sometime in the next 20 to 30 years.
Hence the need for larger, more efficient container ships, and the reason Maersk plans to sail its Triple-Es from Europe to China.
Maersk Line CEO Eivind Kolding, at a signing ceremony in Tokyo earlier this year, said Triple-Es offer "record capacity and energy efficiency" that will give Maersk an advantage in the marketplace.
September 1, 2011
Copyright 2011© LRP Publications