BY GREGORY DL MORRIS
Concerns of the global marine and insurance markets about safe transit in the Suez Canal have been increasing ever since the Egyptian army deposed the country's elected Islamist president, Mohamed Morsi, and the violent crack-down on mass demonstrators in Cairo and other big cities began.
To be sure, the military-backed interim government has every reason to keep the canal open and operating as smoothly as possible: Published reports estimate that the canal generates as much as one-tenth of Egypt's hard-currency income, and comprises as much as $2.4 billion of the nation's economy.
Slightly less than one-tenth of world maritime commerce moves through the canal, but it is not a major oil route, accounting for less than 5 percent of the trade. Crude tankers have gotten so large that they cannot fit through the canal and go around Africa. The largest container ships and bulk carriers must do likewise.
An Aug. 19 bulletin from the Norwegian Shipowners' Association confirmed that "the Suez Canal remains open and with normal traffic volumes. All ports were open and in service as per early morning 15 August, according to available information."
The association detailed further that the military intended to keep it that way: "Egypt's 2nd and 3rd Army, and other forces, protect and patrol waterways, land, air the canal and its surrounding areas. The security presence is solid and visible."
That said, the bulletin cautioned that "services in port cities along the canal, as well as government, banking etc. functions, may be affected by the situation. We hear about disruptions to transport etc. in Port Said, that have affected crew change schedules. It is advisable to avoid crew change or consider very carefully whether it is safe to change crew in Egyptian ports."
While there has been no rush to increase coverage of vessels and cargoes travelling through the canal, "additional cover may be necessary for war risks if the vessel enters a designated zone, as defined by the Joint War Committee (JWC)," said Christian Ott, vice president and head of claims for marine insurer Assuranceforeningen Skuld's Singapore Branch.
"The JWC has the authority to exclude or include areas where additional war risks premium is required," he said. "In addition, shipowners or operators can obtain insurance against kidnap and ransom. Additional premium may be required for war risks if a zone is so designated by the JWC. Changes to such zones will be announced by the JWC."
Ott explained that "a comprehensive ship insurance package includes protection and
indemnity (P&I) insurance against loss and liability to third parties; hull and machinery, which covers losses from physical damage to the ship and on-board equipment; and war risks insurance."
Skuld is a diversified marine insurer with three main market brands: Skuld P&I, Skuld Offshore and Skuld 1897, a syndicate at Lloyd's.
If there were a closure of the canal -- official or de facto due to threats or actual hostilities -- and subsequent rerouting of traffic, Ott said, "Skuld members and clients are typically covered for worldwide trading, subject to policy terms.
"If members choose to proceed via the Cape of Good Hope, they would usually remain within standard cover. Restrictions on the use of or closure of the canal would, however, cause a reaction within the broader shipping industry, because an alternative to shipping through the Suez Canal is around the Cape of Good Hope," he said. "This would result in longer shipping times and increased costs because of the longer distance."
In its May country profile on Egypt, Lloyd's did not specifically address the canal, but reported more broadly on the market.
"Egypt's political crisis is still going, with questions about the power of different political groups, the role of the military in a new government and how domestic economic policy may change in the future all yet to be answered," it said.
"The insurance sector in Egypt will be affected by the slower economic growth and a possible pause in the positive trends in the sector that had been taking place. These included opening up to foreign competition and a trend towards financial liberalization and governance.
"Weaknesses in Egypt's underlying business environment, namely elevated corruption, uncertainty over property rights and a rigid labor market, are likely to continue for the foreseeable future."
Lloyd's reported that "the insurance market is currently dominated by the Insurance Holding Company (IHC), which is a state-owned enterprise through which the government maintains its stakes in Misr Insurance and the National Insurance Co. of Egypt (NICE)."
Taking the long view, Lloyd's was optimistic when peace and order are restored.
"Low insurance policies per capita in health insurance and personal accident insurance are likely to open opportunities for insurance companies, while investment in infrastructure projects are likely to stimulate future growth opportunities for commercial insurance, provided political stability can be maintained."
GREGORY DL MORRIS is a New York-based journalist with a specialty in energy.
August 28, 2013
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