Batten down the hatches
Storm damage-related losses should be a concern for all ports and terminal operators, explains Alex Hughes
Public perception is that major weather events are becoming ever more common, but the insurance industry serving ports and terminals stops short of calling it a trend.
While insurers have had to pay out quite substantial sums to repair various global port installations, there is too little data at present to say whether this is the start of an important development in the industry or not.
“Some years we see severe storms, only for the next year to be comparatively storm free. As a result, there doesn't appear yet to be a massive upward trend in claims for storm damage,” says Andrew Webster, partner in the Marine Division of JLT Specialty.
Lucky for the industry that it isn’t a ‘trend’ in insurance terms as, according to Mr Webster, ports and terminals are generally under-insured for coverage for such events.
“Not as much insurance is being bought as we would necessarily advise; it all comes down to 'risk appetite',” he says.
If a port or terminal has a very strong balance sheet, with a readily accessible cash surplus, it might decide it doesn't need to insure against certain perils, since if the worst came to the worst the balance sheet would be able to take the strain. In these cases, insurance is only taken out for events that are known could really inflict financial loss on the operation.
“Some organisations can't afford the necessary cover, but will pay for it anyway, because they perceive the risk to be greater than it might otherwise be. Other people can afford it, but don't take out the cover, because they don't perceive the risk to be as great as it actually is. It's all about perception,” says Mr Webster.
The UK's HR Wallingford Ltd has done a great deal of work on climate change risk assessment and is regularly called in by ports authorities worldwide to model the impact on water levels, waves, tidal flows and extreme weather events around their facilities.
According to Dr Janice McKenna, business manager, Maritime: “Extreme weather events do appear to be on the increase and are causing significant damage to some ports, many of whom are well aware of the danger.
“With the adverse weather that impacted Northern Europe this winter, we have seen a significant rise in enquiries from ports. Ports are certainly not helpless in the face of extreme weather. We do have the mathematical tools available to help them,” says Dr McKenna.
Given that mathematical modelling will identify vulnerable areas, ports may subsequently need to make significant capital investment in sea defences, such as more breakwaters and higher sea walls. As to whether they will do this all comes down to risk appetite.
“Our modelling could probably identify those ports most at risk,” says Dr McKenna. “However, whether the investment identified will be made will almost certainly be the result of some kind of cost/benefit analysis.”
The most direct benefit from such an analysis wouldn't necessarily come from lower insurance premiums, she says, although those ports able to demonstrate that their defences were already more than adequate might well have a case for negotiating lower premiums. Yet the payback from having good defences in the face of extreme weather would be instantaneous: they would be able to keep operating when others had to close and there would be a reduced need to take out insurance for loss of revenue.
“The sums of money involved in modelling are minuscule compared to the cost of repairing installations if the right sea defences are not in place,” says Dr McKenna. “In fact, understanding the risk and planning for the worst might be the difference between a port surviving an extreme weather event or not.”
As for whether insurance companies will go as far as to insist that additional measures are taken prior to insuring port installations against weather events, Mr Webster stresses that this doesn't normally happen. Instead, the insurer and the insured invariably have a long conversation covering such areas as storm preparedness, what procedures are in place and how good early warning systems are. There is, he adds, a lot of debate and discussion prior to the insurance company offering a premium.
“Under normal circumstances, an insurance company will offer coverage. As to whether the port of terminal is prepared to pay that is another matter all together. However, those that prepare properly will find themselves paying lower premiums, because the underwriters view the risk as being relatively low,” says Mr Webster.
In fact, insurance is available for virtually any kind of storm damage, but that doesn't necessarily mean a port or terminal would be able to afford it, simply because it would cost too much.
“The argument is that you should buy as much insurance coverage as you can afford, but this should be 'appropriate' and make financial sense,” he says.
Storms can sometimes close down port operations. Often this is temporary, although severe damage can result in berths being out of commission for protracted periods, leading to major losses of income. However, the insurance industry will provide coverage against this eventually, too.
“A container terminal might buy insurance in case one of its cranes is blown over in the wind, which might mean having to hire in a mobile harbour crane, thereby increasing the cost of doing the work. There are policies available out there which allow those extra costs to be recovered.
“A port might also be completely destroyed as the result of a catastrophic event, for which business interruption cover can be taken out. However, doing this depends on risk perception. Brokers always urge port operators to purchase it, because it gives balance sheet protection, but some terminals take the view that it is not necessary and don't,” says Mr Webster.
The situation becomes more complicated when taking into account the interface between terminal and shipping line. If a vessel causes damage to terminal infrastructure or equipment during a storm working out the liability can be quite complex, because it depends on a number of different factors.
If the master had been told to leave the berth prior to the arrival of the storm, although failed to do so, the terminal would be able to claim for the damage from the vessel owner's standard protection and indemnity (P&I) insurance.
However, “these cases are rarely clear cut and take a lot of unravelling before blame can be apportioned”, points out Mr Webster.
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