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Ports and Terminals Insurance: sensible and realistic risk management

Posted by on 05 June 2019
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Change is driven by innovation and new technology.

In the insurance sector, particularly for ports and terminals, these developments are changing the way risks are assessed by not only streamlining current service provision but allowing for greater opportunities for data collection and fraud detection - these can lead to better risk identification and mitigation.

However, these changes will initially be accompanied by uncertainty and doubt as insurers navigate a course of establishing liability and how to handle risks and claims.

Ahead of the 4th annual Ports and Terminals Insurance Seminar we spoke with Frans van Zoelen, Head of Legal at Havenbedrijf Rotterdam N.V. (Port of Rotterdam) and Chairman of the IAPH Legal Committee, about sensible and realistic risk management. In our discussion he spoke about how insurance, and insurance law, related to ports and terminals should not be viewed in isolation. Breaking down the insurance process and understanding the dynamics behind it is not only helpful, but essential.

Read the interview below.

Iain Gomersall: Ports are being challenged worldwide by demands for gains in port efficiency, increased customer responsiveness, and lower costs to move cargo through the port. How are they evolving in an increasingly competitive world, and what dynamics are in play?

Frans van Zoelen: At the Port of Rotterdam, a high quality of port infrastructure appears to be the winning formula to increasing customer responsiveness. Safety and security are, and should be, a priority.

With respect to services, we have seen efficiency increases as information flow has been enhanced by the digitalisation of processes – for example, customers and stakeholders being informed precisely when a quay wall will become available for the next ship. This vessel can then adjust its speed accordingly.

IG: How have ports expanded their service offering, and what complications has this brought to insurers?

"Some ports make a virtue out of this necessity and transform themselves into suppliers of digital business services."

FvZ: There are two types of port. There are those which are purely maritime ports - for the loading and unloading of goods or passengers - and then you have ports which are a combination of maritime and industrial activities.

Climate change is a unique challenge for both maritime and industrial ports. For industrial ports, this could mean that their portfolio is changing the next 10 or 20 years, for example, the throughput of crude oil and refinery activities.

Ports and terminals are looking to diversify their income by being active as consultants to other port operators or assisting in the building of a new port in a completely different part of the world.

Furthermore, ports are increasingly using digital tools to become more efficient. Some ports make a virtue out of this necessity and transform themselves into suppliers of digital business services.

For insurers it is very important to understand what is going on, and they should have a keen interest in the key drivers for vessel traffic and management, and should understand how they have changed in the last few years.

On the one hand, you have the regulatory framework of a harbour master. Traditionally, they are responsible for the safety of ships, entering or leaving a port and executing a variety of mostly public tasks. From port to port, and from country to country, there may be differences in how liability is regulated.

On the other hand, we have new technology which can steer the course of a ship. These technologies may be able to directly influence what a ship is doing, influence the choices of a ships’ master or a management behind a master. The decisions taken by the master are based on a new set of data.

It is important for insurers to understand who is liable for the data going through software which influences the decisions made by the operator of a vessel.

It is important for insurers to understand who is liable for the data going through software which influences the decisions made by the operator of a vessel. It’s also extremely important for insurers to understand the regulatory landscape too – such as the relevant conventions and law-making organizations.

The development of Maritime Autonomous Surface Ships (MASS) could end the need for a master on-board a ship. This brings some serious questions about the legalities of this under the current maritime conventions created by the IMO.

At this point of time, Member States of IMO are reviewing current conventions to see if MASS would not hamper with existing legislation. If not, then what should be changed? If there is no master, then this begs the question of liability. Who is then taking the decisions? Are decisions actioned by remote control? If software is making decisions, then how is the liability regulated? Many masters will be familiar with software and its current support functions on a vessel. However, what does this look like in the future?

If the IMO determines that a master should always be onboard a vessel, then of course that would be a hugely significant issue for MASS.

These are just some of the very big questions that lawyers of insurance companies, shipping companies and other operators will need to be aware of.

IG: Increasingly, the rapid pace of innovation is driving the regulatory agenda. How are insurers staying ahead of the curve? And, how is insurance law and regulation responding to keep up?

FvZ: Insurers will more than likely have a department with some very clever people who are following the developments and they will more than likely be aware of the agenda of the IMO.

Specifically, the insurance companies and P&I Clubs will keenly follow developments in this area to ensure that they are ahead of the curve.

IG: Do you believe there is a necessity, or even obligation, to be insured in general?

FvZ: With regards to insurance law, there are few laws under which one is obliged to insure against certain types of risks. There is a freedom to be insured, or not to be insured.

On IMO level too, there are no rules which state that one must insure maritime liability in general. While we do have the Guidelines on Shipowners responsibilities in respect of maritime claims (IMO-resolution A.898(21)), these are only recommendations.

The view is that this works well because the great majority of the fleet is connected to a P&I Club. The issue is not so much that ships are not insured, but more that they are creditworthy to have P&I-coverage when an issue arises.

With regards to specific liabilities, we have made tremendous progress over the years. The obligations to insure specific liabilities are embedded in specific conventions; The Civil Liability Convention (CLC), the Nairobi International Convention on the Removal of Wrecks, the Bunkers Convention and the HNS Convention on the Carriage of Hazardous and Noxious Substances (2010 HNS Protocol). This is a form of compulsory insurance with direct access to the insurer and which is very helpful in case the liable party is not creditworthy.

In modern economical terms, pooling risks in this manner and sharing financial burdens generates significant amounts of coverage at relatively low cost to the industry.

In my view, these conventions are very precious achievements of the Member States of IMO. In modern economical terms, pooling risks in this manner and sharing financial burdens generates significant amounts of coverage at relatively low cost to the industry. At the same time, it is crucial these rules have alignment globally - which is essential for a global industry such as shipping.

In conclusion, I would mention that the 2010 HNS Protocol still lacks enough ratifications to be entered into force. For the protection of the financial interests of ports and terminals operators, in case of damage caused by hazardous and/or noxious cargo on board of a vessel, it is vital that enough ratifications are collected to have this convention operational.

IG: Many businesses and organizations are taking on high-risk innovations as a strategy - even if they fall outside the scope of existing regulations. How is the Port of Rotterdam managing risk, while remaining focused on innovation, digital developments and the energy transition?

FvZ: With regards to risk management, a process whereby risks encountered in every business segment are analyzed is in place. When there is a red flag the issue will be analysed in greater detail.

With regards to the application of rules and regulations, a compliance system is beneficial.

IG: Rising tensions in the Gulf and the bombing of four tankers may lead to a surge in war risk premiums. What pressures could this exert on ports & terminals receiving or sending vessels from the Middle East?

FvZ: It is difficult to say if the risk profile will stay the same. For owners or carriers, it probably will mean the premiums they pay will go up. It may affect the crude oil price, but that is not something of direct influence on a port or terminal. This will be something for the operator of the vessel, P&I Clubs, traders and oil refining companies to bear in mind.

IG: Climate change and rising sea levels. How can you insure a port if it might be underwater in 20 years?

FvZ: That's a very interesting question, and one we are dealing with now. While this is something which we don’t see happening in the next year, it is something we foresee in the next 10 to 20 years. We will thoroughly investigate the effects of rising sea levels and what we must construct, if we must construct something.

If there are areas which raise a red flag, we will investigate them from a technical point of view. It may mean that we build quay walls or mechanical dykes which will go up in a moment that the sea level rises above a critical level.

It’s something that is of great importance to us.

To answer your question on whether we will have to insure a port area, a big port - like the Port of Rotterdam - can absorb a lot of risks. A big port can have a long balance sheet with healthy ratios and cash-flows, hence for a big port it won’t automatically look to insure this type of risk.

At this moment of time, there are very few products available for insuring this type of risk. If this becomes a more common risk, then maybe an insurance product will be created for this type of problem.  Again, here it might pay off as well pooling risks together in order to reduce costs of the port and terminal industry.

Smaller ports run a very real risk of interruption, and a ship blockade or flooding of the port could be business critical.

Smaller ports run a very real risk of interruption, and a ship blockade or flooding of the port could be business critical. Bigger ports have many basins which create cash-flow, but if you only have 1 or 3 basins and something happens, then you are in big trouble.

IG: How would smaller ports, with no big legal team, keep up to date with this level of intricate legal detail?

FvZ: Quite a lot of ports are members of the International Association of Ports and Harbors (IAPH). In the technical committees, for example the Legal Committee, information and best practices are shared.  We also have a manual called the Introduction to Maritime Law for Ports Officials, which is an up-to-date source of information which members can refer to.

As a consequence of the IAPH undergoing a modernization process and providing this added value, we have seen the membership grow. Basically, because the sharing of information and best practices is valued by the members and leads to sensible risk aversity and safer operations.

Being a member of IAPH should give ports the privilege to get reduction on their insurance premiums too!

Interested in learning more about what a port is liable for and how to handle risks and claims? Book now for the 4th annual Ports and Terminals Insurance Seminar, 11-12 June 2019, in London.

The 2-day seminar offers detailed guidance on how the changing insurance market, risks assessments and what cover you need for your port or terminal - hosted through a series of interactive and practical sessions.

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