20 April 2020
Rama Chandran, Chairman of the Ocean Hull Committee at the International Union of Marine Insurance (IUMI) and member of the Marine Insurance Committee at the General Insurance Association of Singapore (GIA), shares with SMF the impact of IMO 2020 on shipping and marine insurance.
2020 began with one of the most significant changes to the global maritime industry: the enforcement of the International Maritime Organisation (IMO)’s 2020 Sulphur Cap. Vessels operating outside designated emission control areas have to adhere to a drastic reduction of sulphur oxide emissions from 3.5% to 0.5%. The bold but necessary move to reduce sulphur oxide emissions was implemented with the goals of improving air quality and health, and making shipping a more sustainable and environmentally friendly form of transportation.
In the lead-up to 2020, ship owners were presented with the options of installing exhaust gas cleaning systems, also known as scrubbers, on their vessels or switching to compliant fuels such as marine gas oil, ultra-low sulphur fuel oil (ULSFO) or very low sulphur fuel oil (VLSFO).
Traditionally, most ships run on Heavy Fuel Oil (HFO). Some ship owners chose to install scrubbers on their vessels as they foresaw a fall in HFO prices with the introduction of IMO 2020. However, this was not an easy option in view of the cost and off-hire expenditures required.
The alternative of switching to compliant fuels was made easier with the assistance from various parties within the shipping community, including classification societies, engine manufacturers and bunker suppliers. However, such a transition was bound to introduce unprecedented risks. At present, the adoption of compliant fuels is still in its infancy for most ship owners, thus there are still some uncertainties with regards to its implications. Apart from potential damage to the vessels’ main and auxiliary engines as well as fuel systems, there is a risk of grounding and collision arising from the failure of the main propulsion engines. It is imperative that shipowners engage all service providers to ensure that such risks are significantly mitigated or eliminated.
Three months into the implementation of IMO 2020, the maritime industry is starting to settle down, albeit still facing some challenges.
The Impact on Marine Insurance
Globally, machinery claims have remained at elevated levels in recent years. In fact, in the last five years, it has averaged 40% to 45%. Currently, it does not provide much allowance for large losses that might happen from time to time. With the implementation of IMO 2020, the possibility of increased machinery claims is a significant concern to underwriters.
Hull and machinery underwriting has always been a difficult task, with many variables to be considered, including the quality and risk management processes employed by ship owners. At this point in time, underwriters are still monitoring the impact of IMO 2020 on hull and machinery premiums, and it is hoped that premium adequacy will be achieved in the next year or two.
At IUMI, a professional body representing national and international marine insurers, we are gathering information to establish any clear trends to update the global underwriting fraternity, in order for them to better engage their clients and provide them with more adequate prices. As Chairman of IUMI’s Ocean Hull Committee, I hope to discuss this extensively at the IUMI conference in September this year.
In addition, as there have been a few cases where ISO 8217-2017 (fuel standard for marine distillate fuels) was found inadequate, we are engaging relevant parties to improve the risk of bunkers not meeting the requirements of ship owners. Besides keeping track of the impact of low-sulphur fuel on the vessels’ main and auxiliary engines as well as fuel systems, we are also observing the impact of scrubbers fitted on vessels.
Navigating the Road Ahead
As the maritime industry continues to navigate through changing currents, the marine insurance sector should be on a constant lookout for new opportunities and challenges in the market, and proactively engage its clients to ease them into changes.
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