The Costa Concordia disaster has stunned the world. It seems unbelievable that such an event could occur in the centenary year of the Titanic tragedy. Given the vast improvements in nautical technology since then, the risk that a modern cruise liner could capsize from hitting rocks on the seabed seemed minimal.
The impact of this tragic event on the victims and their families, as well as the threat to the ecosystem, is understandably at the forefront of everyone’s mind. The effect of this tragedy will, however, be felt worldwide and not just in the global cruise industry itself. The international insurance sector that protects the industry is going to be impacted. With analysts and industry experts predicting total insured losses of nearly $1billion, the Costa Concordia disaster is being cited as one of the worst maritime insurance losses ever and will have implications for business worldwide.
Marine Insurance
A unique characteristic of marine insurance is that cover for personal injuries, shipwrecks and environmental damage is provided through Protection and Indemnity clubs, or “P&I clubs” as they are known. These clubs are associations of shipowners and charterers which operate on a mutual, non-profit making basis. The members contribute “mutual premiums” which are pooled to meet all the claims, reinsurance and administrative expenses of the P&I club that year.
A significant feature of the structure of modern marine insurance is the pooling agreement in place among the 13 largest P&I Clubs through the International Group of P&I Clubs. The International Group is attractive to P&I Clubs as membership limits their exposure to claims resulting from catastrophic events such as the Concordia. The International Group also provides a central lobbying force for the marine market and an information sharing forum. The International Group insures over 90% of worldwide shipping. Standard Club and Steamship Mutual, the two P&I clubs reportedly providing cover for Carnival Corp., Costa Concordia’s owners, are members.
Under the International Groups’ pool agreement, claims in excess of $8million are shared between all the International Group members who can also avail of the Group’s joint-reinsurance policy. Thus, large losses impact on each individual P&I Club pool member regardless of whether or not their individual shipowners or charters suffered the loss.
The Impact
Industry experts are estimating that claims from passenger deaths, injuries, trauma and loss of effects from the Costa Concordia disaster will surpass the $8m barrier. Claims will therefore exceed the International Group’s claim-sharing level to the pool’s reinsurance policy with Hydra, a Bermudian captive reinsurer. This estimate disregards the potentially massive claims should any environmental damage be caused to the protected Tuscan Archipelago National Park from the oil stored on board the stricken ship. Equally, if the ship is declared a “Constructive Total Loss”, meaning that the cost of recovering the ship exceeds its value, the P&I Clubs will be exposed to the enormous costs of removing the wreckage. Should these losses occur, the claims are likely to reach the upper layers of the International Group’s reinsurance arrangements. From industry reports, it seems that Hydra reinsures the Group for $30m excess as well 25% co-insurance of the top layer of $560m. The upper layer is lead by Catlin.
The impact of such a large claim will undoubtedly result in higher mutual premiums for individual ship-owners and charterers who are members of the underlying P&I Clubs, whether they are involved in the cruise industry or not. These increases will be needed in order to fund the International Group’s elevated reinsurance costs following the Costa Concordia claims. The resultant greater costs of shipping will undoubtedly filter through as higher transportation costs worldwide. This will have a knock-on effect on businesses at a time when the global economy is already struggling to recover from recession.
Export trade is already under great pressure as is evident from China’s formidable export growth slowing. In Ireland, with domestic demand static, we rely on exports to drive our economy’s recovery. Any additional costs placed on this industry could damage competitiveness. These higher costs of shipping could also disseminate to individual businesses, whether or not they are directly involved in shipping, through increased prices in the cost of goods.
This potential effect of the International Group’s claim and reinsurance sharing arrangements comes at an unfortunate time. In August 2010, the European Commission announced that they were formally investigating the International Group’s arrangements for infringement of EU competition rules and this inspection is ongoing.
For the time being, any impact is likely to be delayed as the International Group reinsurance arrangements for the 20 February 2012 renewal period have been agreed. However, the Costa Concordia’s Titanic episode is likely to convey the fundamental importance of the shipping industry to the global economy and the impact it can have worldwide. Through its ripple effect, its reach is vast.
Contributed by Kerrie Glynn.
