Marine underwriters' greatest difficulty is assessing exposure in areas where accumulation occurs either on conveyance or at distribution/collection points during the voyage in aggregation across a po

Marine underwriters' greatest difficulty is assessing exposure in areas where accumulation occurs either on conveyance or at distribution/collection points during the voyage in aggregation across a portfolio.

With 90% of cargo moved globally shipped in containers by some 40,000 plus ships moving through 3,000 ports, one can begin to see the complexity of the calculations. The increasing global population of containers is currently thought to exceed 15 million with over 300 million TEUs (20-foot equivalent units) moves per annum. Further, as container ships increase in size, there is a growing trend to service a limited number of major hub transshipment ports rather than many smaller ports. The cargo loss on the vessel Hanjin Pennsylvania, which caught fire and exploded off the coast of Sri Lanka in November 2002, highlighted the potential for large aggregate loss value from the high numbers of containers shipped on specialised container ships.

The Hanjin Pennsylvania was built in 2002 and is classed as Panamax size with a carry capacity exceeding 4,000 TEUs. The loss arose from a fire following an explosion within one container that quickly spread, affecting approximately 1,000 of containers on board from a total of 3,000. The total value of cargo on board is reported in the region of US$175 million.

Although a modern ship, the Hanjin Pennsylvania is by no means the largest type of container ship in service today. Such Panamax vessels have a maximum capacity in the order of 4,400 TEUs, whereas jumbo and post-Panamax vessels accommodate between 6,800 and 8,500 TEUs of capacity. Current trends in design will, no doubt, lead to even larger capacity vessels, and global deliveries evidence signs of rapid growth where the average size of new build containership in 2004 is 4,000 TEUs, this doubles to an average of 6,100 TEUs by 2007.

Recently, Chinese carrier COSCO reported it had on order a fleet of ships of more than 9,000 TEUs. These larger ships sizes are by no means at the limit of future growth. Various industry authorities suggest the next generation of mega-size container ships to be built in five to ten years will be more than 12,000 to 18,000 TEU capacity with 22 to 24 containers across a 60 meter-wide deck and drafts of 15 to 21 meters.

Tomorrow's mega-size container ships are likely to be used on the main east-west global pendulum routes (ending on either coast of North America) calling only at a limited number of onshore and offshore, deep-water ports.

Containers at the offshore terminals would then be transshipped by feeder vessels to other regional ports.

Another, more radical suggestion involves a fleet of 15,000 TEU vessels providing a two-way equatorial round-the-world service through an enlarged Panama Canal. This fleet would serve just seven strategically located transshipment hub ports, some floating in deeper water.


Whatever the event risk basis for total loss of a container vessel, with none recorded to date from over 35 years of trade, the possibility of substantial partial loss to ever increasing size of cargo loads has prompted studies to try to assess total cargo value at risk during any one, fully laden sailing.

Applied to container vessels, the rising TEU capacity is a known factor for marine risk. However, there are ways for insureds and insurers to calculate the risk of accumulation.

The value of cargo contained in the respective TEU count will vary hugely from box to box, cargo to cargo. Upper values clearly are the most difficult to estimate, although high value, hi-tech items can easily reach $2 million in one 20-foot container. More extreme values will also be possible for a cargo of precious items or sensitive precision equipment.

Huge volumes of lower value goods are also distributed by this proven economic method of shipment. For the purpose of this piece, we can use average figures of $25,000 for a 20-foot container's cargo value. Single vessel aggregate cargo value, therefore, can be estimated in hundreds of millions of dollars, depending on the size and cargo type, which will vary the average values shipped.

Viewing a modern standard container vessel of 8,500 TEUs, its full load may be valued in excess of $200 million, yet the Hanjin Pennsylvania with only 3,000 containers (including 40-foot units) had a reported value of $175 million. There is a temptation to increase estimated average values for TEU cargo, but perhaps it is more realistic to develop a range of values tied into trade routes. The estimate for full-load 8,500 TEU cargo could then be between say, $200 million and $400 million.

Other areas of accumulation are found inland by road, rail or airfreight, but container capacity of these modes of transport does not generate figures approaching the marine exposures. However, a clear area for accumulation is in the port, airport and distribution hubs through which the cargo will pass on its onward voyage. Again, while various probable and/or possible maximum loss (PML) calculations will enter entirely different considerations, the primary issue is to assess the aggregate total value at risk.

Container terminal capacity also rises

As container vessels increase in size, so will the concentration of containers at ports. A container terminal of 50,000 TEU capacity will readily accumulate well in excess of $1 billion in cargo value. Hong Kong terminal, for example, currently accommodates in excess of 60,000 TEUs and has an annual throughput of over 20 million TEUs.

Even if it were possible to move every container through the port within one day, then the daily average shows the accumulation to be close to higher estimates of value. Frontline European ports, such as Hamburg and Rotterdam both exceed 7 million TEU annual throughput, as does Los Angeles.

Cargo values in these ports can therefore easily reach $500 million by average value for just containerised loads ashore.

Serving mega-size container ships presents problems for ports, such as ensuring deep water (including dealing with the many environmental concerns generated as a result of dredging), wider channels and deeper berths.

To maintain rapid ship turnaround time for these large vessels, ports will need to invest in high-speed cargo-handling equipment, including longer out-reach post-Panamax sized, quayside gantry cranes.

Many of these newer gantry cranes come equipped with dual container lift capacity, dual-handling platforms (from ship to elevated platform and then a second lift from the platform to the quay). These high-speed gantry cranes can handle up to 50 container lifts per hour - a must in loading and unloading mega-sized container ships. To ensure productivity, transshipment hub ports require a highly productive and reasonably priced labour supply, available 24-hours per day, seven days per week. The large volume of containers being handled per ship call requires considerable expansion of the port's landside storage area. Hub ports will also need suitable berths for coastal feeder vessels, and good road and rail intermodal connections to inland destinations.

Hull values growing

The evolution of larger capacity vessels also seems likely to provide some challenges to insurance markets when underwriters are assessing and rating the risks. As these vessels grow in size, sums insured must also grow. With 9,500 TEU capacity vessels hitting values in the range of $60 million-$80 million each and 18,000 TEU vessels on the horizon, underwriters need to assess more carefully the premiums they will require to pay for the 'unthinkable' loss of just one of these vessels.

Individually, these vessels do not provide hull and machinery underwriters with much problem. However, as smaller ports struggle to upgrade their facilities or are restricted by their drafts, the mega container vessels will be driven to larger container hub ports or transshipment stations.

This will indeed cause aggregation issues for an underwriter who writes the major container fleets. All the major operators will potentially have multiple vessels operating out of the same hub ports.

Hull underwriters generally base their maximum written line per dollar exposure on the highest vessel value in a fleet. Perhaps they should be considering that two or three vessels could be involved in the same event, such as a typhoon, fire or terrorist attack

Security benefits

This article has focused on the issues of estimating accumulating values at risk. According to World Trade Organization (WTO) figures, $7.3 trillion of cargo was exported globally in 2003. The great unknown factor for insureds and insurers alike is their actual interest part of any one vessel or port location. Natural catastrophe risks are the usual consideration for areas of accumulation, and there are many risk models available to work through PML scenarios, and yet the increasing security risk from international terrorism is leading us toward the possibility of specific manifest load data that will enable cargo and container owners to more readily establish their individual accumulations.

Of benefit to underwriters and ship owners are the current security initiatives.

Firstly, GPS products, which container owners and logistic entities shipping valuable cargo increasingly use, provide a platform for tracking and positioning of loads on a global basis.

Secondly, the Container Security Initiative (CSI) implemented by the US Customs Service affects over 16 million containers arriving in the United States each year. Among wide ranging security standards, CSI requires container manifests for US bound cargo to be electronically transmitted to US Customs before vessel departure from its overseas origin port.

The US Customs Service has also implemented a joint government-business initiative entitled Customs-Trade Partnership Against Terrorism (C-TPAT), which addresses all areas of supply chain and border security.

The most recent initiative is the International Ship and Port Facility Security Code (ISPS), which came into effect on 1 July 2004. These standards, released by the UN through the International Maritime Organisation (IMO), were the cause of some concern owing to potential delay and subsequent accumulation if vessels are turned away due to non-compliance.

Continuing global security initiatives and technological developments in an effective electronic or 'digitized' supply chain may ultimately provide a supplementary risk management service to cargo and container owners by tracking multiple manifest loads and reporting on accumulation in container terminals. Such technological improvements will help provide ever more accurate risk data for cargo underwriting partners. In time, the cross-customer data then can be compiled for model analysis, giving more accurate trade and container values together with realistic exposure accumulation scenarios as applicable to individual cargo insurers.

Gordon Fry is cargo underwriter, GE Frankona Re, and Michael Thompson is hull underwriter, GE Frankona Re.