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Cast away: cargo losses at sea are becoming more expensive to marine writers.

The huge cargo ships that ply the world's oceans are losing containers overboard in rough seas, a problem for insurers, product manufacturers and steamship companies worldwide.

Though cargo losses at sea are as old as the shipping industry, the new twist is that today's modern container ships carry a significant part of their loads stacked above deck. Despite loading and fastening regulations, containers regularly fall overboard during the stormy months of the year.

In October 1998, a fearsome storm in the North Pacific lashed a giant, modern container ship that had stacked some 1,300 containers six levels high. The APL China, en route from Taiwan to Seattle, lost 300 containers overboard. Some 700 more were smashed. The vessel survived swells of 46 feet to reach its destination, but its cargo losses amounted to $100 million.

APL China's story made headlines, unlike most overboard container losses, which occur frequently. But those involved in cargo insurance say the line remains profitable despite the losses and that there is not much more insurers can do to improve the situation. Estimates are that 2,000 to 10,000 containers fall overboard at sea each year resulting in losses of up to a half billion dollars.

While insurers do not consider cargo losses a growing problem, what has changed is that there are fewer incidents of loss, but when there is one, more containers are involved, said Forrest Booth, a senior partner with the law firm Cozen O'Connor. He specializes ha maritime and marine-insurance matters. "What's happened is that ships have gotten larger, and the stows are wider and higher," he said. "If one container breaks free, or it it's old and weak and structurally collapses, then the entire stow gets weak. Then what happens is that containers start going over the side."

Newer, Bigger Ships

Many ships in today's cargo fleets were built in the past four or five years. Before then, ships carried up to 4,000 20-foot equivalent units (TEUs), the typical length of the steel, water-tight containers. Newer ships carry 6,500 TEUs, and those under construction will carry from 8,500 to 10,500, Booth said. The ship industry labels these newer vessels "post Panamax containerships"--they're too big to pass through the Panama Canal. Such big ships extend as much as 60 feet below the water and have a problem entering some ports, but they offer economies of scale. Their crew sizes--usually 14 to 20 people but as few as 12--are the same as those of older, smaller ships.

Since September, 15 contracts have been let on ships to carry more than 9,000 TEUs, and some more than 9,500, said Raymond P Hayden, president of the Maritime Law Association.

On one level, the larger ships are actually safer and have been a good thing for the insurance industry, said Booth. Ships older than 20 years tend to be battered and beaten around, and they start having problems, like old cars. Ship officers are better trained, and with modern navigation equipment, parties know where ships are at all times, he said. In addition, steamship companies subscribe to ocean-routing advisory services to help them avoid the worst weather. Advisories are updated every eight hours.

"Insurers by and large advise companies they should subscribe to services like that, but don't require that they do," said Booth. "Most big companies do subscribe, but once a ship's in bad weather, it's still up to the captain to decide at what angle to put the bow into the waves and wind. Sometimes they slow down to ride out the storm--in effect they stay in place--although they try not to do that because they have schedules. You don't want to be slamming the bow of a 1,100-foot ship into 50-foot seas."

Captains enhance advisory services by reporting to the provider what Localized weather they're actually seeing. The use of ocean-routing services has allowed claims to be reduced very dramatically, Booth said.

The APL China, with a capacity of more than 5,300 containers, received weather reports from Japan and the United States, but they didn't help. According to published accounts, the ship was eastbound in late October in the North Pacific when it was overtaken by a storm that tossed it for 12 hours, mostly at night. The master reduced speed and attempted to steer into increasingly higher seas. The seas became confused and violent, however, and officers reported water at the bridge level during the worst of the storm.

Parametric Rolling

More frightening than the waves, however, was the ship's roll of 35 to 40 degrees front side to side, far more than the 20 to 25 degrees the ship's builders expected and in a much more odd and complex motion that also twisted and stressed the ship. The phenomenon, later identified as head-sea parametric rolling, has been found to afflict today's large container ships, and scientists have modeled the motion on computers. "Its existence confronts the insurance industry with the potential for a catastrophic loss," said Richard G. Roenbeck, a senior executive with St. Paul Global Marine, a business unit of St. Paul Fire & Marine Insurance Co. "A ship breaking in two hasn't happened yet, but when the APL China arrived in port, engineers found major damage to large-strength structural members? While parametric rolling has not yet sunk a ship, it exacerbates the risk of containers falling overboard.

When containers are loaded, they are lashed down with steel rods that secure them to fittings on a ship, according to Booth. Additional containers are stacked, sometimes even higher than six levels. The top row is secured by lashings to the deck, and when the stack is exceptionally high, some intermediate levels are often secured as well. The containers are fitted into cones, an oval-shaped slot at the top and bottom of each container. These cones provide a rigid connection between the lower and upper tiers, and workers set up crisscrossing rods from the upper layers to the bottom. Workers use turnbuckles to tension these rods to provide more rigidity to the stack.

Sometimes the top layers of the stacks are not secured, however. When the containers are stacked seven or eight levels high, stevedores don't want to go on top, said Roenbeck. In those cases, nothing is holding them on.

Under normal circumstances, the system works well. There are plenty of instances, though, in which older containers get overloaded, split and knocked around. "The corner posts need to be in perfect shape," said Roenbeck of the containers. "Otherwise, the container can collapse or not withstand the normal stresses of a voyage. Then every container on top goes over the side. Ship companies don't talk about it; it's hush-hush. It doesn't make the evening news." Roenbeck estimated that the typical event results in losses of about $400,000.

Insure and Subrogate

Insurers market their coverage to parties responsible for shipping products to wholesale or retail distribution points. A party in Asia, for example, may want to send clothing to the United States, and it insures the clothing. The product is loaded into containers, is transported overland, and is loaded by cranes onto a ship. The steamship company gives the party a bill of lading, which is a receipt and a contract governing how goods are transported. The party air-mails the bill of lading ahead of the ship to the destination point in the United States. When the clothing arrives, a consignee must present the bill of lading in order to receive the goods. It shows that the consignee is entitled to the container of clothes.

If containers wash overboard, an insured Fries a claim. The insurer quickly writes a check to the claimant, then sues the shipping company to begin subrogation, said Booth. "It's routine for an insurer to subrogate," be said. "They usually settle, but the tougher cases go into litigation." The Carriage of Goods by Sea Act provides some defenses to a steamship company and defines circumstances under which the company is not liable in cases of food spoilage or contamination, Booth said.

Parties prefer to buy insurance because they don't know enough about the U.S. legal system to go after steamship companies themselves, said Booth. Most don't want to get involved, though some big, sophisticated insurance buyers save on premiums by choosing high deductibles. But "probably nobody forgoes insurance completely," he added.

While insurers take on the risks, they generally don't have a presence during loading or on ships at sea. Actions that compromise the safety of the products or the overall strength of the stow can occur at many times during the shipping process. Goods may be improperly loaded into containers, or containers onto vessels. Regulations call for heavier containers to be at the low levels and lighter ones to be at the top levels, for example. But sometimes dock supervisors may place a heavy container on top of the stack because of the order in which a ship visits ports, said Roenbeck. "They would hate to discharge eight containers to reach a ninth one on the bottom," he said.

It's also not uncommon for one or more containers to arrive just minutes before a ship is supposed to sail. "In theory, workers are supposed to follow a cargo security manual loading order," Roenbeck said. "In practice, it's whatever they can get away with. It's a matter of time and money." Regulations require that each ship have a cargo security manual designed for it to help determine the load and stow for each voyage.

A Relationship Business

Last-minute additions of containers generally represent only minor violations of loading orders. But if" an "outfit" purchases an older ship with the intention of "driving it into the ground," it's not likely to be concerned with proper cargo loading, or with maintenance and safety, for that matter, said Roenbeck. Indeed, insurers look to do business with reputable steamship companies. "We are assuming to a very great degree that the major shipping lines and lines our customers use will be diligent ha protecting the venture they're helping us to undertake," said David Drake, vice president of ocean cargo for Zurich North America's marine unit. "They'll use any means available to protect our customers and their own assets. It's a very, competitive business, and they can't afford to lose equipment and their customers' good will."

Insurers' own competitors can also make the cargo-insurance market more difficult. "The problem with marine insurance is that it's easy to enter and exit this market," said Roenbeck. "It's not heavily regulated. You just need a little capital and to get some reinsurance. It's a market that allows for quick entry--they come in and cut prices, and then if they go bust, they're out. London [Lloyd's] was the worst offender for a long time. They had an unusual accounting system--three years looking back." Capacity is still too great in the industry, he added.

Roenbeck, however, said St. Paul avoids pitfalls and Finds the cargo-insurance business quite good, especially compared to the related lines of hull insurance, which insures the ships themselves, and marine energy, which insures oil-drilling operations. Roenbeck said hull insurers have not made money for 10 years. "Cargo does OK, but we have to be vigilant," he said. "We can't chase rates down a rat hole. At times, we have to let go of business, but it will come back to us. If you're not disciplined, you will lose your shirt."

Drake also said the business is profitable. "Part of the underwriting process is to look at your exposure base and try to get a feel for container value," he said. "Some insureds ship hundreds of containers at a time. With some predictability, you can expect how many boxes you will lose." He added that "containerization" has made it easier to handle cargo, and he said it's rare that a stevedore illegally unloads or loads a vessel.

As part of its loss-prevention activity; Zurich will monitor the condition of containers, and it sometimes requests below-deck stowage. Random, on-site checks at dockyards are rare, however. "You can't just walk onto a dock or vessel, particularly with today's concerns about terrorism," Drake said.

But Zurich, like other cargo insurers, actually relies most on an insured's record of claims when negotiating coverage, said Drake. Novice shippers without experience in international trade are the toughest to insure. "Loss experience will demonstrate how well a shipper is monitoring its operations," Drake said.

Reinsurers in the United States usually participate in cargo insurance on an excess-of-loss rather than a proportionate basis. Direct writers are willing to retain much of the risk because cargo insurance is a profitable line, said Robert Bauer, managing director of Ocean Marine for Swiss Reinsurance America, a major reinsurer of cargo containers. Bauer said 1998 and 1999 brought some big losses for direct writers in cargo, but since then rates have risen and conditions have improved. Hurricanes Mitch, Georges and Floyd may have accounted for the higher losses in those years, he said.

Reinsurers seek to affiliate with direct writers with expertise, Bauer said. Its marine group employs about 70 people worldwide.

To put cargo loss at sea into perspective, Drake said cargo transportation on land is actually more risky, particularly from theft. He said that Zurich applies its loss-prevention activity from door to door. That includes the method of shipment and packing, loading and unloading, and theft-prevention. "Quite clearly, theft occurs when cargo is at rest--in marshalling yards, port facilities, or wherever the cargo is sitting," he said. "We look at the overall transportation route and where cargo might be at rest. We concentrate our efforts to speed that process and to maximize security at points it has to be stopped."

Drake said it is not unusual, for example, for a delivery to an end user to occur late on a Friday and sit for an entire weekend. "We've seen all manner and quality of stopping points when that occurs," he said. "What we try to do when we review insured transportation routes is to try to put in as many safeguards as possible."

James M. Craig, president of the American Institute of Marine Underwriters, agreed that cargo theft on the road is a much greater concern to underwriters than losses at sea. He said insurance underwriters are mindful of who is manufacturing the products, who is making the packages, who is putting the products into containers, and who is transporting the containers. "Trucks can capsize, catch on fire, be in at collision or be stolen," he said. "One of the biggest problems on land is theft of cargo. The ports themselves are pretty safe."

Craig said his trade association has been working with others, such as the National Cargo Security Council, to create more severe penalties for cargo theft.

Marine Hull and Cargo/Transport Gross Ultimate Loss Ratio

Assuming that a loss ratio of 70 is the break-even point, hull insurers have gone seven years without profits. Higher premiums and lower claims, however, allowed cargo/transport insurers to achieve profitability in 2002.

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Title Annotation:Property/Casualty
Comment:Cast away: cargo losses at sea are becoming more expensive to marine writers.(Property/Casualty)
Author:Panko, Ron
Publication:Best's Review
Geographic Code:00WOR
Date:Dec 1, 2003
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