Safety and Shipping Review 2021:
The Covid factors

Expert risk article | August 2021
The shipping industry has shown great resilience through the pandemic but the crew change crisis, volatile trade volumes and constraints on capacity continue to have significant implications. And although the pandemic has had only a limited impact on marine claims to date, that doesn’t mean it will be all smooth sailing in the future.
AGCS' Safety and Shipping Review identifies loss trends and highlights a number of risk challenges for the maritime sector.
Following sharp falls during the early part of the pandemic, global trade volumes have since rebounded. However, volatility in demand, constraints on capacity and the ongoing impact of Covid-19 are causing major congestion at ports and disruption to supply chains. In May 2021, Covid-19 outbreaks at Guangdong Province in southern China and one of the busiest ports in the world, Yantian in the city of Shenzhen, brought further delays.

However, despite the devastating economic impact of Covid-19, the effect on maritime trade has been less than first feared. According to Clarksons Research [1], global seaborne trade volumes declined only by an estimated 3.6% in 2020, and are on course to surpass 2019 levels this year. The roll-out of Covid-19 vaccines is expected to “supercharge” global growth in 2021, said  Euler Hermes [2] at the end of 2020. Vaccines could push forward the global trade recovery by one year, with trade in goods already returning to pre-crisis value levels at end-2020, it said at the time.

While the cruise industry and the car carrier segment have been worst affected by the pandemic, the industry’s three largest markets – tankers, bulkers and containers – have been quick to recover. The container market has staged a remarkable recovery, as increased demand and restricted supply resulted in a surge in freight rates. By early 2021, freight rates from China to South America had jumped 443% and by 63% on the route between Asia and North America’s eastern coast, according to the United Nations Conference on Trade and Development [3].

“Coronavirus has shown that unpredictable events are just that,” says Justus Heinrich, Global Product Leader Marine Hull at AGCS.

“Trade volumes did not fall off a cliff as expected and now we see a strong recovery in several parts of the industry. The pandemic is also testament to the reliance of the shipping industry. Shipping companies learned the lessons of the global financial crisis, and as a result, are in a good position this time around.”

Data from the Institute of Shipping [4] showed global container throughput in the first months of 2021 exceeded pre-pandemic levels, increasing by 6.4% [5] in January 2021 compared to January 2020. Changes in consumption and shopping patterns triggered by the pandemic, combined with an easing of lockdowns and government stimulus packages, has led to increased demand for manufactured consumer goods, typically moved in shipping containers.

Similarly, the dry bulk market has benefited from the recovery of commodity prices. Demand for agricultural materials, coal, iron ore and other metals has caused commodity prices to rise sharply, helping drive up transportation costs by more than 50% [6]. The average daily earnings of dry bulk carriers saw a more than threefold increase in the first three months of 2021 compared to the start of 2020, its highest value in 10 years

There has been increased demand for manufactured consumer goods, typically moved in containers. Picture: Adobe Stock

However, the recovery is volatile and dependent on the success of vaccinations and the ongoing effects of the pandemic. Despite a recovery in the price of oil, seaborne oil shipments in 2020 ended the year lower – crude oil trade down 8% and oil product trade down 12% – while  tanker revenues per day [7] fell from a peak in April 2020 to their lowest level in over 20 years in January 2021.

Even the container market has had its ups and downs. Surges in demand combined with Covid 19-related delays at ports and shipping capacity management problems led to congestion at peak times. Having retrenched at the start of the pandemic, carriers, ports and shippers were all taken by surprise by the stronger than expected demand in the second half of 2020, which led to a shortage of empty containers in Asia.

“The current supply chain disarray in the container trade highlights the need for effective backhaul of empty containers,” says Captain Andrew Kinsey, Senior Marine Risk Consultant at AGCS. “As a result of trade imbalances shipping lines are faced with significant volumes of empty containers in the US and North Europe that need to be returned to Asian ports. When callings are canceled due to congestion this exasperates the shortage of available teus to load out bound cargoes.”

Other factors are likely to affect shipping capacity in the months ahead. In the dry bulk market, few ships were ordered in 2020 while the scrapping rate was twice as high as in 2019. Orders for new container ships picked up in the last quarter of 2020, following several years of deferred orders, although there is a lag of two to three years between the placement of vessel orders and delivery.

There are risks associated with volatile trade volumes, says Captain Rahul Khanna, Global Head of Marine Risk Consulting at AGCS: “Unpredictable, sudden sharp downturns and surges in demand are difficult to manage at the best of times, and can lead to capacity issues and supply chain disruption. In the early stage of Covid-19, many ships were taken out of service – either scrapped or in layup – and this has led to some supply constraints.”

The surge in demand for consumer goods has also been cited as a potential contributing factor in the recent rise in incidents of containers lost at sea. Stacking of containers on vessels is reported to be at very high levels in order to service this demand with concerns growing about whether containers are being safely secured on board.

[1] Splash247.com, Clarksons predicts seaborne trade volumes will surpass 2019 levels this year, March 8, 2021
[2] Allianz Research, Vaccine Economics, December 18, 2020
[3] UNCTAD, Shipping during Covid-19: Why container freights have surged, April 23, 2021
[4] Institute of Shipping Economics and Logistics, Container throughput still above level before Corona crisis, March 30, 2021
[5] Institute of Shipping Economics and Logistics, Leading container ports again achieve double digit growth rates, January 2021
[6] Institute of Shipping Economics and Logistics, 2020/2021 dry bulk traffic development - ore export ports are back on track, March 2021
[7] Institute of Shipping Economics and Logistics, The poor start in 2021 leaves quite some room for recovery in the tanker market, March 2021

Picture: Adobe Stock

The crew change crisis continues to have a major impact on the health and wellbeing of seafarers, with potentially long-term implications for safety. 
The Wakashio ran aground off the coast of Mauritius in July 2020. Picture: Adobe Stock.

Covid-19-related travel and border restrictions, and the widespread suspension of international flights, have significantly impacted the ability of ship operators to conduct crew changes. Between March and August 2020 only 25% of normal crew changes were able to take place (ICS) [8] while at least half a million seafarers have been affected.

As of March 2021, it is estimated that some 200,000 seafarers [9] remained on board commercial vessels, unable to be repatriated and past the expiry of their contracts, with a similar number of seafarers urgently needed to join ships to replace them. On any given day, nearly one million seafarers are working on some 60,000 large cargo vessels worldwide, according to the IMO.

The crisis raises serious welfare, safety and regulatory concerns. In addition to humanitarian and crew welfare issues, there is an increasing risk that crew fatigue could lead to human error and even serious accidents.

“Timely crew changes are vital to the safe operation of shipping, and seafarers spending extended periods on board are more at risk of mental health issues, exhaustion, fatigue, anxiety and mental stress,” says Captain Nitin Chopra, Senior Marine Risk Consultant at AGCS.

“There needs to be a global collaborative effort to get crews off ships. But the industry also may need to take measures to give crew some respite, such as adjustments to working hours.

If crews are fatigued a vessel could potentially be considered unseaworthy under international maritime law.”

Crew changes are also a compliance risk. According to the International Labour Organization (ILO) Maritime Labour Convention (MLC) crew should serve no more than 11 months continuously at sea and are entitled to access onshore medical facilities and care. According to the IMO, Covid-19 has caused many seafarers to serve significantly longer than the 11 months agreed by the ILO. If ships are unable to operate safely in compliance with international rules, vessels may have to suspend their operations.

The ongoing crew crisis is likely to have longterm consequences for the shipping industry, according to Kinsey. “With hundreds of thousands of crew members stuck on board vessels or on extended contracts, I have serious concerns for the next generation of seafarers. The situation with Covid-19 means that we are not training and developing them, while the sector may struggle to attract new blood due to current working conditions,” says Kinsey.

“Shipping is likely to experience a surge in demand as the economy and international trade rebounds with vaccinations. However, many crews are fatigued and have been under immense strain from Covid-19 for over a year. Potentially, we could see a shortage of seamen if the industry struggles to retain or recruit.” 

The crew crisis took on a new dimension in 2021. As Covid-19 infection rates escalated in India, one of the world’s largest sources of seafarers, ports – including Singapore, Hong Kong and the UK - barred vessels and crew that had recently visited India. Vessels also stopped calling at Indian ports, which are an important stopover for trade between Europe, Africa and Asia.

In a bid to resolve the current crisis, the IMO established a Seafarer Crisis Action Team and, working with the International Chamber of Shipping (ICS), developed a ‘Framework of Protocols’ for safely conducting crew changes. The IMO and other organizations have repeatedly urged governments to designate seafarers and port personnel as “key workers”, exempt them from national travel or movement restrictions, facilitate emergency repatriation and prioritize vaccinations. Mirroring these calls, more than 450 shipping companies and allied organizations signed the Neptune Declaration on Seafarer Wellbeing and Crew Change [10].

Extended periods at sea can lead to mental fatigue and poor decision making, which ultimately impact safety, says Khanna. “The mental health and wellbeing of seafarers is a massive issue that desperately needs to be dealt with. While there is recognition of the problem – as seen in the Neptune Declaration – this issue cannot be dealt with by the shipping industry alone and can only be solved in partnership with governments and other stakeholders.”

Crewing issues came under the spotlight in the wake of the Wakashio incident in July 2020 when the vessel ran aground off the coast of Mauritius, spilling hundreds of tons of oil in the process. Reports [11] indicated at least two of the crew had been on board the vessel for more than 12 months, unable to disembark when their contracts expired because of restrictive quarantine rules worldwide.

A global vaccination programme is likely to be the answer to the crew change crisis, although the situation is complicated by the international nature of shipping, explains Khanna.

In March 2021, the ICS [12] warned that lack of access to vaccinations for seafarers is placing shipping in a "legal minefield", and could cause disruption to supply chains from cancelled sailings and port delays. Vaccinations could soon become a compulsory requirement for work at sea because of reports that some states are insisting all crew be vaccinated as a precondition of entering their ports. However, over half the global maritime workforce is currently sourced from developing nations, which could take many years to vaccinate. In addition, the vaccination of seafarers by shipping companies could also raise liability and insurance issues, including around mandatory vaccination and privacy issues.

[8] International Chamber of Shipping, The Covid-19 pandemic: The crew change crisis
[9] International Maritime Organization, Crew changes: A humanitarian, safety and economic crisis
[10] The Neptune Declaration on Seafarer Wellbeing and Crew Change
[11] Lloyd's List, Two Wakashio crew were on board for more than a year, August 17, 2020
[12] International Chamber of Shipping, Shipping companies in 'impossible position' as proof of seafarer vaccinations poses legal minefield, March 22, 2021
Overall, Covid-19 has had only limited impact on marine claims to date, although the pandemic has increased the cost of some large claims, and may yet result in claims in future as vessels in layup return to service, and as the potential impact of the crew crisis and any delays in maintenance is revealed. 
The Golden Ray salvage operation has been complex and costly. Picture: Shutterstock

Hull insurance has seen little direct impact from the pandemic, although vessels in layup, in particular cruise ships, led to some large accumulation exposures, especially in hurricane exposed Florida and the Caribbean. Marine liability insurers are expected to face passenger liability claims related to cruise ships, while cargo insurers have experienced an uptick in perishable goods claims.

It is still early days however, according to Heinrich. “The frequency of marine claims has not reduced, despite the slowdown in trade in 2020. Most ship owners have maintained operations throughout the pandemic, and now we see a surge in demand and increased freight rates for container shipping and bulk carriers. Before we draw conclusions on the impact of Covid-19, we will have to see how claims develop in 2021.”

The surge in demand for shipping, coupled with the pandemic, has put shipyards under pressure, Heinrich continues. “We are seeing an increased cost of hull and machinery claims due to delays in the manufacture and delivery of spare parts, as well as a squeeze on available shipyard space, which is in short supply.”

Salvage is another impacted area. For example, the salvage and wreck removal of the Golden Ray car carrier, which ran aground near the Port of Brunswick in the US state of Georgia in 2019, suffered a setback when a number of the salvage crew tested positive for Covid-19.

“The availability of resources and the movement of people has been significantly impacted by Covid-19 and the imposition of border and travel restrictions. This has resulted in delays for hull and machinery claims, pushing up costs of salvage and repairs,” says Khanna.

Chopra also believes the pandemic may influence marine insurance claims further down the line: “Covid-19 has created an environment of elevated risk for the shipping industry, which is having to operate under very difficult circumstances. Covid-19 measures at ports, crew fatigue, disruption to maritime supply chains, surges in demand for shipping and the increased use of virtual pilots can all affect exposures.”

Potentially, insurers could see an uptick in machinery breakdown claims if Covid-19 has affected crews’ ability to carry out maintenance and repairs, or follow manufacturers’ protocols, Chopra concludes

In May 2021, the MSC Virtuosa became the first cruise ship to set sail from the UK in 14 months. A few weeks prior to that, Carnival’s Costa Cruises returned to service for the first time in 2021 in the Mediterranean, with sailings from Italy. 
Machinery breakdown claims could arise if reactivation or maintenace protocols are not followed on crusise ships. Picture: Adobe Stock

With the roll-out of Covid-19 vaccinations, most cruise operators have been tentatively preparing for a limited return to operations. A more substantial return to service is expected later in 2021 with the reopening of the US market.

For the cruise industry, reopening will mean reactivating the 300-strong global cruise ship fleet, which has been in layup. Although some operators have taken the opportunity to retire some older vessels early. Last year Carnival announced it is to remove 13 ships from its fleet and delayed deliveries of new ships.

The cruise fleet that emerges from the pandemic will be younger and more modern, although there are potential risks as vessels come out of lay-up, according to Chris Turberville, Head of Marine Hull and Liabilities UK at AGCS.

“Most cruise ships have been in warm lay-up, and would have been frequently moved and maintained by a skeleton crew. Machinery breakdown claims could arise if reactivation or maintenance protocols are not followed, but cruise ships typically have some of the highest standards of maintenance,” says Turberville.

In March 2021, a fire broke out on the MSC Lirica cruise ship, which was in warm lay-up in the port of Corfu. The fire reportedly started in a lifeboat, although all 51 crew were unharmed. In June 2020, a fire broke out on the cruise ship Asuka II, which was also in lay-up at the port of Yokohama, although it was quickly extinguished.

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