Marine insurance experts urge sector to work with shipowners in push towards maritime sustainability

Marine insurance firms should help clients to develop decarbonisation strategies, a white paper from underwriting firm Atrium and Bayes Business School (formerly Cass), City, University of London suggests.

The shipping industry currently accounts for around 3 per cent of global greenhouse gas emissions (GHGs) but the paper warns that figure could reach up to 13 per cent in the coming decades as other sectors decarbonise at a faster pace and global trade increases.

The white paper is based on co-author Andrew Mackenzie’s research project for his MSc in Insurance and Risk Management at Bayes, with input from two Bayes academics, Drs Cormac Bryce and Ioannis Moutzouris.

The International Maritime Organization (IMO) introduced two initiatives, Effective Energy Efficiency Existing Ship Index (EEXI) and Carbon Intensity Indicator (CII), which came into force on 1 January 2023. EEXI sets energy efficiency thresholds  for vessels, and CII assesses GHG emissions based on freight volume and distance sailed.

CII introduces a rating system which grades vessels between A and E, depending on their emissions performances. Both initiatives aim to track and evaluate the environmental impact of maritime operations. However, the sector has been seen as sluggish in cutting emissions – partly due to the high price premium on more fuel-efficient vessels, and uncertainty about which “greener” fuels will emerge as the fuel of the future and future regulations.

Action plans needed for most polluting vessels

The CII initiative requires shipowners and operators of vessels rated D or E to produce and implement an action plan to reduce greenhouse gas emissions.

Describing the move as a watershed moment, the paper says: “These actions raise the prospect of ships becoming non-compliant with IMO decarbonisation targets. Shipowners with lower ratings could face more detailed inspections from, for example, port state control and coast guard authorities.

“Non-compliance with IMO conventions could lead to prosecutions from the flag states responsible for enforcement.”

While most countries are still grappling with enforcement and penalty issues, the co-authors warn that in some countries it could potentially lead to the seizure of ships. Although that risk falls to owners of non-compliant vessels, they argue there are sound business reasons for maritime insurance companies to fulfil their “moral duty” to encourage decarbonisation of the sector.

The paper says: “At the very least, the decarbonisation challenge presents an opportunity for insurers and shipowners to work together more closely. The shipowner has the direct obligation to comply, and the insurer has a moral duty to facilitate that obligation with the best possible insurance solutions.”

Sounding an upbeat note, the paper continues: “The good news for both sectors is that there are ways to move forward.”

For insurers, these include:

• Warranties that require insured vessels to comply with the latest IMO initiatives – which would permit underwriters the option to survey vessels suspected of non-compliance.
• Amending underwriting guidelines and risk-adjusted premium models so they capture compliance data and use it with other risk criteria to adjust premium rates and deductible levels.
• Working more closely with clients to help them find innovative ways to remain compliant and transition to a greener future.

Mr Mackenzie said: “It is almost certain that regulators will set a strict and clear enforcement regime in the not-too-distant future and insurers who want to stay ahead of the curve should act now.

"Failure to act could have damaging consequences commercially and in pure reputational terms. I’m sure that many insurers will be taking the chance to consider whether clients who have ships rated D or E on the index might have a less robust approach more generally – and particularly around wider ESG issues.”

The paper and its authors recognise, however, that insurers need to strike  “a delicate balance”.

Dr Bryce said: “This research marks the beginning of an important line of enquiry as the maritime and insurance industries transition towards fulfilling their green agendas. The research is clear: stakeholders who work together in the maritime industry, better understanding the complex risks, challenges, and opportunities that IMO initiatives can bring to bear on their own businesses can ensure they are best placed for a greener future.”

Dr Moutzouris said: “The research findings suggest that to achieve the 2023 IMO targets for reducing GHG emissions while ensuring the smooth functioning of the maritime industry, needs collective and co-ordinated actions from all stakeholders involved. Marine insurance plays, and is expected to continue to play, an important role in that.”

Marine insurance is highly competitive, and customers have a wide choice of markets in which to seek cover. Being an outlier in terms of approach to decarbonisation could result in loss of market share in a sector that produced global premiums of $US35.8 billion in 2022.

However, the paper also flags challenges and uncertainties which insurance firms will have to navigate. These include ensuring new conditions in insurance policies comply with the UK Insurance Act (2015) and that coordinated action by the industry, including under the umbrella of the UN-led Net Zero Insurance Alliance, does not breach anti-Trust legislation.