Cybercrime and piracy. No, this isn’t another tired article on illegal Game of Thrones downloads. Underwriters are seeing cybercrime and piracy combine to pose an unprecedented risk to the world’s marine industry.
Truth be told, the unpredictability of the high seas has always made shipping risky business, but when it comes to emerging risks, Australian operators seem to be in as tough a spot as any worldwide.
“Emerging risks are the flavour of the month at the moment, and there’s a particular question around cyber,” says Matthew O’Sullivan, Head of Property, Engineering & Marine at Zurich Financial Services Australia.
According to Allianz, 147 out of 246 global piracy events (60%) took place in south-east Asian waters in 2015, with Vietnam topping the list – not the best news when the overwhelming majority of our goods pass through Asia.
Pirates, of course, are nothing new. But tech-savvy swashbucklers are increasingly able to locate vessels, search out their weaknesses, and pinpoint the location of valuable cargo. And they’re drawing the attention of underwriters.
Underwriters are seeing cybercrime and piracy combine to pose an unprecedented risk to the world’s marine industry.
“We have only seen a couple of examples where hackers have got in,” says Ron Johnson, Allianz Global Corporate & Specialty – Pacific Regional Manager of Marine.
“But there have certainly been more cases where hackers have identified where cargo is in a port, hub or vessel.”
In theory, hackers could take over a whole ship, or at the very least disable its systems, adds Johnson.
“There have been examples where hackers have remotely accessed drilling rigs and taken control,” he says.
Neil Hiller, Managing Director of Austbrokers Hiller Marine, says one type of potential cyber risk which isn’t necessarily covered by conventional cargo insurance is where goods are effectively stolen by hacking a system and changing ownership details.
“Through cybercrime it is possible to fraudulently assume ownership of goods through the theft or alteration of shipping documents whilst they’re being sent from one side of the world to the other,” he explains.
Zurich’s O’Sullivan says brokers need to be aware of the importance of letting their clients know that is is critical to minimise the chances of their computer systems being compromised.
“In marine, everything is being done online. And so there’s a risk in people getting access to records, which for example could identify that there are high valued goods in a container,” O’Sullivan explains.
“If that information is passed to someone that is a criminal, theft could occur.”
Les Rout, QBE Insurance Australia’s National Product Manager of Marine, agrees that the marine sector is “particularly vulnerable to cyber attack”, whether by targeting databases or storage locations.
As such, marine insurance policies are now subject to cyber risk exclusions, says Rout.
“The challenge for marine insurers is to determine whether a theft of goods during transit is a straightforward cargo claim or due to a cyber attack,” Rout explains.
MEGA-SHIPS AND CARGO ACCUMULATION
Cyber is not the only emerging risk making waves in the marine industry. Many underwriters are also keeping an eye on the rise of the mega-ships, which as Johnson puts it, are like the “Melbourne Cricket Ground on water”.
Capable of holding more than 20,000 containers, mega-ships can transport cargo worth more than $2 billion.
These mega-ships are state-of-the-art, so there’s no inherent added risk to the container per se. But the sheer accumulation of wealth is what has insurers taking note.
“With a value of about $100,000 per container, we are talking significant values at risk,” Zurich’s O’Sullivan says.
Truth be told, the unpredictability of the high seas has always made shipping risky business, but when it comes to emerging risks, Australian operators seem to be in as tough as spot as any worldwide.
“In Australia, we don’t get these mega-ships going through our ports because we don’t have the infrastructure to cater for them.
“But potentially our cargo is being transhipped onto these mega vessels in Hong Kong, Shanghai or Singapore.”
Mega-ships are not the only place goods accumulate. Having too many items in one port, at one time, also poses risks, such as the 2015 Tianjin explosions (see case study).
“Our clients send millions of dollars’ worth of cargo per year, but the nature of shipping means we don’t always know whether a large proportion of it may all be momentarily at one port,” says Rout.
SUPER-STORMS AND CLIMATE CHANGE
Another emerging risk is the increasing frequency of super-storms due to climate change.
“Most people are aware of it. What can you do about it? That is the difficulty,” says Allianz’s Johnson.
You only have to look at the 2012 Hurricane Sandy as an example of what can go wrong when you put too many eggs in one basket. Underwriters say it was the first event that really highlighted the exposure to cargo from super storms.
Presently, the best solution is to try and get out of the way.
“Risk management or cyclone mitigation controls allow us to work with the broker and the insured to move the at-risk goods or containers out of the way,” says QBE’s Rout.
Then there are emerging geopolitical risks.
“Developing nations are becoming key parts of the overall global supply chain so that in itself is an enhanced risk,” Zurich’s O’Sullivan explains.
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“Brokers need to have an awareness that these countries could often be an intricate part of their insured’s business.”
Rout adds that trade sanctions also threaten supply chains.
“The marine insurance market uses a regularly updated international global cargo watch list to review risk exposure to complex destinations,” he says.
WHAT BROKERS NEED TO KNOW
When it comes to properly looking after clients in the marine insurance industry, Rout says brokers need to have a basic understanding of which contract law applies to their clients’ marine insurance risks.
There are important differences between the Marine Insurance Act 1909 (MIA) and the Insurance Contracts Act 1984.
“For instance, issues such as duty of disclosure, effect of warranties on a policy and how claims are adjusted,” Rout says.
And for clients who import goods, Rout warns there can sometimes be misunderstandings about who is actually responsible for insuring goods.
“We have seen many cases where insurance has been arranged by the supplier but they still lodge a claim under their Australian cargo policy,” Rout says.
For emerging broker opportunities in marine insurance, Rout says it’s hard to go past cargo insurance.
“It is a major segment of the Australian marine market. It touches all businesses – from the smallest SME importer to the largest multinational company,” Rout says.
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“Brokers have an important opportunity to build their client base as many businesses which receive transported goods by sea are often unaware of their liability if the container or ship is damaged en-route.”
The sheer volume of economic activity within the logistics and international trade industries mean there’s no shortage of opportunity, adds Austbrokers Hiller Marine’s Hiller.
“International trade makes up nearly 50% of Australian GDP. So clearly there are a lot of opportunities in relation to international trade,” he says.
“The logistics industry is now the largest industry in Australia – it’s bigger than mining and it’s bigger than agriculture. And marine insurers typically underwrite risk in logistics.”
WHAT’S ON THE HORIZON
When it comes to the approach of brokers and underwriters who deal in marine insurance, Hiller says they can be divided into two camps.
“Some insurers are increasingly taking a commoditized approach encouraging brokers to use their online quoting and binding systems,” he says.
“Then there are other practitioners who are going for the advisory model where the brokers understand the complexities of marine insurance law and the risk exposures that their clients are exposed to – giving advice rather than just simply selling an insurance policy.”
That said, Hiller believes more and more brokers in this space will adapt their services to provide a combination of risk management advice, as well as selling traditional insurance products.
“So it’s combining risk management advice, loss management advice, insurance wording and also giving advice on not just insured losses but also the uninsured losses,” he says.
And despite the emerging risks of cybercrime and climate change, the re-emergence of piracy and massive accumulations of cargo on mega-ships, Hiller says in reality there hasn’t been a major worsening of risk exposure across the industry because of big improvements in the level of risk management.
“At the time of the WWII marine insurance premiums made up 50% of all global insurance premiums. And now it’s probably less than 5%,” he says.
“That’s not just a reflection of the competition, that’s actually because the risk exposures are substantially reduced.”
Which means that while technology is opening the door for risks such as cybercrime, it’s being more than counterbalanced through risk mitigation solutions.
“In the old days we had people carrying sacks of flours on their back and now we use shipping containers,” says Hiller.