Marine Cargo Catastrophe Modeling: Navigating the Challenges, Charting the Opportunities
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Marine Cargo Catastrophe Modeling: Navigating the Challenges, Charting the Opportunities 1 Building the World’s First Cargo Cat Model Our global economy is increasingly interconnected. International trade and complex supply chains rely on a vibrant shipping industry that transported $10 trillion in cargo in 2014, a volume that has quadrupled since containerization took hold in the 1970s. Insurance is essential to a resilient marine cargo industry. And while marine coverage is one of the world’s oldest forms of insurance, the rapid changes in global trade raise new challenges. Not only has the volume of international trade expanded as vessels grow larger and ports expand, the industry is exposed to greater correlations and accumulations of risk. Two recent catastrophes have highlighted the importance of risk and accumulation management in cargo and its correlations with other lines of insurance. In Hurricane Sandy, billions of dollars of claims resulted from a high concentration of cargo, watercraft, and specie risk — losses which clashed with the wider property losses caused by storm. More recently, the Tianjin Port explosions led to a record-breaking amount of cargo loss. In 2015, RMS set out to develop the world’s fi rst global model to provide the marine cargo and specie market with tools to better understand its catastrophic risk accumulations and correlations Sponsors with other insured lines of business. To do so, we partnered with seven leading marine (re)insurers, and with their guidance and data, have now completed this model, with coverage across almost The views provided in this report are those of RMS. We are grateful for the advice, comments, and feedback 80 countries. As an outgrowth of this collaborative development eff ort, this report is intended of our steering committee members from these sponsoring clients. to raise awareness in the marine industry about its risk to catastrophic loss, and to provide the insights and tools to not only improve risk management practice, but to innovative and create new fi nancial and risk transfer products for a growing and vital market. Hemant Shah President, CEO, and Co-Founder Risk Management Solutions Table of Contents Introduction ..................................................................................................................................................... 5 Current State of the Market ......................................................................................................................11 A Better Approach to Cargo and Specie Modeling ........................................................................12 Vulnerability ..............................................................................................................................................12 Exposure Accumulation ........................................................................................................................16 Cargo and Specie Disaster Scenarios ..................................................................................................19 Best Practices for Marine Cargo Catastrophe Modeling ..............................................................27 The Future of Marine Cargo Modeling ............................................................................................... 30 Introduction In the days leading up to Hurricane Sandy’s landfall at the Port of New York and New Jersey in 2012, longshoremen worked relentlessly to secure equipment, unstack cargo, and evacuate personnel. The preparation helped protect employees and allowed for a quick recovery; many terminals were accepting new traffi c within a week. However, these preparatory measures incorrectly assumed that strong winds would be the primary driver of cargo damage. In fact, it was a 14-foot storm surge that inundated unstacked shipping containers, new cars on open lots, and other cargo — cumulatively, all worth billions of dollars. The surge’s devastating eff ects on marine cargo became apparent when claims adjusters began their work the following week. In total, 16,000 autos were lost, 7,500 loaded containers were fl ooded, and more than 100 miles of railcars were damaged. Marine claims from the event totaled over $3 billion, the costliest losses in the line’s history. Sandy was the latest of several signifi cant marine losses in the 21st century. Just 10 months earlier, the Costa Con- cordia ran aground off the coast of Tuscany, causing insured losses of more than $2 billion. And since these events, the explosions at China’s Port of Tianjin in August 2015 resulted in an estimated $5 billion insured loss, another record-setting event for cargo risk. This succession of large losses has prompted many in the industry to question whether, given the rapid growth in global trade, these events have become the new norm for the marine industry. The purpose of this report is to explore this question in detail, highlighting the catastrophe exposure of key global ports, the risk management practices that aff ect cargo fragility, and the implications for the insurance industry. 5 The Containerization Revolution Prior to 1960, global shipping was cumbersome, time took two decades for the industry to agree on global consuming, and expensive. Tariffs and freight fees were container standards, the ultimate benefits cannot be paid at every stage of a journey and each shipping understated. Containerization is responsible for dra- line had different sets of packaging and transportation matic reductions in shipping costs and transport time, standards. Longshore operations were entirely manual and corresponding increases in efficiency and reliability. and cargo theft was pervasive. Consumer goods previously limited to luxury markets, such as fresh produce and foreign autos, became avail- Malcolm McLean, an iconoclastic American transport- able to a wide consumer base. This, in turn, further in- ation entrepreneur, invented and operationalized the creased the demand for trade. Between 1970 and 2010, first intermodal shipping container in 1956 — an inven- global sea-based trade tonnage nearly quadrupled. tion with tremendous potential that went unnoticed for several years. His solution was simple: using plain Today’s largest container ships can carry more than containers of standardized dimensions which could 18,000 containers at capacity. Many of the largest easily be stacked and seamlessly accommodated by ports have automated operations and annually process trucks, trains, and ships. hundreds of billions of dollars of cargo. This has led to faster turnaround and greater cost efficiencies. But But over time, McLean’s eventual success led to wide- from an insurance and value accumulation perspective, spread acceptance of container shipping. Although it it has created new challenges. International Seaborne Trade Tons Loaded (MM) Malcolm McLean at Port Elizabeth Image by Maersk Lines 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1970 1980 1990 2000 2010 6 The Growing Impact on Insurers The Need for Managing Cargo Cat Risk Cargo containerization benefitted the global economy, units) of container cargo each year. If these containers Property insurers have embraced catastrophe risk • What is the relative risk of different categories of but it created new catastrophic risk exposures for insur- were laid end to end, they would circle the earth more models to understand their exposure to hurricanes, cargo, such as autos, electronics, temperature- ers. As the size of container ships grew, the capacity of than five times. Therefore, any large marine insurer can earthquakes, and floods. Even “movable exposure” controlled goods, and petroleum products? ports and storage facilities increased to accommodate expect to have significant accumulations of insured such as workers compensation and life insurance is • What is the likelihood the same catastrophe them. Larger vessels rendered many river ports inacces- cargo in cat-exposed ports. actively managed. The same framework should be used causes losses to other lines of business within sible, necessitating their consolidation with seaside ports for cargo risk, providing actionable results to assist in my company? where cargo became more vulnerable to windstorm and Exacerbating the challenges of this risk is the fact that key risk-management decisions such as: • What is the impact of greater geographic storm surge. Many of these ports were built on landfill, cargo is mobile. Unlike buildings and their contents, diversification of my book? Can I achieve the amplifying their vulnerability to liquefaction in the event whose locations are fixed and whose values are well • How much cargo exposure have I accumulated in a same benefit from reinsurance purchase? of a major earthquake. understood, cargo moves frequently and its at-risk given location? value can be volatile over time. While real-time shipment • What are my potential losses in a broad range of The same catastrophe models used by property in- The size of today’s ports was unimaginable a few tracking is standard in retail trade, the marine industry catastrophic events and how likely are those events surers can successfully be used by cargo insurers to decades ago. Shanghai, the world’s largest port, turns currently lacks the mechanism to track insured ship- to occur? manage their risk. Historically, property and marine loss over more than 30 million TEUs (twenty-foot equivalent ments with any meaningful precision. • How much should I price for the catastrophe load have been well