Decarbonization is the single most significant challenge facing the global shipping industry over the next few decades, as firms embrace net-zero emissions targets by 2050. Shifting to cleaner energy sources opens companies to a host of exposures that the insurance industry needs to cover.
“There’s a huge amount of investment and modern technical advancements are required to achieve the targets that have been set by the IMO (International Maritime Organization),” he said in an interview with Insurance Business.
The price tag for the transition from carbon-based shipping is about US$1.4 trillion (around CAN$1.84 trillion), according to the Global Maritime Forum. Shipping contributes around 3% of global greenhouse gas emissions annually.
The IMO's strategy is to reduce the carbon intensity of international shipping by 40% by 2030. But Khanna said individual organizations have set even more ambitious targets.
“A lot of shipowners have themselves adopted even stricter targets of being net-zero by 2050,” said Khanna. “That means we need to literally change the way we run ships and design vessels. We will need to change how we train people and how we build the infrastructure around these ships.
“So, we are looking at large-scale changes in the industry. And any sort of change, in the beginning at least, brings high risk because we don't understand the short-term and even long-term risks of these changes.”
AGCS recently released its annual safety and shipping review, outlining losses and trends in the marine industry. This year’s report again highlighted the risks posed by decarbonization efforts worldwide.
According to AGCS, shipping companies and cargo operators have begun switching to vessels powered by liquefied natural gas and experimenting with alternative fuels such as biofuels, methanol, ammonia, and hydrogen.
Other green technologies being adapted in the industry include solar and battery-powered all-electric vessels, wind-assisted propulsion systems, more efficient propellers, and bulbous bow designs.
The transition will take decades to complete, in the meantime, shipping companies will likely be using a mix of fuels, posing challenges for shipowners, operators and ports.
While the shipping industry has yet to see any major claims from decarbonization efforts, AGCS anticipates more issues may arise as alternative technologies and fuels are rolled out at scale.
These innovations can accelerate the carbon transition efforts but also expose shipping companies to risks, according to Khanna.
For one, companies must have well-trained, well-qualified crew operating new machines and equipment to avoid accidents.
“It’s extremely essential that the industry takes its time to understand the risks before we start using new technologies,” Khanna said. “Training is an integral part of the transition, and we need crew that can keep up to speed with the changes that are coming.”
Decarbonization will also accelerate the trend for larger ships, AGCS noted in its report. These vessels already make up an outsized proportion of container trade worldwide; an estimated 65% of fleet growth in the next few years is expected to be focused on ships larger than 15,000 teu (twenty-equipment units, or twenty-foot containers).
Larger vessels can more efficiently transport goods, but they also pose a greater risk of having multiple interests involved in an incident, which means potentially larger losses. The increase of large vessels also leads to higher container cargo accumulation and exposure.
Moreover, the salvage costs for large container ships are tremendously high, AGCS noted, with only a limited number of ports and shipyards able to service and repair such vessels.
Finally, alternative fuels like hydrogen and ammonia are difficult to transport and handle, heightening risks for shipowners.
Collaboration will be essential to mitigating the risks of the carbon transition, according to AGCS. Companies and insurers must work together and exchange information on the newest innovations and alternative technologies, and the risks these pose.
Brokers are a critical part of this chain of information, Khanna stressed.
“Insurance brokers are pivotal in that they play a key role in getting the information from clients to the insurers, and vice versa,” he said. “An insurer can price a risk when they fully understand its complexities. So, the flow of information between the insurer and the client must be very, very good.”
Khanna encouraged brokers and agents to be transparent about their clients’ decarbonization efforts.
“We understand that these are new technologies and new methods, and that there are some variables for which we may not have a full explanation,” he said. “But as long as there's transparency and a flow of accurate information between the insurer and the client, there can be some great partnerships.”
Like their clients, brokers will also be pushed to innovate insurance solutions for new risks that will arise from the decarbonization effort.
“Brokers are in a unique position because they can get the industry together to dialogue and produce tailored solutions,” Khanna said.
What are your views on the decarbonization of the global shipping industry and the risks associated with the transition? Tell us in the comments below.
