As the Suez Canal reopens, the insurance industry is bracing itself for huge losses ‘made up of compensation for delays’ and covering ‘potential damage to cargo’
Brokers and underwriters in the UK are scrambling to understand the full impact of the blocking of Egypt’s Suez Canal, which resulted in disruption to global shipping as companies awaited vital goods and parts.
The Ever Given is one of the world’s largest container vessels - it become wedged in the canal on 23 March and was not refloated until 30 March, a whole week later. The backlog created by the canal’s obstruction is expected to cost billions of pounds.
It is not only the cargo on the affected vessel itself which has been impacted, as there were nearly 100 vessels waiting to use the canal once it is reopened.
For the UK, the blockage had the potential to cause shortages of a range of goods and supplies.
It is estimated that seven of the top 10 exporters of electrical goods to the UK are Asian countries, while the UK also sources half its furniture from Asia. China manufacturers produce almost half the toys imported into Britain, which are likely to pass through the canal, as well as a similar amount of home goods.
The Ever Given was bound for Rotterdam and was estimated to be carrying goods worth $89m, however the situation had the potential to create more than $40bn of trade disruption, according to analysis from Russell Group.
Analysis from the research university collective showed that the potential disruption of the blockage could have a significant impact for the retail sector, with the Evergreen container ship carrying clothing items with an estimated value of $4m.
Commenting on the figures, Russell Group managing director Suki Basi said: “The disruption highlights that global trade has become dependent on these ‘mega ships’ and how any disruption in trade routes can leave many organisations and their (re)insurers significantly exposed to business interruption risks.
“Coming on top of the global pandemic and recent disruptions to global auto production caused by other events, this latest blockage shows that insurers and their risk partners increasingly need to follow the money when assessing their underlying connected trade risks.”
David Smith, head of hull and marine liabilities at broker McGill and Partners added: “The blocking of the Suez Canal might appear to be a local issue, but in truth it is a situation of global significance with more than 10% of world trade passing through the narrow Egyptian waterway.
“The ships stuck in the queue behind the grounded Ever Given could arrive at their destination well behind schedule, with no obvious ‘ETA’ in sight. This is incredibly damaging for those sending, receiving and transporting freight.
“The disruption will come with a hefty price tag, a figure of $100m has been mentioned by some in the industry. However, the final bill - which will be made up of compensation for delays, loss of revenue for the Canal Authority, potential damage to cargo and the cost of refloating the ship - is likely to be even more expensive.
“For some time now the salvage industry has been warning that container ships are simply getting too big for situations like this to be resolved efficiently and economically.
“This incident may force shipbuilders, owners and cargo operators to sit up and listen.”
Fitch Ratings said the ultimate losses will depend on how long it took the salvage company to free the container ship completely and when normal ship traffic can resume, but Fitch estimates losses may easily run into hundreds of millions of euros.
The company added that because the Ever Given should still be able to travel once freed, claims related to hull and cargo insurance, including salvage - which will be borne by the shipowner’s hull insurer - should remain significantly below this cost level.
“However, the shipowner’s protection and indemnity club will probably also face claims from the owners of the cargo on the Ever Given and of the other ships that [were] blocked in the Suez Canal for losses related to perishable goods and supply chain disruptions,” warned Fitch.
“In addition, they may face claims from the Suez Canal Authority itself for loss of revenues.”
Guy Platten, secretary general of the International Chamber of Shipping, added: “The world relies on the shipping sector to keep all of us supplied and the incident in the Suez Canal has shone a spotlight on the delicate nature of these global supply chains.
“The literal ‘pinch point’ of Suez is a prime example of how an unexpected incident can disrupt the finely balanced system that we all rely on.
“Not only will the goods aboard the Ever Given be severely delayed on their journey, but the hundreds of other ships are also affected. The damage done to the global supply chain will be significant.
“This also speaks to a deeper problem. The governments and markets are sitting up and paying attention to this issue as we can clearly see an economic fallout from the delay to goods the blockage [caused].”