Summary of Working Paper No. 85-1997

IV.3.3: Marine Insurance for the Northern Sea Route: The Feasibility of a New Risk Regime. Some Initial Conclusions.

By Edgar Gold, John A. Cantello and Peter L. Wright, Oceans Institute of Canada, Halifax, Nova Scotia, Canada.

It was quite clear from the commencement of INSROP research, that risk coverage for Northern sea Route operations would be one of the key foundations upon which the idea would either succeed or fail. Over four years of detailed research have amply confirmed this fact. During this period the marine insurance research group has made contact with all major marine insurance markets, covering hull and machinery, cargo and liability claims. This involved not only an assessment of the availability of coverage, but also providing insurance interests with information on the Northern Sea Route and its commercial possibilities. In other words, direct contacts with the insurance industry in London, New York, Moscow, Oslo, Montreal and Vancouver has opened the door to the possibility of developing a new risk regime. Although marine insurers have provided coverage for Arctic shipping operations for some years, this has occurred on a relatively irregular basis and has never formed a major part of the marine insurance market.

However, the Northern Sea Route is projected to become a regular trade route, both for the transit of vessels from and to the Far East and Europe, as well as for the export of Russian Arctic resources. If this is to become a reality, then traditional marine insurance coverage will probably not suffice and a new risk regime will have to be created. This will present marine insurers with a significant challenge. However, marine insurance is an industry that, in the past, has always responded well to innovative needs. It is an industry that has developed new risk regimes for super tankers and their larger VLCC and ULCC sisters, a whole series of high risk/high-value offshore oil and gas operations, LNG and LPG carriers, and highest-risk cruise vessels. Accordingly, the Northern Sea Route should not present marine insurers with risks that cannot be covered. Hesitation would only arise if the information needed to properly assess the risk were incomplete.

The INSROP marine insurance sub-project has attempted to fill the information gaps for marine insurers throughout the project. However, the perceived weakness in this approach was that, at this stage, the Northern Sea Route is still a hypothetical theory. This problem was exacerbated by the fact that the shipping and cargo sector has not so far shown any significant commitment to "try" the route. In other words, the research group has been unable to present marine insurers with "real" ships and cargoes, to pass through the Northern Sea Route, on which a risk could be assessed. Even the Kværner Masa-Yards ancillary project, that presented relatively "realistic" hypothetical ship profiles, has had great difficulties in persuading marine insurers to actually "quote" on the information provided. Although some quotations were received from insurers in New York, Vancouver, Oslo and Moscow, these were generally rough estimates that, nevertheless, provide a general idea. On the other hand, despite a number of attempts, the London market, which will be the real "key" to Northern Sea Route marine insurance, has so far reserved any decision on this part of the project. INSROP research has not yet sufficiently determined the types of ships and cargoes that would transit the Northern Sea Route. Furthermore, the position of the Russian government, as well as the types and reliability of the shipping services available along the route, remain unclear. There are many open questions that still need to be addressed in the next INSROP research phase. It is also clear that INSROP's marine insurance sub-project needs to carry on its "missionary" work to inform the marine insurance and related shipping sectors of the importance of the project. In the end it is these contacts, already well-developed, that will lead to a reliable data base that could assist insurers in their risk assessment decisions. Some of this can be furthered through contacts with industry organizations, such as the International Union of Marine Insurers (IUMI), the Institute of London Underwriters (ILU), The American Institute of Marine Underwriters (AIMU), The Insurance Institute of London, The International Chamber of Shipping (ICS), INTERTANKO, the International Group of P&I Clubs, The Petroleum Association of Japan, the Japan Shipping Exchange, and others. For example, it has been suggested that any further study of this subject area must involve close cooperation with the Salvage Association which is heavily relied upon, particularly by the London marine insurance market. This work should provide the necessary combination of direct involvement, reliable knowledge base, tested data, and some assurance of commercial viability to turn an important, innovative international research project into economic reality.