The maritime shipping industry: Transitioning to the future

Authored by AXA XL Head of Marine for France, James Amos

About 90% of the world’s goods—raw materials, foodstuffs, manufactured items, and energy products—are transported by ships, underscoring the maritime shipping industry’s vital role in today’s highly interconnected global economy.

How did this happen? Two answers: The introduction of standardized shipping containers and assets that got bigger—much, much bigger. The ships, the ports, the equipment used in ports to handle cargo, and even the Panama Canal are larger than ever. However, “bigger” isn’t necessarily all upside. As the shipping ecosystem has grown, so have the risks and environmental impacts, posing significant challenges to all corners of the maritime shipping industry and society at large.

Against that background, I highlight three of the industry’s most significant issues, the first relevant to cargo owners, the second to marine insurers, and the third to ship operators.

Shipping delays: Increasingly prevalent and costly

Containerization enabled many companies to adopt just-in-time manufacturing and inventory management practices, which, in turn, reduced operating costs. However, the downside is that shipping delays can upend companies’ carefully orchestrated operational plans, leading to significant financial losses.

The COVID-19 pandemic brought this into stark relief. When national lockdowns stopped or slowed the flow of goods, the generally efficient maritime shipping industry suddenly had to contend with numerous challenges and many supply chains were severely disrupted. These episodes underscored how value creation today depends heavily on shipments arriving within narrow windows. Or, conversely, how value can be destroyed when goods and materials don’t come on schedule.

While shipments can be delayed for many reasons, one relates to how the maritime ecosystem has struggled to adapt to the massive ships entering service. (Geopolitical tensions have also been a factor.) The shortcomings include bridges with insufficient clearances, port quays and turning basins that aren’t deep or wide enough, and cranes ill-suited to efficiently loading/offloading larger cargo loads. Although many ports are working to accommodate bigger ships by expanding their facilities and upgrading their operations, the “margins” associated with these mega-vessels keep getting smaller and smaller, increasing the potential for a value-destroying delay. Who can forget, for instance, the saga of the Ever Given being stuck in the Suez Canal for six days? Or, more recently, the Baltimore bridge that collapsed after being struck by a container ship.

Unfortunately, since standard marine cargo and contingent business interruption policies require physical loss or damage to trigger coverage, harms caused by shipping delays generally aren’t insurable. The limited exception to this is machinery/equipment included in “delay in start-up” or “advanced loss of profits” policies that indemnify clients against any additional expenses, penalties or lost profits they incur if a project finishes behind schedule, e.g., if critical components don’t arrive on time.

These increasingly prevalent shipping delays are prompting some companies to re-assess how they organize and manage their supplier networks. Two responses we’re seeing are:

Re-configuring supply chains. In particular, prioritizing suppliers located nearer at hand over those on the other side of the world.

Re-thinking inventories. A critical premise underpinning many operating models is that inventory is expensive. However, for some materials/components, the added expense of maintaining slightly larger inventories could offset the direct and indirect costs of a delayed shipment.

The Poseidon Principles for Marine Insurance

The Poseidon Principles for Marine Insurance (PPMI) represent a groundbreaking framework designed to integrate climate considerations into the marine insurance industry. The initiative was launched in December 2021 in response to the growing need for environmental accountability within the shipping industry, a sector that is responsible for about 2-3% of global greenhouse gas emissions. It is also part of a broader initiative supported by the Global Maritime Forum, alongside similar frameworks for financial institutions and cargo chartering.

The PPMI are a collaborative effort involving major international marine insurers, including AXA XL, and leading maritime shipping companies. The Global Maritime Forum and UMAS, an independent commercial consultancy supporting decarbonization initiatives in several industry sectors, provide expert support. (Sundeep Khera, AXA XL’s Global CUO Marine Hull and Head of Marine, UK & Lloyd’s, is Vice-Chair of the steering committee for signatories.)

The primary objective of the PPMI is to establish a standard for quantifying and reporting the carbon intensity of marine insurance underwriting portfolios. By aligning with the International Maritime Organization’s (IMO) goals, these principles aim to ensure that the global shipping industry can meet its target of reducing greenhouse gas emissions by at least 50% by 2050 compared to 2008 levels and achieving net-zero emissions as soon as possible within this century. The principles are designed to be revised and updated in alignment with the most recent scientific evidence and international climate targets, ensuring that the marine insurance industry remains at the forefront of sustainability efforts.

Since their inception, the PPMI have made significant headway in promoting transparency and accountability in the marine insurance industry. The annual disclosure reports published under these principles provide insights into how closely their marine insurance portfolios are aligned with the required decarbonization trajectories. These reports highlight achievements and areas needing improvement, guiding the industry towards more sustainable practices.

The principles have also been instrumental in promoting a shift towards more environmentally responsible underwriting practices. They encourage participating companies to consider the environmental impact of their portfolios and make informed decisions that contribute to global decarbonization efforts.

Decarbonization is a shared responsibility. As a leading marine insurer, we look forward to working with our clients and fellow Poseidon Principles for Marine Insurance members to build on existing industry initiatives, drive action and realize a positive impact.

Deploying more environmentally sustainable fleets

Most of the approximately 60,000 merchant ships afloat today consume massive amounts of heavy diesel oil and generate vast quantities of carbon dioxide, sulfur dioxide, nitrous oxide, soot and fine dust. In addition to generating 2-3% of global CO2 emissions, these vessels contribute about 15% of the nitrous oxide and 13% of the sulfur dioxide in the atmosphere.

However, the industry recognizes the need to lessen its environmental footprints, and myriad efforts are underway to deploy more environmentally sustainable fleets. These include, for example, using alternative fuels like liquefied natural gas (LNG). Other innovations include advanced hull designs, enhanced propeller configurations, and air lubrication technology, which reduces friction between the ship’s hull and the water. All of these help reduce fuel consumption and emissions.

At the same time, ship owners in many parts of the world are starting to design and deploy vessels incorporating lithium-ion batteries or sails.

Innovations pioneered by the automotive and consumer electronics industries have substantially reduced the cost of lithium-ion batteries while improving their performance. As a result, applications involving lithium-ion batteries have become increasingly attractive and accessible to other industries.

In recent years, more and more vessels have begun using lithium-ion batteries in either fully electric or hybrid systems.

For example, three fully electric passenger ferries were launched last year in Singapore to transport employees, contractors and visitors from the mainland to a small island 5.5 km offshore that houses one of the region’s largest oil refineries. These ferries travel at 21 knots, or nearly 40km per hour, and have battery capacities twice that of most electric ferries this size; hence, they emit significantly less carbon dioxide and no nitrogen and sulfur oxides.

Similarly, Norway’s extensive network of passenger ferries now includes several fully electric ferries, and more are being developed.

In other cases, some new cruise and large container ships have been equipped with hybrid systems combining diesel engines with lithium-ion batteries. This setup allows them to use battery power to run onboard electric systems and for propulsion in ports and coastal areas, thereby reducing harmful emissions in densely populated places.

Then there is the original, and still free, power source: The wind. However, the modern sail technologies being incorporated into commercial ships to supplement engine power are unlike the cloth sails of yore. These include rigid and kite sails that harness wind power to propel ships.

Rotor sails (or Flettner rotors) involve oversized cylindrical rotors placed on a ship’s deck. The spinning cylinders use the Magnus effect for propulsion. These sails have been used on various vessels, including tankers and cargo ships, to reduce fuel consumption.

Kite sails are essentially giant kites flown in front of the vessel to pull it along using wind power. These systems can be used on virtually any large vessel and provide significant fuel savings under suitable wind conditions.

In conclusion, the maritime shipping industry understands and respects its essential role in powering global trade and is committed to transitioning to more sustainable vessels and operating practices. AXA XL fully supports these efforts and looks forward to working closely with our clients and industry partners to enable this transformative shift in the global maritime sector.