Today we take a trip down Memory Lane, all the way back to 17ecentury London. Just as they do now, the inhabitants then loved a good cup of coffee – and even a nice piece of coffee culture. However, if you step into one of their coffee houses, you may get more than you expected.
To us modern people, free WiFi may seem like the most disturbing thing that has ever happened in a liquor store. But once this is where the entire insurance industry happened. Founded in 1688 and a popular meeting place for shipowners, merchants and sailors, Lloyd’s Coffee House on Tower Street sparked the birth of marine insurance – it catalyzed the globalization of trade and laid the foundation for the many lines of insurance we’ve come to know since.
There is little left today of the place that launched a thousand slips. But just a short walk from the former site is today’s Lloyd’s of London Market, which trades billions of pounds in sea bounty every year.
Aside from this minor move, arguably little has changed in maritime insurance, even though the shipping industry itself has evolved tremendously, from wooden sailboats to steel container ships. Sure, the IT and the regulations are new, but it’s essentially the same Coffee House.
However, for both financial and environmental reasons, marine insurance could one day soon once again find itself at the forefront of industry disruption.
For starters, the expensive manual processes that underpin the industry are looking increasingly striking, given the prolonged pressure on margins endured by shipping insurers. Meanwhile, the impetus for change will also come from outside, as consumers, businesses, governments and regulators have a growing interest in ocean management and the environmental and social footprint of the maritime sector.
From hull and cargo to offshore energy, marine insurance isn’t going anywhere anytime soon. But it’s time we at least ask the question: what could the next iteration look like?
In this short series, we find an industry ripe for automation technologies such as Blockchain and IoT. We are also exploring how maritime insurers can help the wider industry achieve its CSR and sustainability goals – by facilitating the transition from offshore oil and gas to offshore renewable energy and supporting environmentally sound ship recycling. Finally, we look at the risks and opportunities posed by the next generation of global trade as we move beyond cargo sensors to fully autonomous ships and ports.
Disrupting the oldest insurance line in the world
Even before COVID-19, shipping lines were in dire need of a reset. Years of soft market conditions and declining loss trends – especially in the hull – had left rates at unsustainably low levels. A correction was already underway in 2018, with Lloyd’s insurers significantly prune their sea books. And this profitability was also supported by the accelerated market hardening that 2020 brought to commercial lines more broadly.
However, reliance on favorable market cycles is unlikely to lead to long-term profitability. So, given that shipping remains fundamentally commoditized, where will the renewed profits come from?
An obvious place to start is with improvements at the bottom. Paper processes are indeed so prevalent in shipping lines that they represent an opportunity to bring about a step change in costs. However, this paperwork exists for a reason: to document complex multilateral agreements between shipowners, shipbrokers, freight owners, logistics companies, insurance brokers, risk bearers, port operators, law firms and more. Automation initiatives need to simplify – but also maintain – this complexity.
It is this conundrum that makes marine insurance an ideal, if unlikely, home for Distributed Ledger Technology (DLT), such as blockchain – as a way to streamline and strengthen multi-party agreements in equal measure.
The Fisherman’s Blockchain
To date, the reality of blockchain in marine insurance has largely left the hype behind. However, this is a much slower moving sector than blockchain’s other hunting grounds – from cryptocurrencies to CryptoKitties – so it’s far from time to write off the wisdom of those long on the tech.
Indeed, we are starting to see a slight increase in commercial deployments. London-based Insurwave, which estimates it can eliminate 40 percent of ecosystem costs through its marine blockchain platform, raised £5 million in September 2020. More recently, the B3i consortium and the Eurapco Alliance have joined forces in Unity – a blockchain-based risk transfer service they try for reinsurance at sea.
A similar long position could be taken on the Internet of Things (IoT), which has the potential to transform the risk management of containers in transit, especially containers that need to be stored at very specific temperatures (such as the COVID-19 vaccine). ). The use of in-pallet sensors, such as that of Lloyd’s Lab participant Parsyl, has been limited so far, but the potential adoption base is huge.
The ability to “see” inside containers in real time will not only reduce the spoilage of sensitive cargo, but also reduce the risk of ship fires, a growing trend in claims on large container ships. This will also be helped by better labeling conventions – where DLT can again play a role – to prevent the unconscious concentration of combustible cargo in any part of a ship.
IoT and blockchain offer maritime insurers more than just cost-saving opportunities, they also enable a variety of top performance and value-added services. The self-ordering pallet – where a spoilage claim is automatically triggered by sensor measurements – has been talked about on the conference stage, but remains an interesting concept. We may also consider a pay-as-you-sail policy, perhaps with the option to enable piracy and storm coverage based on satellite geolocation.
So, despite its well-deserved reputation for drowsiness, there are plenty of opportunities to make marine insurance profitable again — albeit a little technology and a lot of perseverance. And this isn’t the only way innovators can make a difference.
Can insurers play a role in maritime sustainability?
In addition to the manual processes we alluded to above, the shipping industry also has other manual processes. Manual processes that don’t involve paper, but all in all more annoying materials – and which will certainly be more difficult to eliminate.
Ship shedding is something we rarely have to deal with – out of sight is out of mind indeed. But every ship that was ever insured was eventually scrapped.
Shipbreaking is as primitive as it sounds. The vast majority of ships end their days being torn apart by workers, including children, on Third World beaches. Not only does this work cause frequent accidents, it also exposes the environment to the engine oil, asbestos and heavy metals contained in these often decades-old hulls.
There is enormous scope for the maritime sector to reduce its hidden environmental and social costs by promoting more responsible forms of ship recycling. To see how insurers can play a role here, stay on board for our next installment.
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Contact James Thomas