URSABLOG: Don’t Write Shipowners Off

It had all the hallmarks of a great idea talked about over a long lunch in the City by no doubt very intelligent people nonetheless hampered by ignorance. You can almost imagine it, in some fine dining establishment in the self-styled Maritime Capital of the World, the City of London:

“So let’s see. If the CII (Carbon Intensity Indicator) is at D or E, then we could withdraw Hull and Machinery cover because obviously these are substandard, older, obsolete ships run by cowboys. More wine? It really is a lovely drop isn’t it, the 2014? Anyway, we could try that, or at least adjust the premiums to reflect a poorer CII rating. What if we get some academic credentials too, make it a bit more – you know – scientific, give it humph. Loads of funky graphics. And then we can send a press release out and make some waves in the ESG space, get us some more kudos. God knows we need it. Pour me some more would you. Thanks. Got to be on the crest of the wave with all this stuff, right?”

Well, maybe I am being a bit facetious, but this is what came into my mind when I read in Tradewinds about publication of a paper by Atrium and Bayes Business School (formerly Cass) of City, University of London. I apologise in advance if I have offended anyone in the insurance world of my characterisation of lunches around Leadenhall, which is nonetheless informed by my own experience.

Anyway, the basic idea is – although there is liberal use of words like ‘may’, ‘maybe’, ‘suggests’, ‘might’ and ‘could’ – underwriters could pull cover from ships that perform poorly under CII ratings as a way to encourage decarbonisation efforts:

“For those shipowners that have vessels rated ‘D’ or ‘E’ on carbon intensity, their insurance could be more expensive and restrictive – potentially facing bigger premiums, higher deductibles, risk audits and tighter policy wordings. They may also be commercially less attractive to finance companies and charterers.”

You see what I mean about the use of ‘could’ and ‘may’. Anyway, the report quotes an underwriter:

“If you’ve got an insured that is a ‘D/E’ rated, maybe that gives you a glimpse as to how they run their organisation. In terms of risk selection, that becomes more of an issue for underwriters.”

’Maybe’. Or maybe not. In fact definitely not.

The CII rating, as currently calculated, is fundamentally flawed. I point both Atrium and Bayes to the monumental piece of data driven research by the owner/operator Oldendorff, which they should have referred to, or at least been aware of before releasing their own observations.

Here are some of their conclusions which have found general agreement in the shipping industry as a whole:

I could go on, and there is much, much more but this information is out there already, and not just from Oldendorff. I commend the paper to Atrium and to Bayes.

A comment like the one quoted above about underwriters glimpsing how owners – sorry the insured – run their ships through a D or E rating says more about how underwriters think than how ships are run.

I asked a client of mine – the owner of a substantial fleet of vessels about the CII rating of a series of ten sister ships trading in the Atlantic, mostly between North America and the EU. He told me that three had a B rating, four had a C rating and three had a D rating.

“We don’t worry about those with a D rating,” he told me. “All we have to do is a couple of longer ballast legs – even if it’s not profitable – and they will go up to a C in no time.”

This owner has a well-deserved excellent reputation for the quality of their vessels, not only seaworthiness, but cargo and charterer worthiness.

I despair when I see ships circulated in the S&P market with their CII ratings, as this just shows a misunderstanding of how CII ratings are reached, and therefore say nothing of the inherent quality of the vessel itself. As we all know, in the markets at least, past performance is no guide to future performance.  

But the underwriters obviously think differently. Here is another quote from one of them:

“Assume you have a shipowner who has deliberately and repeatedly refused to comply with regulatory requirements regarding emissions and potentially exposed itself to fines. One that has a completely careless attitude to the regulations and their legal requirements. Could an H&M underwriter claim that it was material for them to disclose this cavalier disregard on account of moral hazard? Absolutely, because what it reveals is that legal requirements are not something that [the Assured] prioritises, and it is indicative effectively, of a lack of proper maintenance.”

Leave aside that there is no mechanism in place to penalise owners at present, and even less of a framework in place to enforce it. Also leave aside that a poor CII rating of a ship – as seen from the work of Oldendorff – does not suggest a “cavalier disregard” for anything. A poor CII rating – that could come from a very good ship trading on short laden voyages with few ballast legs and a long time in port – does not in any way reveal anything about an owners’ view of how important legal requirements are to them, let alone an effective indication of a lack of proper maintenance. A casual reader of the shipping press over the last couple of years would know this, and I would have hoped that underwriters and academics would too.

I have no particular axe to grind with Atrium, but I do feel that if the London insurance market wishes to remain relevant they should at least understand the issues surrounding CII and not leap to assumptions about the quality of the management of the ships they may insure because of CII ratings. 

As for Bayes Business School, as may expected, their own press release is a bit more nuanced and reasonable. Even so, I find this statement from Andrew Mackenzie, the lead author of the paper, worrying:

“Failure to act could have damaging consequences commercially and in pure reputational terms. I’m sure that many insurers will be taking the chance to consider whether clients who have ships rated D or E on the index might have a less robust approach more generally – and particularly around wider ESG issues.”

This is a very dangerous suggestion to make.

Bayes Business School are an academic institution and have to produce relevant research in the areas it concentrates on. Atrium are a business and have to make money in a competitive market place. But shipowners are in the business of owning and managing ships, and are therefore more acutely aware of the challenges of decarbonisation regulations, not just as a ‘moral duty’ but in most areas of their daily operations, to say nothing of the decisions they will have to make in the ships they invest in the future. Shipowners are the customers of underwriters, not their enemies, and pay for the services they provide. Perhaps underwriters should engage with them more, rather than – literally – writing them off completely when producing papers like this. Without them, their business would not exist.

Simon Ward