Risks to global trade:Allianz experts task marine, shipping industry on robust risk management

• Diversification strategy for supply chains

• Underscores effects of shipping disruptions

• War attacks put crew welfare in spotlight

Cynthia Ezekwe

The global marine and shipping industry is being urged to adopt a holistic approach to risk management in order to steer clear of the looming risks that threaten to capsize the future of trade.

It comes as the global trade landscape is being buffeted by escalating geopolitical tensions, climate change-driven disruptions, increasingly complex cyber threats, among other volatilities that threaten the future of international trade.

Marine experts at Allianz Commercial Marine, the business insurance giant, in calling for a “holistic approach to risk management”, observed that the shipping industry, the lifeblood of global trade, is being tossed about in the turbulent waters of volatility and uncertainty.

With war, geopolitical turbulence, climate change-induced disruptions such as droughts in the Suez and Panama Canal, and the resurging threat of piracy in the Horn of Africa, the industry is navigating treacherous seas on multiple fronts, and the experts warn that these challenges pose an existential threat to established trade routes, supply chains, and the stability of international trade as a whole.

Allianz Commercial’s latest safety and shipping review underscores a troubling trend: the growing volatility and uncertainty stemming from war and geopolitical events is casting an ominous shadow over the shipping industry. Recent incidents, such as those following the conflict in Gaza, serve as a clear warning that global shipping is increasingly exposed to the destabilising effects of proxy wars and geopolitical disputes, a vulnerability that could have devastating consequences for the stability of international trade.

According to the report, in the wake of a bitter conflict, the Red Sea became a flashpoint for violence, with the Houthi militant group unleashing more than 50 attacks on merchant vessels between November 19, 2023, and early April 2024. It points to this spike in attacks as a chilling example of the vulnerability of global shipping in the face of geopolitical instability.

“We have also seen the first total loss of a vessel, the first fatal attack, as well as signs that the crisis may have spread following the seizure of a container ship by Iranian forces in the Strait of Hormuz, the world’s most important choke point for oil shipping,’’ the report added.

The report also underscores the cascading effects of shipping disruptions in volatile regions, noting that the attacks against vessels in the Red Sea and Middle East waters, combined with the persistent drought-driven disruption in the Panama Canal, represent a one-two punch for global supply chains.

“The attacks in the Red Sea have severely impacted Suez Canal transits, while a lack of rain and the El Nino phenomenon contributed to the second driest year in the Panama Canal’s history, also affecting transits.  Both routes are critical for the transport of manufactured goods and energy between Asia, Europe, and the US East Coast,’’ it noted.

Allianz’s report also sheds light on the ripple effects of the disrupted Suez and Panama canals, noting that transits in early 2024 dropped by 42 percent and 49 percent respectively from their peak levels. For vessels, the new reality is a harrowing one: longer journeys, higher transit costs, and a ripple effect on global trade that reverberates through economies worldwide.

The continued disruption to shipping, according to Rahul Khanna, global head of marine risk consulting at Allianz Commercial, has been a persistent problem that’s unlikely to ease anytime soon. Khanna noted that shipping has become a prime target for groups seeking to wage proxy wars, as attacking vessels allows them to gain global attention and cause widespread damage to markets. This disturbing trend, Khanna warns, exposes the shipping industry to unprecedented risks, making it essential for companies to adopt a comprehensive risk management strategy to weather the growing volatility and uncertainty.

Highlighting the core challenges faced by shipping and maritime industry which  poses risk to international trade,  Khanna noted that attacks from war puts crew welfare in the spotlight, adding  that the human cost of the Red Sea crisis has been staggering, with hundreds of crew members impacted by the violence.

“Seafarers are on the front line, putting their lives at risk daily. The maritime industry is already grappling with a workforce and skills shortage and there is a great concern that the crises of recent years will impact our ability to attract talent at a time when it must meet growing demands from decarbonisation and an increasing reliance on technology,’’ he stated.

Nitin Chopra, a senior marine risk consultant at Allianz Commercial, highlighted the alarming evolution of warfare and the increasing vulnerability of commercial shipping. The changing landscape of modern conflict, he explained, means that highly sophisticated weapons, previously the exclusive domain of state actors, are now falling into the hands of non-state actors, including proxy groups and terrorists. The potential for catastrophic disruptions to shipping, Chopra warned, has been dramatically amplified by the growing use of drones and explosive devices in attacks on critical trade routes, as evidenced by recent events.

“Looking to the future, more technologically driven attacks against shipping and ports are a distinct possibility. Reports of vessels experiencing GPS interference and jamming, which can result in lost or inaccurate signals affecting navigation are increasing, particularly in hotspots such as the Strait of Hormuz, the Mediterranean and the Black Sea. Vessels’ Automatic Identification Systems (AIS) can also be spoofed and are open to cyber-attack. The blocking of the Suez Canal by the container ship ever given in 2021, for example, highlighted the potential to cause widespread disruption to global trade via an attack on a large vessel,’’  Chopra remarked.

According to Régis Broudin, global head of marine claims at Allianz Commercial, the world’s supply chains have been subjected to a litany of disruptions in recent years, from extreme weather events and shipping disasters to the COVID-19 pandemic, regional conflicts, and, most recently, the Baltimore bridge collapse. The list of calamities seems endless, each delivering a blow to global trade and leaving in their wake a trail of economic and logistical chaos.

In the face of these multifaceted challenges, Broudin urged the shipping industry and its customers to adopt a diversification strategy for their supply chains, with nearshoring and onshoring becoming viable options in some cases. Moreover, Broudin stressed the importance of increased transparency in tracking cargo, underscoring the need for a comprehensive approach that combines diversification, agility, and data-driven decision-making to weather the storm of disruption in global trade.

“While the global risk environment for shipping has changed significantly in recent years, the average shipper still knows very little about the location of their cargo, which makes it very difficult for them to put effective contingency plans in place to minimise disruption. Ultimately businesses will need to update their approach to cargo risk management and business continuity planning,’’ Broudin added.

Wayne Steel, senior marine risk consultant at Allianz Commercial, weighed in on the potential ramifications of rerouting, highlighting the need for a broader recalibration of the shipping industry’s supply chain. He cautioned that a prolonged shift towards alternative routes, like the Cape of Good Hope, will require an overhaul of essential infrastructure and services, such as bunkering, supply, repair, and maintenance facilities. This paradigm shift, Steel noted, will demand a profound level of strategic foresight and logistical dexterity if the shipping industry is to weather the disruptions without incurring severe losses.

Wayne expanded on the implications of rerouting, pointing to the potentially hazardous consequences for smaller vessels accustomed to calmer waters. Navigating the rough seas and stormy weather near the Cape of Good Hope, he explained, could be a formidable task for vessels and crews that are not properly prepared and trained. This unfamiliarity with more challenging sea conditions, Wayne cautioned, could lead to a higher incidence of accidents and incidents, exacerbating the strain on an already overburdened industry.

The complex web of sanctions imposed on Russia’s oil and gas exports since its invasion of Ukraine has, according to Allianz, created a troubling shadow fleet of tankers operating outside international regulation and lacking proper insurance. This hidden armada of ageing vessels, often poorly maintained and equipped, presents a significant hazard to both maritime safety and the fragile environment in strategic choke points critical for oil shipping.

“Russia is not the only country to operate a shadow fleet. Iran and Venezuela have used such tankers to circumvent sanctions and maintain oil exports. Estimates put the size of the dark fleet at between 600 to 1,400 vessels, roughly a fifth of the overall global crude oil tanker fleet,’’ the report noted,’’ Allianz stated.

The precarious nature of the shadow fleet’s ageing vessels is a major safety concern, as noted by Justus Heinrich, global product leader for marine hull insurance at Allianz Commercial. He warns that many of the vessels in this clandestine armada are past their operational prime, pushing the envelope of safe operation and often sailing on razor-thin margins of safety.

As the political landscape grows increasingly fraught with tension and volatility, Allianz marine experts urge shipping companies to anticipate and prepare for potential disruptions to their operations and supply chains. The insurance experts underscore that proactive measures to mitigate risk, combined with greater flexibility and adaptability, are essential for navigating the turbulent waters of global trade in the 21st century.