News & Events
NEWS | Sep 11

Post online – Reinsurers demand greater decision-making powers as wreck removal costs soar

Munich Re is calling for reinsurers to have more say in decisions relating to marine salvage and wreck-removal operations against the backdrop of increased politicisation and escalating costs surrounding the Costa Concordia cruise liner wreck.

Dieter Berg, Munich Re senior executive manager for marine, said: “”In the recent past, political considerations resulting in disproportionate operational requirements have developed into the key drivers for escalating wreck-removal expenditure.

“We are troubled by the fact that, although reinsurers have to pay the lion’s share of the costs, they are hardly involved in the decision-making process for the salvage operation. We would like to have a say in the measures that need to be taken.”

Last month, Munich Re revealed the cost of removing the Costa Concordia, which ran aground off the island of Giglio in January 2012, as exceeding $1.1bn (£700m) (www.postonline.co.uk/2287375). The Italian government has ordered the ship be removed in full, rather than removing the wreck in pieces.

Demian Smith, Torus Insurance global marine head, has agreed that the rising cost of salvage and removal of wreck operations is concerning.

He told Post: “”Our presumptions of the appropriateness of pricing have been based on an environment previously where countries weren’t quite so environmentally sensitive as they appear to be now. The costs are going up and we need to make sure that we understand what drives the costs and that we can charge an appropriate level of premium.””

He added that insurers being involved in the decision making process is “”slightly more challenging””.

“The challenge with having a say in the measures that need to be taken for salvage is that our policies are of indemnity to an insured that will be subject to decisions made by a competent jurisdiction or a competent court.”

As the Costa Concordia and the 2011 Rena wreck off the New Zealand coast have shown, governments have the power to dictate what happens in their territorial waters, Smith said.

“The New Zealand government said the same thing. This is their waters, this is what they want to have happen, they will hold the ship owner to account on it and their PI insurers then provide a policy of indemnity.”

Referring to the Costa Concordia, Nigel Russell, marine director at broker RFIB, said: “”As of the present moment reinsurers have no control over these kinds of claims. The whole maritime community has become aware that governments are becoming a lot more difficult on these removal of wreck type claims and pollution incidents.”

“Reinsurers are saying either this is isn’t the type of risk we thought we were underwriting or they are saying that in the future they want to exercise some more control as to the claims handling process,” Russell said.

Willis Marine managing director Neil MacNaughton predicts Munich Re is not alone in its concerns.

“The days of patching vessels to make them watertight and pulling them into deeper seas are becoming less acceptable in many locations. The impasse over the Costa Concordia is a good example. That it can be done is not in doubt but it appears the authorities are insistent it be done in a certain way which is causing the complexity, delay and driving up the cost,” he said.

Berg also questioned if the way salvage operations are insured should be changed.

“The introduction of an individually priced separate cover for removal of wreck depending on the type, size and value of the ship in question has to be considered,” she said.

MacNaughton agrees separate insurance cover is an interesting concept.

“The PI clubs respond to legal liability and do so in a consistent and predictable way. Authorities around the world like this and can trust the certification they provide on board the vessels,” he said.

“If you had separate insurance for removal of wreck then less scrupulous operators may not buy such cover or have insufficient limits. It would be far too late by the time this was uncovered.”

Smith added that, traditionally, wreck removal has been seen as a small part of the risk.

“Suddenly we have got this whole area of risk that we didn’t think was of primary importance. How do you start rating for it? It may be separate head of cover,” he said.

MacNaughton suggested certificates of financial responsibility similar to those required for the US 1990 Oil Pollution Act could be a solution.

“However, this would unlikely bring the reinsurers any closer to the decision making process,” he added.

“On that basis the PI clubs remain a better option but they may choose to consider their own limits of liability in future.”

Lloyd’s released a report looking into the rising cost of marine wreck removal called Complex Cases, Costly Solutions: The Challenges and Implications of removing Shipwrecks in the 21st Century in March.

The International Union of Marine Insurance is due to hold its annual conference next week in London. Removal of wreck and salvage operations are among various topics that are scheduled to be discussed.

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