Comparison of Marine Insurance for Arctic Routes 

(by Karl Magnus Eger)

Marine insurance allows ship owners and carriers generally to take on the risk of trading on Arctic routes. Of particular importance for Arctic shipping is Protection and Indemnity (P&I) insurance, offered through so called P&I Clubs. P&I cover a wide range of liabilities including personal injury to crew, passengers and others on board, cargo loss and damage, oil pollution, wreck removal and dock damage. In addition, underwriters normally charge a surcharge with respect to Hull and Machinery (H&M) and Cargo Insurance.

The Northeast Passage

One of the first tries in order to identify insurance risk aspects of the NSR was the International Sea Route Programme (INSROP, 1993-1999), followed by the Arctic Operational Platform (ARCOP, 2003-2006). INSROP was important in terms of recognizing required risk coverage related to H&M, cargo insurance, P&I and a number of miscellaneous risks. It became clear that the Russian as well as the global marine insurance market was willing and able to underwrite NSR navigational and related risks, provided that appropriate and adequate information structures of the risks involved could be presented to underwriters. However, the research carried out by INSROP identified that the claims on the NSR would be higher than those experienced in southern waters. In particular, wreck removal, pollution salvage and towage, cargo, and crew claims was of particular concern. Estimates showed that the total insurance rate would be expensive for the ship owners and almost twice the comparable insurance rate prevailing in shipping via the Suez Canal.

Overall there was a lack of reliable statistical data and the insurers suggested that initial premiums would be conservative until a better database is provided. In that respect, Russia has not been willing to share much of its official data, for instance, on the rate of damages. However, some statistics are available, based on historical data of accidents. Most hull damages, for instance, have occurred in the eastern NSR, principally East Siberian and the Chukchi seas, due to its more difficult ice conditions.

Of note, is also that approximately 10% of ice damage to ships occurs when navigating independently; 60% of damage occurs when following an icebreaker; and the remaining 30% results from towing, grounding and other operations in ice. Furthermore, it is still unclear to what extent the statistics presented by the Russians are valid and significant. It does not state, for example, how many of the operations that have taken place during winter and/or summer season. The underwriters will need more reliable and extensive statistics in order to make appropriate risk coverage of the NSR available. However, the marine insurance industry is generally unwilling to provide information on risk coverage based on hypothetical or theoretical questions. As a result, the provision of insurance for tends to be on a case-by-case basis. 

The Northwest Passage

The combination of draft restrictions, narrow straits, severe ice conditions and lack of infrastructure are significant risks that will affect the insurance premium in terms of navigation on the NWP. Draft limited to 10m excludes many of the standard types of ship unless they are very lightly loaded. The deep draft routes via the Prince of Wales Strait (or M’Clure Strait) would be suitable in this sense, but have the most extreme ice conditions in the archipelago. Furthermore, it is likely that navigation on the NWP will continue to be difficult due to the pattern of ice drift from the Central Arctic Ocean swept southward through the Canadian archipelago. The previous observations also show a very high year-to-year variability of sea ice coverage in the NWP, an important factor of uncertainty when considering marine insurance.

Moreover, the severe ice conditions would be a potential damage to hull, which means that additional H&M insurance would be required in order to cover the risk. In addition, the P&I cost would most likely be very high for any ship owner that enters the NWP. When considering the availability of icebreaker assistance it seems also quite limited (from June to November).  In light of insurance, this will most likely increase the premium. In additions, there is uncertainty related to the official statistics of incidents on the NWP. Furthermore, there are examples of ships having navigated the NWP without the knowledge of the Canadian authorities. Thus, it is difficult for Canadian authorities to provide a complete picture of NWPs historical accident statistics. There is limited knowledge and research on the marine insurance aspects of the NWP. However, as demonstrated, there are several risk aspects which may imply that the insurance premium will remain high.

The Transpolar Passage

Currently there has not been any commercial voyage using the central Arctic Ocean as a shortcut. However, if one considers the possibility of any future TPPs, the insurance rate is likely to be higher than for the coastal routes. Higher risks for ice damage to ships and potential damage to cargoes in extreme cold temperatures, and non-existent maritime infrastructure in the Central Arctic Ocean will most likely be factors in determining future TPP insurance rates.

The Passages in Comparison

With the exception of the NSR experience and the research that was provided through the INSROP and the ARCOP, there is only limited knowledge on the marine insurance aspects of Arctic shipping.  Lack of empirical data and significant statistics makes it difficult for marine insurance underwriters to compose an overall risk assessment related to the risks of the various Arctic shipping routes. Even if lots of the risks associated with shipping are well known and understood by insurers, there are still risks related to Arctic navigation that needs to be identified. Underwriters normally base their underwriting premiums on statistics and the frequency of accidents is a key element in the evaluation of risk when navigating in Arctic waters. Knowledge of accident rates can help determine insurance rates.

The international insurance market is willing and able to underwrite risks in terms of shipping on the three Arctic transport corridors, but to a very different price. On the basis of the risk factors identified in this study, it is likely that the insurance premium will be higher for the NWP and TPP than for the NEP.

Karl Magnus Eger, 2010, Comparison of Marine Insurance for Arctic Routes, CHNL.©