Marine Insurance Aspects of the NSR/NEP

(by Karl Magnus Eger)

An important initiative to the marine insurance aspects of the NSR was the INSROP (1993-1998). According to the Russian legislation, a compulsory insurance is required for foreign ships trading in the NSR¹ . Furthermore, it appeared unlikely that the shipping industry would develop an interest in the NSR without the necessary economic incentives or much better information on the route² . The substance of these aspects was not fully recognized when INSROP was initially designed. During INSROP 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 underwriters² .

Although NSR had been used for many years this had been confined to specialized, mainly Soviet shipping. In that respect shipping tended to be insured under state schemes. During the 1990’s the state monopoly in the Russian insurance sector ceased to exist, and that Russian insurance sector was now a proper marine insurance market with many companies competing for business for various types of risk coverage, assisted by a modernized legal system of Russia. In other words, Russian marine insurance market is today able to underwrite NSR coverage specifically³  .

INSROP recognized that risks required coverage was: H&M, cargo insurance, P&I and a number of miscellaneous risks⁴ . P&I insurance, including cargo insurance, depends on a ship size and a type of cargo, and H&M insurance compiles with the ship price, taking account for the estimated damage rate. Furthermore, those H&M policies do not cover navigation in ice infested waters and require special arrangements with the insurer. For instance, and although double hulled vessels had been operating in Arctic waters for a long period, double hull may involve higher repair and maintenance costs and, thus, higher insurance premiums.

Regarding P&I clubs, INSROP found that some of the Clubs had experience of Russian operations. However, claims on the NSR would be higher than those experienced elsewhere. In particular, wreck removal, pollution salvage and towage, cargo, and crew claims was of particular concern⁵ .

INSROP 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 route⁶ . Overall there was a significant lack of reliable statistical data and the insurers suggested that initial premiums would be conservative until a better data base is provided.  

Russia was not willing to share much of its official data during INSROP, for instance, on the rate of damages. However, some statistics of damages along the NSR was presented. It was stated that during the period 1954-1990 a total of 800 damages (22 a year) were reported on the NSR (See Table 5.4).

Table 5.4: Ice Damages to Ships on the NSR (1954-1990⁷ )

gear⁵ . Relatively many old ships of L1 class had been involved in the damages. L1 class ships, as the lowest rated ice capable class, do not have appropriate strengthening and are sufficient for navigating in summer season in very light ice conditions.  The most hull damages have occurred in the eastern NSR, East Siberian and the Chukchi seas, due to its more difficult ice conditions principally⁵ .

Table 5.5: Hull damage frequency in different modes of operation (1954-1990⁸ 

ARCOP was a three year (2003-2006) research project that concentrated specifically on accessing the oil and gas resources of the Arctic regions of Russia. The main purposes were to determine what specific changes that had been taken place since INSROP and what risk factors that would likely affect the On the other hand, the potential insurers would need a more reliable and extensive database in order to calculate the risk. That was the INSROP conclusion drawn through further contacts with the major marine insurance actors. One of the main problems was lack of significant statistics showing the relative variations. Insurers are not comfortable in responding to hypothetical or theoretical proposals. However, INSROP stated that scattered data about damages to vessels caused by ice exist, but a more analytical approach and description discussing the damages caused to vessels of higher ice class in different ice conditions would be needed. The actual damages should also be compared with theoretical estimates and class regulations. More detailed descriptions of both the ice conditions and the actual damages would make it possible to apply these data on other vessels. I.e. statistical data on the operations along the NSR must be presented more detailed⁶ . In the next stage, these data should support the different risk estimation procedures of future operators.

insurance⁹ . ARCOP faced complexities similar to that experienced during INSROP. This was due to the fact that the marine insurance industry was generally unwilling to provide information on risk coverage based on hypothetical or theoretical questions. However, it was, again, stated that if marine underwriters are presented with a realistic situation, i.e. full information on a named vessel, information on the route to be taken, the cargo to be carried, the duration of the voyage, and such other information that a practical insurer may require, it appeared to be certain that a realistic insurance rate would be quoted by the insurance negotiator involved⁴ .

This was basically the same conclusion drawn from the INSROP project, namely that marine insurers appear to be willing to underwrite the various risks involved in NSR shipping operations. However, this could not be fully confirmed until more practical evidence of the actual planned shipping services was being provided² .

Non-Russian Commercial Transits of the NSR/NEP

What came out the ARCOP and the INSROP was that marine insurers are capable of responding to new risk coverage demands in many innovative ways, but such risks must be based on practical experiences.  Given the organization structure of the insurance industry and how it works, it seemed clear that the most effective way of evaluating the future of insurance for NSR shipping is to perform experimental voyages on the NSR with non-Russian ships. According to ARCOP, there appeared to be little new evidence that cargo exporters and importers had expressed further interest in the use of the NSR and there was less concern with actual trans-Arctic shipping. Neither INSROP nor ARCOP research had been able to present marine insurers with significant data.

The Kandalaksha (1995) experimental voyage, using the NSR/NEP from Yokohama to Kirkenes, carried out by INSROP² , had been more a test of propulsion technology, communications and navigation systems, ice strength, ship hull design, etc. than a commercial venture. Although the experiment was important and successful, the project group concluded that further experimental voyages were needed in order to have the commercial aspects including marine insurance tested² .

The Arctic Demonstration and Exploratory Voyage (ARCDEV), in April/May 1998, was carried out to demonstrate the technical feasibility of transporting oil/gas condensate from the Russian Arctic to Western Europe by icebreaking tanker and to evaluate the economic situation of such transport. The Finnish tanker Uikku was used to find out the objectives of creating basic material on economics of marine transportation including marine insurance cost. According to the Russian NSR Guidelines, a mandatory insurance is required and financial security issued for potential liability in case of marine environmental pollution. The fact that nuclear powered icebreakers are widely used in NSR created a specific problem related to insurance cover. The marine insurance underwriters excluded insurance coverage for any kind of consequences of damages from radiation of nuclear materials. On the other hand, and in accordance to the Russian regulations, the Russian nuclear powered icebreaker operators do not have any liability insurance which would cover for any kind of consequence of nuclear related incidents. This was a problem in the case of Uikku, According to the project group, it implied that, the ship owners are provided services which remove their insurance cover and they expose themselves for risks which are not accountable¹⁰ . The following response was presented:

“It is common knowledge that nuclear related risk are beyond the scope of cover under all marine insurance policies. Thus any kind of nuclear related incident or liability would be sorted out in a way that bona fide ship owners would be held harmless. Uninsured nuclear risks are alien to western operators and an obstacle to make reliable risk assessment for investors. In a logical sense those who gain profits from using optional nuclear fuel would solve the problems with additional insurance costs and liabilities in case of incidents¹⁰ .

Moreover, their concern was related to the fact that the assisted vessel cannot choose what kind of fuels that are used on icebreakers. In addition, the project group disclosed that H&M coverage operates with a much higher premium than normal. The higher premium was made due to the fact that there has not been any major hull damage in past operations. Again, this is similar with INSROP and ARCOP findings.  Even if this was a practical case for the insurance industry, it reacted with a high risk assessment, due to lack of available statistics.

Recently, the German company, Beluga Shipping transits of the NEP during August and September 2009, was one practical experiment that would be of interest to insurance companies relative to their need for reliable data in their risk analysis. Two ships delivered various heavy lift modules from Ulsan, South Korea, to Novy Port/Yamburg at the River Ob, via the NEP/NSR by passing the Novaya Zemlya and continued to Arkhangelsk, where ships loaded steel pipelines to deliver them in Nigeria. The exact marine insurance coverage and cost is currently not available, but according to one representative from Beluga, the marine insurance aspect of the NEP/NSR transits was not a significant barrier when considering the economic profitability. 

The INSROP and ARCOP marine insurance projects focused on responding to some specific questions in order to determine if risk coverage for the NSR navigation were realistic. One of them related to certain time- and cost-saving advantages in using the NSR over the Suez Canal routes. However, the exact economic advantages were not known. This was also due to the lack of detailed knowledge related to costs for icebreaker assistance and ice navigators, real time ice data, reliable weather forecasts and administrative procedures and acceptance in the Russian bureaucracy.

However, the Beluga case gave some indications in that respect. For instance, by using the NSR/NEP over the Suez Channel, Beluga made financial savings of about 100 000 USD alone for bunker costs plus 20 000 USD daily for each day travelling the NEP shortens the usual voyage time¹¹ . Overall, about 300 000 USD per vessel were saved by transiting along the NSR instead of using the Suez Channel.

Another factor that must be added to the calculation is the cost related to icebreaker escort and navigation. According to Beluga Shipping representatives the two Beluga ships had Russian Ice Navigators steering the ships through the passage. In addition, two nuclear powered icebreakers were hired during the transits. The icebreaker hire was handled as a regular service component included in the “Charterers Agreement”, and it was arranged that the client should cover the costs for ice breaker assistance. According to Beluga, the cost of hiring icebreaker escort was around 60 000 Euros, not a very significant amount.

Furthermore, the ice breaker assistance for parts of the voyage was something that the client and the insurers as well paid great attention to. “However, nobody insisted, since icebreaker assistance is a regular part and integrated into the NSR regulations anyway. You need to pay for them no matter whether you use them or not¹² . According to Beluga, special meetings were held between their experts and representatives of the insurers. The details of Belugas’ planning and preparation processes, the routing proposal, technical details of the vessels etc., had been presented to the underwriters who then decided on the extra premium applicable for these particular cases. Nonetheless, Beluga was not willing to give details about the extra premium, since that was part of private negotiations. Still, Beluga was willing to share some of the insurers’ risk concerns, including:

· Vessels may encounter unknown, unexpected coastlines or areas of shallow water.

· Vessels may encounter sea areas strongly covered with broken ice.

· Vessels may get stuck in ice.

· Vessels may lose propulsion due to damage or lost variable pitch. 

· Less functionality of radar/nautical equipment.

Another aspect that would reduce the risk and high insurance premium of transiting the NEP is how the project was organized and prepared in advance. In that respect, Beluga had gone through detailed preparations and procedure for the voyages i.e. modern ice hardened vessels, experienced seafarers, a committed department Health, Safety, Security & Environment, an own future-oriented department for Research & Innovation and engaged chartering expert. In addition, Beluga had three full time employed meteorologists with access to up-to-date satellite pictures and analyses of the ice situation on a daily basis. During the transits, they provided the captains with daily routing suggestions avoiding ice contact as best as possible to minimize the risk.

In addition, it is interesting that the Beluga Headquarters in Bremen are planning the process for using the NSR again in 2010, then perhaps with up to six vessels during the possible six to eight weeks in the Russian summer. According to Beluga, next year’s transits might result in financial savings of about 600 000 USD per vessel and transit¹¹ . This will create another new dimension for the utilisation of the seaway that has just opened up. Although the insurance cost in the case of Beluga are unknown, it might only be a speculation, but if the financial savings are as significant as they suggest, it is also possible that they are willing to pay a relative higher insurance premium, as opposed to ARCDEV project in which the insurance was regarded as an economic obstacle.

However, Beluga was quite restrictive regarding the insurance issues. According to Beluga: “(…) the risk issues are seen as an experimental advantage and marks a main difference between our approach and others who wants to sail the NSR, but don’t know how to deal with the concerns¹²   In other words, Beluga claimed that they knew how to satisfy and reassure the insurers, “(…) but we are not revealing that to everybody for quite obvious reasons¹² .

Karl Magnus Eger, 2010, Marine Insurance Aspects of the NSR, CHNL.©