In this episode we look at how the industry calculates risk with regards unexpected disruptions, both in port and at sea.

The Strike and Delay Class at NorthStandard insures shipowners and charterers against lost income or profit caused by delays arising from 30 different risks.

These include typical P&I and H&M risks, but more relevant for today, the class specialises in force majeure risks - in other words those that are outside the control of companies.

That means things such as disease, extreme weather, war, terrorism, labour unrest, strikes, civil disturbance, protest, revolution and supply chain disruption.

We talk to Columb Strack, who works with a team looking at some of these risks.

He is Head of Global Cargo Risk at S&P Global Market Intelligence, which provides forward-looking actionable intelligence and risk quantification on political and security risks affecting marine and other sectors.

Also on the show is Nick Rowe, Head of the Strike & Delay Class of NorthStandard to explain how the company supports its members with regards these areas of risk.

Hello and welcome to Alongside, the podcast from NorthStandard for the shipping industry across the world. I'm Kait Borsay. In this episode, we look at predicting the unpredictable - calculating risk, like unexpected disruptions, both in port and at sea that can severely affect operations.

The whole framework that we were working with in the last 20 years or so, that's been broken down, first economically by COVID. And then geopolitically by Russia's invasion of Ukraine.

We exist to look at challenges look at the impact that they might have on businesses, and then say what kind of insurance solutions can we provide to those businesses and at what cost

Cover for disruption like this is called Strike and Delay and the Strike and Delay class ensures shipowners and charterers against loss of income or profit caused by delays arising from 30 different risks. These include typical p&i and H and M risks but more relevant for today, the class specialises in force majeure risks, in other words, those that are outside the control of companies. This means things such as disease, extreme weather, war, terrorism, labour unrest, strikes, civil disturbance, protest, revolution and supply chain disruption. Joining me to discuss this are Nick Rowe head of the strike and delay class of NorthStandard.

Hi

And Columb Strack who is Head of Global Cargo Risk at S&P Global Market Intelligence, which provides forward looking actionable intelligence and risk quantification on political and security risks affecting marine and other sectors.

Hi, Kait

Welcome to both of you column. Let's start with you. And firstly, tell us how your company works.

Yeah, so basically, we use a an open source intelligence infrastructure to do indicator-led forecasting. And what that involves, basically is collecting and structuring any sort of information that might indicate a change in risk. So we're constantly monitoring a range of local news sources, social media inputs from the personal networks of all of our analysts, and then using that are making it available to a team of around 50 country experts. Those are mostly from the regions they cover. So they usually have strong networks in their countries. They're from a range of different backgrounds. So we have people from former government, military intelligence, business, lawyers, and I think between the team, we speak a combined 50 or 60 different languages. So it's a very international team, very interesting place to work.

It's been an extraordinary few years, hasn't it in terms of news events? Talk us through, for example, how the pandemic and the war in Ukraine has impacted your work?

Well, like you say, it has been an extraordinary few years, which have had a huge impact geopolitically, I suppose the world order, or the whole framework that we were working with in the last 20 years or so, certainly, for Western countries based around globalisation and geo economics primarily, that's been broken down. So first, economically by COVID. And then geopolitically by Russia's invasion of Ukraine. We're still only beginning to understand the implications of that. And it's probably, I'd say, gonna take years now for the world to rebalance or find a new equilibrium. But what is becoming clear is that geopolitics is playing a much more important role now than it has for some time, that means that we need to sort of rethink a lot of the assumptions that we might have had before.

We're recording this a year after the war began, did it Did it surprise you and your team given the rhetoric that we'd heard from Vladimir Putin in the years before?

Yes, yeah, I think we were all a bit surprised, even though all of the indicators that we were monitoring, at the time for a Russian invasion were actually triggered. But ultimately, it then came down to one man's decision, right? So up until the last moment, it could have been an elaborate bluff, or brinkmanship. I think that demonstrates quite well how there's always an element of uncertainty. So no matter how good your intelligence is, or you think it is, and it also brings us back to this idea that we were operating in a different world or under different assumptions. And it was almost at the time, hard to imagine that Russia would actually try to invade and overthrow a democratic European state, because we haven't seen that in a long time.

So were those indicators warning you that Russia could launch a full scale invasion on Ukraine? Of course, they'd already invaded Ukraine in 2014 in Crimea, but were those indicators sort of flashing for you already over a number of years? And do you have to some extent, slightly ignore those based on what you're weighing up about whether Vladimir Putin would actually make that decision to launch a full scale invasion?

Yeah, well, it's not an exact science. So what we tried to do is get a team of people together beforehand and sort of think about, what would we expect to see if Russia was planning to invade. So that could be for deployment of certain units to certain locations, bringing in different types of supplies. So he'd make a long list of those those indicators. And then we would track them as best as we could, based on open source information. And then over time, they start to trigger. And once you've seen, you might not see all of them. But once you've seen a sort of critical mass of those, that would be a strong indicator that something was going to happen. But like I said, ultimately, then when it comes to the final decision, in this case, it was it was up to Putin. And he could have backed off at the last moment. And all of these indicators that we were tracking could have also been part of a bluff.

Yeah. And as we know, from many commentators, war experts, geopolitical experts, it's really, really very hard to predict what Vladimir Putin's moves might be. Nick, in terms of the Ukraine war, but also the pandemic as well, what's been the impact on the insurance industry because of those events?

One of the core purposes of insurance is to step in and help When disasters occur, whether it be mitigating further damage, or indemnifying, the cost of rebuilding. So yes, the insurance industry has certainly been engaged and impacted by these events. However, the difference here is that ordinarily, the risk is on our radar, so to speak. So insurers are broadly ready for them. But these two events were completely unexpected. So in the case of the pandemic, we found ourselves insuring the impact of a risk, which had never really been contemplated on such a large scale, advising members and clients how to manage their exposure to it, and indemnifying them for their losses. Russia's invasion of Ukraine was likewise completely unexpected. As Colin was said, as insurers, we needed to figure out and respond to the challenges faced by members and clients as best we could. Fortunately structured as a mutual, which is owned by its members, we're well placed to do this with seamless access to the company's at the sharp end of the issue, and strong reserves of capital maintained by the club to help weather the risk of such volatility.

Nick on the pandemic, what are the key learnings from your perspective?

So I think in summary, the key learnings for us from a major event like the pandemic is the need for us as a global p&i Club is to be fast footed and responsive and to have the right people in the right teams looking at the problems that might occur for our members and trying to come up with the right kind of solutions ahead of time.

We're going to on the show today focus on three regions specifically as we start to unpack really how the shipping industry protects and mitigates for huge world events. We're going to start with Ukraine. Now more than a year after the full scale invasion by Russia. Columb, let's start with you. What impact has the war had on shipping in the Black Sea and both in the Sea of Azov which feeds into the Black Sea? We know that Ukrainian forces have targeted Russian vessels and vice versa to a certain extent, but the warfare The conflict has been at sea as well, hasn't it? How do you mitigate for that that actually, as well as mines being there as well as the issues with with ports, that this is you know, part of this conflict has been at sea?

Yeah, so the, the main impact from a maritime perspective has been on Ukraine's ports. So there are still around 60 vessels and 300 crew members stuck in Ukrainian ports since the start of the war, and some of those are still at severe risk from Russian shelling, that's particularly the case in ports that are close to the front line, like Kherson and Mykolaiv. The Odessa ports which are covered by the grain corridor agreement are at lower risk, although they still have been some Russian missile attacks on those ports or nearby. Then in the Black Sea itself, the the main risk to vessels now comes from sea mines, a lot of them have broken free from their anchors in storms, and then are drifting with the currents. The prevailing currents tend to be or tend to carry those sort of counterclockwise along the Black Sea coastline. Now we've seen a number of these these mines appear in waters of, of neighbouring countries as far east as Georgia. I think they're about 40 or 50, detected so far, and going by estimates from Ukraine and from the Russians, that could be several hundred still floating around. So that is likely to be an issue for several years to come. And that's independent of what happens with the wall. I suppose the maritime component of the war was more focused on the beginning of the war when there was still fears that Russia might try to launch an amphibious landing in southern Ukraine. But that was that was mitigated by one the deployment of hundreds of sea mines, which, which we've just spoken about, but also the the Ukrainian missile capabilities. So they turned out to be quite effective at keeping Russian naval vessels away from from the coast. And since then, really, at least for the last few months, there hasn't been much Russian naval activity within those areas of the Black Sea.

And how does the industry plan for the next 12 months ahead? Do you expect the war to continue?

Yeah, so our most likely scenario for the next 12 months is that neither side at the moment has the military capability to achieve a definitive victory and end the war, at least not with the resources that they currently have. So we're expecting a war of attrition in the coming months with heavy losses on both sides. And that will probably get to a point where it just becomes politically unsustainable for both governments and eventually results in some sort of de facto ceasefire, that that maybe freezes the lines in place, we'd expect that sort of towards the end of the year. But beyond that, there's no obvious path at the moment towards a peace settlement, both sides would probably use any any kind of ceasefire to prepare for the water resume at a later point. That's our most likely scenario. We've given that 60% probability. And then Russian victory is is we think that's very unlikely at the moment, we've given that 10% probability, and the Ukrainian victory a little bit more likely, but still unlikely at 30%. And that's in the next 12 months.

That's really interesting. And the overall message there is that it will be a long and protracted war, essentially, until until reserves run out until the weapons supply ends. Let's pick up on the green corridor initiative, Ukraine well known as the breadbasket of Europe, the green corridor initiative has been really fundamental to getting cargo out of the country during the war. How important is it that this specific element continues?

Clearly very important for for Ukraine. So the the initiative was last extended in November. And it's coming up now for renewal on the 19th of March. So there's a lot of questions around whether or not it'll be renewed. What will the Russians do, especially given that last time round, they backed out of the agreement a few weeks before, but they were then forced to U turn. For that reason, we think it's it's more likely than not that the agreement will be extended, again, for the same reasons why Russia agreed to the extension in November. So firstly, there's a lot of political pressure from the G 20 countries on Russia to improve food security, which affects a lot of the developing countries and Africa, for example, that Russia is trying to bring into its own sphere of influence. And then secondly, if Russia attempted to stop the Ukrainian green exports, that would invite retaliation, that would severely disrupt Russia's own exports from the Black Sea, which is mainly grain and oil. For those reasons that we think the corridor is likely to continue, although Russia is not happy about it. And they will probably try to continue disrupting the inspection process, possibly withdraw temporarily, but we wouldn't expect that to be for more than a few weeks at a time.

And just remind us Columb of the fundamentals of the grain corridor initiative.

Yeah, so very basically, three ports in Ukraine around Odessa have been reopened to specific types of cargoes. There's mainly grain and a few other agricultural products. But all of the vessels participating in the initiative need to be screened by three parties. So it's Russia, Ukraine and Turkey. And that takes place in the Bosphorus. And it's that process that the Ukrainians and the Turks has been saying the Russians are interfering with, they're delaying, I think there's a big backlog at the moment of vessels waiting to be checked before they're allowed to participate in the in the corridor.

Nick, from your point of view, what's been the impact in your work of the conflict over the last year and what are the continuing issues from your perspective?

Well, a key component of the club's work has been staying abreast of the fast evolving UK, US, EU and UN sanctions regimes, incorporating them into our policies and ensuring that all members and clients are clearly advised of these in a shipping context as a war insurer, as part of numerous different covers that we offer. The second component has been ensuring the cover offered by the club is appropriate for the risks associated with the war. So we closely engage with the reinsurance market and ensure members are aware of what their policy does and does not cover in a particular context. But we also seek to support members even though the risk is more acute with for example, Ukranian grain corridor transits.

Thanks, Nick. Let's turn our attention now then to the Middle East and the Gulf region with the you Columb. What's the potential impact of geopolitical confrontation in the region on shipping? This is key, isn't it for maritime as you've got two of the world's most important choke points the Strait of Hormuz, and the Bab el Mandeb Strait.

A very important region strategically. And the Gulf is probably also one of the most complex risk environments that we deal with. There are lots of different interconnected drivers of risk. But the main ones are Iran's regional ambitions. Its competition with Saudi Arabia, and also the confrontation with the US and Israel over the nuclear and missile programmes. And a lot of that has been playing out at sea. So we've had Iran seizing and harassing commercial vessels over the last few years. There's also been drone sabotage attacks against tankers, and more recently, particularly Israeli owned vessels. But I guess what we're mainly concerned about in the Gulf is the potential high impact scenario of a regional war between Iran and the US or Israel. And we still think that's unlikely in the next 12 months, at least unless the nuclear negotiations officially collapse. But they have stalled. And Iran also seems to be progressing further than expected with its enrichment programme. And Israel has been pretty clear that it won't accept Iran developing a nuclear weapons. In that context, it's it's worth distinguishing between two different scenarios. So one would be a limited Israeli or US strike targeting Iran's nuclear facilities. In that case, Iranian retaliation would probably be limited to mainly Israel and US forces around the region, which would include Iraq, Kuwait, Bahrain, Qatar. And the second more serious scenario would be if Iran assessed that this wasn't just about eliminating or setting back their nuclear programme, it was actually aimed at regime change in Iran, that would escalate the situation significantly. And then we'd we'd probably also see Iran targeting commercial assets and critical infrastructure in Saudi Arabia, UAE, Bahrain, anything that he believed was supporting the war effort. And it's in that scenario that we would probably see major structural damage to ports, commercial vessels in the Gulf would probably be targeted by anti ship missiles or drones. If we then take that further, and the Iranian government was faced with what it perceives, was perceived as an existential threat to its governance, then we'd probably also see possible deployment of sea mines into the Strait of Hormuz with the objective being to block it to commercial traffic, and that would probably be effective at blocking it for up to several months at a time.

Nick. Unlike Europe, this region has more of a history of political upheaval, doesn't it certainly within the last 20 to 30 years. How does this impact the insurance risk approach?

This fact is certainly recognised in the insurance industry. The joint war committee of the Lloyds Maritime Association and the International Underwriting Association produces a list of high risk areas. And this contains the majority of the waters and seas off the coasts of the countries within the this region. Consequently, developments in these zones are more closely monitored. And it enables insurers to respond more dynamically to events in the region as they arise and deliver new insurance terms and solutions to their members and clients. So they can make strategic decisions about trading in the areas. If the Straits of Hormuz, which provides access to Persian Gulf countries, as we've been discussing, were to again be threatened by the types of attacks that occurred back in 2019. And that we've been highlighting today, we could assist our members by advising them on the challenges of trading in the area, and tailoring insurance terms across multiple risk points in their business to provide at least a partial solution, which can, as I said, assist them in deciding whether to continue to trade there.

Columb, let's bring it back to Europe, which, as we discuss here has traditionally been more stable than other parts of the world. However, this year in 2023, we're likely to see strike action across the continent even more strike action as high inflation and the increasing cost of living hits home. What are the forecasts when you bear in mind those aspects?

So as you said, inflation and cost of living are the big drivers here. So we're in or approaching double digit inflation across most of Europe. And that's following years of stagnant or below inflation wage increases, especially in heavily unionised sectors like transport. And then at the same time, the operators themselves are also struggling, struggling to meet union demands on top of big increases to their own running costs. Another factor is that the trans Support and freight sectors in many European countries are still affected by labour shortages, which is a hangover from from COVID. So all of these things give more leverage to the unions. And in Europe, we're now in an environment with a very high potential for protracted industrial action, the unions can organise up to hundreds of 1000s of workers. So it's quite substantial. And that kind of industrial action tends to become more likely if there are layoffs or during wage negotiations. If you want to highlight a timeframe, it's also worth looking at September, because that's when we tend to see these these things happening, especially after the end of the Parliament summer recess.

Nick, when it comes to the cost of living crisis, has it made Europe a more challenging market this year in terms of risk?

I don't think it's made it necessarily a more challenging market. But certainly, that challenge has driven a much higher level of interest in the type of insurance product that we provide. And it's put us on notice that we need to be there to support members in one of the core risks that we underwrite them for, you know, we exist to look at challenges, look at the impact that they might have on businesses, and then say, what kind of insurance solutions can we provide to those businesses and at what cost in premium terms? So yes, it will be challenging for companies. But that's exactly what insurance is, therefore, to provide certainty to provide assurance and to indemnify members when they do suffer financial losses in consequence of those events.

Well, it's been a fascinating episode, thank you to both of you, as we get an understanding really, of what factors affect forecasting column from you how you work, to the unpredictability of war and a global pandemic, for example, and Nick how this all translates to the support that you offer to members. So thank you, both of you for joining us on this episode of Alongside - Nick Rowe, head of the Strike and Delay speciality sector of NorthStandard. Thank you, Nick.

Thank you. Thank you Columb

And Columb Strack from S&P Global Market Intelligence. Thank you.

Thanks for having me.

Well join us next time on Alongside when we continue to explore key topics affecting the maritime industry and those who are part of it. Click follow on this podcast to ensure you don't miss an episode. Thank you again to both of our guests for me Kait Borsay thank you for listening.