Polarisation deepens exposure and claims uncertainty for alternative fuels: Allianz

By Rebecca Delaney

May 27 - (The Insurer) - Geopolitical divisions over decarbonisation commitments are increasing uncertainty over future risk exposures and claims costs in the shipping industry, Allianz said in its latest safety and shipping review.

With the sector already dealing with concerns around safety, training and environmental liabilities associated with alternative fuels, last month saw a landmark decision as the International Maritime Organization (IMO) approved the first net-zero framework to combine mandatory emissions limits and greenhouse gas (GHG) pricing across an entire industry sector.

The framework is set to be formally adopted in October 2025 before coming into force in 2028. It will be mandatory for large ocean-going ships of more than 5,000 gigatons, which emit an estimated 85% of the total CO2 emissions from international shipping.

However, Allianz noted that there was significant division in the IMO vote, with 63 countries voting in favour (including China, India and Japan), 16 opposing (predominantly petro-states), and 25 abstained. The U.S. withdrew from talks altogether and threatened retaliation against any fees imposed on U.S. vessels.

"On one hand, sustainability efforts and commitments in large parts of the world continue to increase, but we also now have contrasting views on climate change and the energy transition, which will only increase uncertainty for shipowners, who will be planning investments and placing orders for vessels that will be delivered and operating in the years and decades ahead," commented Rahul Khanna, global head of marine risk consulting at Allianz Commercial.

"If countries like the U.S. refocus on hydrocarbon fuels, it could slow momentum on alternative fuels. Innovation and decarbonisation is expensive, requiring investments in new ship designs, fuels and supporting infrastructure. So, if one of the big players were to move away from that, it could have an impact on the speed of the transition for shipping."

The timely adoption of alternative fuels (including LNG, methanol and green hydrogen) is central to achieving the shipping industry's GHG targets. However, recent estimations by the UCL Energy Institute signal that the industry is not on track to meet the 5% zero-fuel target by 203. This currently stands at just 0.44%, up from 0.32% at the end of 2022.

Uncertainty over the best options going forward may lead to a lack of transparency for insurers, who are already concerned with fire safety, specialised equipment failure, crew competency and environmental liabilities associated with alternative fuels.

Allianz's review added that this could also make for more expensive machinery breakdown claims.

"As modern machinery becomes more sophisticated and complex with measures to reduce emissions, such as the adoption of dual fuel engines, it becomes more expensive to repair," said Anastasios Leonburg, senior marine risk consultant at Allianz Commercial.

"For example, it could be harder to find repair yards for vessels using modern machinery, while spare and replacement parts may take longer to order, as there will be fewer manufacturers."

PROJECT CARGO EXPOSURES

The review also argued that rising investment in high-value infrastructure and renewable energy projects poses new challenges for project cargo exposures.

According to the International Energy Agency, global energy investment was set to exceed $3 trillion for the first time in 2024, with $2 trillion dedicated to clean energy technologies and infrastructure. In order to reach net-zero emissions by 2050, annual clean energy investment globally must hit around $4 trillion by 2030.

In tandem, project cargo risks and values are rising, as project cargo involves high-value, specialist, oversized cargo (such as wind turbines, manufacturing plant machinery, and critical infrastructure), often during the construction phase.

Handling and transportation often requires specialist vessels, equipment, port infrastructure and experienced personnel, with high values and the associated high costs of long delays increasing the risk of potentially large claims in the event that cargo is damaged or lost.

"We now see shipments of large battery storage systems with insured values in excess of $100 million. Wind turbines, while not currently of the same magnitude in value, are getting larger and larger. When you have five large wind turbine blades on one cargo vessel, that can become very costly," said Leonburg.