Magazine article Risk Management

Stay on Dry Land; If You Want to Learn about Risk Management

Magazine article Risk Management

Stay on Dry Land; If You Want to Learn about Risk Management

Article excerpt

A close inspection of the way the world's shipowners and marine insurance markets function is enough to destroy even the most passionate faith in risk management. Virtually nobody involved in this unique world, whether shipowner, cargo owner, marine insurance broker, hull, cargo or P&I underwriter or the governments whose regulatory involvement in marine affairs is unavoidable from time to time, shows any sign of interest in using risk management methods to reduce the number or size--but preferably both--of marine disasters.

Perhaps disappointingly from the point of view of risk management's proponents, this state of affairs seems to portend no imminent doom for the shipowners or marine insurers. Somehow they have achieved a magical immunity from the economic imperatives that govern the rest of us. All they have to do when disasters occur is publicly proclaim a profound concern about risk management standards. Thus, when a huge marine disaster occurs, perhaps involving the loss of many lives or appalling environmental damage, all that the marine community is obliged to do is bemoan the inevitable evidence of poor risk management that the disaster reveals and emotionally urge worldwide improvements without delay In fact, very little ever comes of it.

In the London marine insurance market (still by far the largest in the world, writing about 30 percent of worldwide net marine premiums), this "marine syndrome" can be seen in its most typical form. For example, when the Braer sank off the Shetlands in January 1993, the subsequent government-instigated report of inquiry triggered more than 100 proposals for improving maritime safety and controlling pollution, and the International Maritime Organisation passed a resolution on tankers noting that double-skin (double-hull) ships would be less likely to leak oil in the event of an accident. All very laudable, or so it sounds until you remember that on February 15 of this year the single-skinned Sea Empress (built in 1993), which was bound for a refinery with a cargo of 130,000 tons of light crude oil, hit rocks just off the entry to Milford Haven on the Welsh coast, causing what many have described as the worst environmental damage ever in U.K. waters. Once again the "usual suspects" were rounded up to make the usual speeches about the need for measures to improve maritime safety, to control pollution caused by damaged tankers and for tankers to be built with double skins. That being done, the marine insurance market, shipowners and everyone else involved in this crazy business started getting back to business as normal.

Every now and then the rest of the world reveals how very little it knows about or understands maritime affairs. For instance, Lord Donaldson, appointed to report on the Braer sinking, recently commented in the course of an interview: "As a result of my discussions with members of the Institute of London Underwriters and the London Underwriters Association during the Braer inquiry, I have become convinced that the key to shipping safety is to make it more expensive for owners of substandard vessels to continue to operate them. Make it costly enough and they will either go out of business or take their ships off the seas." He suggested that increasing insurance premiums for poor risks would do the trick.

Such an idea may appear obvious, but it is not (and has hardly ever been) the natural response of the markets. It is not fair to make fun of Lord Donaldson's excusable naivete. As an outsider unfamiliar with the marine syndrome, it was reasonable of him to assume that if marine insurers did not punish bad risks by imposing tougher conditions and higher rates to motivate safety concerns, then it must be because they had never thought of it. Surely any sane underwriters would want to reduce the riskiness of the business they were underwriting, wouldn't they? How could Lord Donaldson know that in the Alice in Wonderland world of ships and their insurers, shipping safety is simply not important; it is not that the owners and insurers do not know how to achieve or promote safety--only that they have no motive for doing so. …

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