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Has economic recovery put a new strain on the global supply chain?

30.06.22 The Big Question

With Isabelle Therrien, IUMI Cargo Committee Chair and SVP, Canada, Falvey Cargo Underwriting.

The global supply chain continues to come under extreme pressure and the likelihood of the pressure easing in the months to come is remote.

A perfect storm of rising demand from across the world, a shortage of labour and the ongoing issues of getting cargo and transport at the right place at the right time are still hindering he ability to move goods to where they are needed.

A report last month by analysts at Royal Bank of Canada (RBC) found that one-fifth of the global container ship fleet was currently stuck in congestion at various major ports.

In China, there were 344 ships awaiting berth at the Port of Shanghai, a 34% increase over the past month, while shipping something from a warehouse in China to one in the United States currently takes 74 days longer than usual, while the rising costs of energy are also impacting logistic companies and are being reflected in the cost of freight.

Inflation is having an effect but as Isabelle Therrien, chair of IUMI’s Cargo committee and VP Falvey Marine Insurance Canada, explains, the issues are far broader and, in many ways, fundamental to the future of the cargo sector and supply chain.

Insurance is and will continue to be asked to play a huge part in the world’s efforts to solve the supply chain challenge it faces.

For Isabelle Therrien, the answer to the question ‘has economic recovery put new strain on the global supply chain?’, is not a difficult one to answer.

The resurgence of the economy after the two years of the significant slowdown caused by the COVID pandemic created huge headaches for the logistics and shipping sectors, with a significant shortage of containers, and many being in the wrong place to be matched with the goods required to be moved exacerbated the problems.

However, Therrien said the industry is having to deal with significant challenges which have impacted the economy and also the ability to move goods and services.

“The global supply chain is under increasing pressure and as we have seen in recent months across the world there is congestion at some of the major ports which has been further impacted by the staff shortages which ports have experiences,” she explained. “It has also created new exposures for both insurers and insureds as the market looks to return to a position where it is working at full capacity.”

“With the ongoing situation in Ukraine it has created a very fluid situation around war risks and the increasing level of sanctions which are being imposed on Russian and associated businesses and goods.”

“Inflationary pressures are also having an effect. They are changing the values of the goods which are being transported and with it the exposures both our clients and the industry face. It is on our radar.”

As the economy and business levels recover it also means insurers are having to make decisions around the risks they are willing to assume.

“Capacity management is another question for the cargo insurers and how and what that capacity can and will provide to meet the current and future demand,” Therrien added. “Climate change is and will have an impact for the industry. The Australian floods earlier this year highlighted the potential for large losses and come after 2021 was the fourth largest year for natural catastrophes on record.

“It cannot be ignored and it comes alongside the aftershocks of the COVID pandemic which are still being felt.”

As the costs of freight increases, some unscrupulous cargo owners have been wrongly declaring what is in their containers in an effort to reduce the costs in transit, as cargo which is deemed to be dangerous comes with an additional cost for the risk management that needs to be put into place.

“The misdeclaration of cargo is an issue that IUMI has long highlighted and we have seen recently major losses where the misdeclaration of the cargo in a container or containers is seem to be a contributing factor,” Therrien said. “We also have new risks. The shipment of lithium batteries and electric vehicles come with different risks for the shipping sector and we need to understand how we can reduce the risks of their carriage through the supply chain.”

“If we want to move these products, we have to manage the exposures properly.”

The drive towards net zero operation will also present challenges for the supply chain given the transport remains a significant contributor to CO2 emissions.

“Recent years have seen the world go through the highs and lows of the shipping cycles, and we are now entering a new age of shipping which requires greater decarbonisation,” Therrien added. “It will require changes to the way shipping operates and a shift to more environmentally friendly fuels. We are going to look at ways in which we create more energy efficient ways of moving goods.”

“COVID has had an enormous impact on the seafarers. The issues around the ability to replace crew has had an effect and we are now seeing a real lack of seafarers at a time when demand for the movement of goods is increasing. It is similar issue to that faced by port operators.

“The war in Ukraine and the pandemic have really taken a toll and in five years’ time we may well be faced with a shortage of officers on vessels. It is now a real and immediate challenge for shipping companies to attract new talent.”

“In the face of the crew crisis the use of autonomous vessels has been seen as a potential solution to the issue, A great deal of work is being put into the technology to allow autonomous vessels to operate and it may well be the case where we get to the point that vessels will be able to safely operate in designated shipping channels on their own by 2035.”

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