Due to difficulties faced during the salvage of the stricken cruise ship Costa Concordia the total insured loss from one of the most costly marine disasters in history look set to rise, perhaps to greater than $2 billion, according to reports.
A report in the Independent newspaper yesterday suggested that the costs to salvage the ship, through attempts to right the vessel, float it and tow the wreck away, are rising. If the current salvage plan failed to work the costs could rise even further as back-up plans such as cutting up the wreck would then have to be initiated.
Carsten Scheffel, chief executive of Allianz Global Corporate & Specialty, told the Independent that the current cost of the Costa Concordia loss is around $1.6 billion. Insurers and reinsurers have paid out approximately $1 billion to date.
The complex nature of the wreck removal is blamed for the escalating costs. The Costa Concordia sank in an environmentally sensitive area, so the first efforts to remove the ship involve righting the ship and towing it away to be dismantled, a costly effort. It’s a long and complex task and estimates suggest that the wreck of the Costa Concordia may be ready for towing by the end of June 2014.
The Independent article goes on to discuss the fact that insurers and reinsurers may be unprepared for the costs that a major incident could throw at them. With the size of shipping vessels growing all the time the article suggests that the salvage industry may not be able to respond to worst-case scenarios, as salvage equipment large enough to cope with such a response does not even exist. A scenario like that would see insurers and reinsurers footing even larger bills as salvage efforts would be extremely costly.
Further loss creep on the Costa Concordia disaster will provide further ammunition for marine insurers and reinsurers to push up rates, something they have been trying to do in recent years. This may make marine rates even more attractive to alternative capital and insurance-linked securities (ILS) players.
With the alternative reinsurance capital market already looking to marine as a viable line of business, a number of collateralized reinsurers, retrocessionaires and ILS funds provide some marine capacity, the prospect of rising marine rates may encourage even more participation from the capital markets.
There has been some exposure to the Costa Concordia loss in the ILS and collateralized reinsurance market, through industry-loss warranties (ILW’s) and retro protections. Some of these have already been settled we understand, so this further loss creep is unlikely to worry the ILS market significantly. If it helps to put more upwards pressure on marine reinsurance pricing it might serve to make marine a more attractive business proposition though.