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Panama Canal expansion: Impact on shipping and insurance

The Panama Canal’s impact on shipping routes and vessel sizes since it opened in 1914 is undisputed. This will continue with the opening of a third channel for larger vessels in 2016. This briefing examines the risk management impact of this expansion on the maritime industry.

 

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> Download the updated risk briefing from June 2016

This risk briefing updates, and adds to, information in the AGCS report Panama Canal 100: Shipping Safety and Future Risks, originally published August 2014. The report can be viewed here:

> Download the Full Report (August 2014)


> Download the Executive Summary (August 2014) as a PDF in:

Why is the Panama Canal expansion significant?

The Panama Canal’s $5.25bn expansion increases the maximum vessel capacity and enlarges the overall volume of transported freight. Existing locks can handle ships up to 106 feet wide, 965 feet long, and 39.5 feet of draft. The new locks will accommodate vessels up to 160 feet wide, 1,200 feet long, and 50 feet deep. Container ship capacities will increase from 4,400 to about 13,000 teus. The new locks create a third lane of traffic for larger “New Panamax” vessels.

The expansion is significant because it impacts the size and frequency of vessels that call on the US East and Gulf Coast ports,” says Andrew Kinsey, Senior Marine Risk Consultant, AGCS. “These vessels presently have to use the Suez Canal coming to the US from Asia”.

What will be the impact of larger vessels being able to transit the Canal?

The Panama Canal Authority (ACP) estimates that the combined effect of 12 to 14 larger Panamax vessels per day (an average of approximately 4,750 ships a year) combined with continued smaller vessel transits will double capacity, increasing Canal throughput from 300m tons to 600m tons PCUMS (Panama Canal Universal Measuring System). (1) PCUMS is the basis upon which vessels are charged for use of the Canal: one PCUMS ton is approximately 100 cubic feet of cargo space. A twenty foot long container (teu) is equivalent to approximately 13 PCUMS tons.

How will the value of insured goods being transported in the region be impacted?

“The value of insured goods transported will increase with the expanded Canal, as will the risk accumulation,” Kinsey explains. “This is the reason why proactive loss controls will continue to be needed; including tracking of the risk accumulation. This is one of the biggest lessons learned from the Tianjin explosion in China last year.”

In particular, the New Panamax ships, which are as long as four football fields, will be impacted. For example, a fully-loaded 12,600 teu container ship could have an average insured cargo value of $250m, based on an average value of $20,000 per teu.

With the cargo-carrying capacity of ships transiting the Canal having the potential to double following expansion, we can approximately assume this could result in an additional $1.25bn in insured goods passing through the Canal in just one given day (2).

According to Captain Rahul Khanna, Global Head of Marine Risk Consulting, AGCS, the Canal’s expansion may also lead to an increase in the number of vessels waiting to undertake the transit on both the Atlantic and Pacific sides. “This means that with the values concentrated in the surrounding area, from an accumulation point of view, this figure could be even higher,” he explains.

Another potential risk is that higher concentrations of insured goods will be transported on bigger ships, which will call in at US ports and terminals, many of which are exposed to hurricanes. For example, a large portion of Superstorm Sandy losses in 2012 were due to storm surge that flooded ports in the Northeast region.

According to AGCS’ Safety and Shipping Review 2016, meteorological predictions anticipate more extreme weather conditions, bringing additional safety risks for shipping and potential disruption to supply chains. Hurricanes and bad weather were contributing factors to at least three of the five largest vessels lost during 2015.

In what other ways will risk management be impacted?

“With the increase in size of vessels transiting the Canal, you have a corresponding increase in operational, environmental and commercial risks,” explains Kinsey.

Bigger ships automatically pose greater risks in that the sheer amount of cargo carried dictates that a serious casualty has the potential to lead to a sizable loss and greater disruption. Increasing traffic of bigger ships means the amount of diesel and petroleum being transported could also pose a heightened pollution risk in the event of a casualty.

Conversely, the prospect of an expanded all-water route from Asia to the US East/Gulf coasts could actually lead to a risk reduction in another area because containers will no longer need to be moved/reloaded onto trains. The fewer times you have to handle a container the lower the risk of damage.

According to ACP, the Panama Canal has invested heavily in training resources, prevention programs and contingency plans in order to maintain its excellent safety record. Hands-on education, preparation, and training programs will help ensure that both the existing and new locks will run seamlessly. Some of the programs are related to the training of the Canal’s pilots and tugboat captains, consisting of simulation and hands-on experience with transit training on a chartered New Panamax vessel. Kinsey describes training as “key to mitigating the risks involved with larger vessels”. With such an important emphasis on training, human error is unlikely to be the main cause of shipping incidents in the Canal.

But the risk of grounding remains, either as a result of equipment failure or a casualty on the ship. Insurance companies will need to consider re-evaluating the routine risk to securing and monitoring containers under the new scenario, says Captain William Hansen, Senior Marine Risk Engineer, AGCS. A grounding of one of the larger ships in the Canal will cause severe disruption.

Given the fact that the new locks will not be using the traditional “mules” but rather tugs which will be in the lock chamber with the vessel that is locking through there is the potential for increased contact with the lock walls, Kinsey believes. “It is believed that the use of tugs rather than mules provides sufficient control over ships in the lock chamber, but it is a situation that will be monitored closely,” he adds.

Khanna agrees that the level of training provided to pilots ahead of opening will be “extremely important” as the expansion of the Canal represents a “new shipping environment for many mariners”. However, he also notes it cannot prepare mariners 100% for the live environment. “Although much training will be given it can only be done on a few vessels. But when the Canal is opened for real, a whole host of different vessels with different characteristics will be passing through. That will be a challenge.”

Then there is particular concern surrounding the salvage limitations for the latest generation of container ships. In the event of an accident in the surrounding region there may be an insufficient number of qualified, experienced salvage experts available to handle the New Panamax ships due to merger and acquisition activity and economic pressures.


Many changes are needed at global ports to allow the safe-handling of New Panamax sized vessels. What are the risk challenges?

Most US East and Gulf coast ports are being dredged in preparation for the New Panamax ships and are upgrading equipment, although each is at varying degrees of readiness. Larger and more ship-to-shore cranes are required to handle increased container volumes. While Panamax-sized ships can be worked by four or five cranes, larger ships will need to be worked with at least six cranes.

/assets/Infographics/Panama%20Canal/2016_Allianz%20Panama%20Canal%20-%20Shipping%20incidents%20including%20total%20losses_large.jpg ***updated graphic from June 2016***

“Ports are attempting to get into the game and stay in the game. There is substantial commercial risk on the East Coast with ports expanding their container capacity in the hope of gaining market share. Ports in the US West Coast have also spent millions to expand their capacity in order to protect a market share that they already have,” explains Kinsey.

"Additional infrastructure upgrades will be needed to handle the increase in volume/throughput. Another major challenge is the actual handling of larger vessels. Port operating procedures will have to be reviewed with regard to wind and weather constraints given the tight operating margins that these ships will be facing.” This means port and shipping workers must undergo training in order to mitigate any operational risks.

/assets/Infographics/Panama%20Canal/2016_Allianz%20Panama%20Canal%20-%20Causes%20of%20shipping%20incidents%20including%20total%20losses_large.%20jpg.jpg ***updated graphic from June 2016***

And of course the potential impact of any shipping incident is much wider than just impeding progress through the Panama Canal. With more larger ships on the move in the surrounding region any incident could also impede traffic at major ports in the US and elsewhere, resulting in a potential increase in business interruption losses.

How does the safety record of vessels transiting the Panama Canal compare?

AGCS analysis shows that the Panama Canal region has an excellent and improving safety record in recent years. There have been 121 shipping casualties (incidents) over the past 20 years (including just four total losses) (3) with the relatively small total of 24 incidents occurring over the past decade. Just two casualties were reported during 2015 – the causes of which were piracy and cargo damage (resulting from the dropping of a luxury yacht as it was lifted onto another vessel). There were more than 12,300 transits of the Canal last year (4).

In a relatively controlled shipping environment vessel collisions (38) and contact with walls (34) have been the main drivers of shipping incidents over the past 20 years, collectively accounting for 60%. Machinery damage/failure is the third most frequent cause, accounting for one in five incidents. This accident rate of around 1 in every 6,000 transits compares favorably with other major waterways such as the Suez Canal (around 1 in 1,450 transits)(5).

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(1) Panama Canal Authority, US Department of Transportation (DOT) and Maritime Administration (MARAD)
(2) Panama Canal 100: Shipping Safety and Future Risk
(3)Lloyd’s List Intelligence Casualty Statistics. Analysis: Allianz Global Corporate & Specialty
(4) Panama Canal Authority
(5) Official transit records, Lloyd’s Intelligence Casualty Statistics. Analysis: Allianz Global Corporate & Specialty

/assets/Infographics/Panama%20Canal/2016_Allianz%20Panama%20Canal%20-%20All%20casualties%20including%20total%20losses%20by%20type%20of%20vessel_large.jpg ***updated graphic from June 2016***

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This risk briefing updates, and adds to, information in the AGCS report Panama Canal 100: Shipping Safety and Future Risks, originally published August 2014:


With approximately 3% (US$270bn) of world maritime commerce ($9trn) transiting the Panama Canal every year the safe passage of vessels is critical. There were just three shipping incidents (casualties) in the canal during 2013, in line with the 10-year average but up on a year earlier*. There were no total losses.

The Panama Canal has seen 180 shipping casualties over the past 20 years (an average of nine a year). Its safety record has improved significantly over the past decade resulting in just 27 casualties (two total losses).

Bulk carriers (11), cargo ships (9) and container ships (9) dominate the canal’s casualty list, collectively accounting for over 75% of all incidents since 2002.

In a relatively controlled shipping environment, the most common cause of incidents in the Panama Canal is contact with walls (53) and collisions involving vessels (50), accounting for almost 60% of incidents. Machinery damage/failure is third (41), accounting for over 20%.

Compared with other significant waterways such as the Suez Canal (505) and the Kiel Canal (272), Panama Canal (180) has seen fewer shipping incidents over the past 20 years, although more ships pass through the Kiel Canal each year than Panama and Suez combined.

The odds of a shipping incident occurring in the Panama Canal are around 1 every 4,000 ships. For the Suez Canal it is 1 every 1,100 ships. For the Kiel Canal it is 1 in 830.

New Risk Challenges

Although the total number of maritime accidents in the Panama Canal has decreased significantly the potential risks are only set to increase with the creation of a new lane for larger ship transits, expected to open in 2015, posing new challenges for the maritime community.

New locks will enable new-Panamax ships (12,600 teu)* to enter the canal. Existing locks only allow for the passage of vessels carrying 4,400 teu.

The expansion will enable between 12 and 14 larger vessels per day (approximately 4,750 additional ships a year) to transit the canal. The increased size of these vessels – particularly container ships of 12,600 teu – will play a critical role in doubling the annual cargo capacity of the canal to 600 million PCUMs tons**.

This will have a significant impact on the insured value of goods being transported. If the Panama Canal operates at its full projected capacity following expansion this could result in an additional $1.25bn or more in insured goods passing through the canal in just one day.

This potentially equates to $460bn a year, significantly, increasing risk accumulation in the region. This estimate does not include hull values or the increasing number of vessels waiting to cross the canal on either side.

Larger Ships Larger Risks

Larger ships automatically pose greater risks. The sheer amount of cargo carried means a serious casualty has the potential to lead to a sizeable loss and greater disruption. For example, a fully-loaded new-Panamax 12,600 teu container ship – as long as four football fields with a beam of up to 49 meters – could have an average insured cargo value of $250m.

The complexity of the new canal lock system for larger ships could present a risk challenge in the event of it failing to operate. This could lead to blockages inside and outside of the canal. Contingency plans for a lock door malfunction will need to be implemented.

The potential impact of any shipping incident is much wider than just impeding progress through the Panama Canal. With more larger ships on the move in the surrounding region an incident could also impede traffic at major ports in the US and elsewhere, resulting in a potential increase in business interruption losses.

In addition, a number of US ports and terminals on the East and Gulf Coasts are exposed to hurricanes. Larger ships carrying higher concentrations of insured goods will spend more time in these ports, posing an increased risk. For example, a large portion of Superstorm Sandy losses in 2012 were due to storm surge that flooded ports in the Northeast region.

There is concern surrounding salvage limitations for larger container ships. In the event of an accident there may be an insufficient number of qualified experienced salvage experts available to handle the new-Panamax ships.

Increasing traffic of larger ships also poses a heightened pollution risk due to the amount of diesel and petroleum carried. The canal’s strategic and commercial importance could also mean political and security risks increase following expansion.

To cater for the larger ships a raft of changes are also needed at global ports. Additional infrastructure upgrades will be needed in the form of larger gantry cranes to work these larger ships and to handle the increase in volume. Processing capability will need to be improved to avoid bottlenecks at choke points in ports. Navigability is critical: air and water drafts need to be sufficient to allow safe passage of the larger container ships.

There is substantial commercial risk for ports on both the East Coast and West Coast of the US with the East Coast expanding its container capacity in the hope of gaining market share, while the West Coast spends millions in order to protect existing market share.

Risk Mitigation

Conversely, an expanded all-water route from Asia to the US East/Gulf Coast could reduce the risk of container damage due to a reduction in multiple transloadings. The fewer times a container is handled the lower the risk of damage.

Training is key to mitigating the risks involved with the impact of the Panama Canal expansion both in the canal itself and affected ports. The Panama Canal Authority has invested heavily in training including plans to charter a post-Panamax ship to practice maneuvers through the new lane. However, when the canal is opened a whole host of different vessels will be passing through. This will be a challenge.

With such a focus on training human error is unlikely to be the sole cause of future shipping incidents. The risk of grounding remains, either as a result of equipment failure or a casualty on the ship. Insurers and insureds will need to re-evaluate the risk to containers under this new scenario, as risks will be exacerbated during the initial opening period.

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* A teu or twenty-foot equivalent unit is an inexact unit of cargo capacity, often used to describe container ship capacity. It is based on the volume of a 20-foot-long (6.1 m) container

** PCUMs tons: Panama Canal Universal Measurement System, the basis upon which vessels are charged for using the canal. A teu is equivalent to approximately 13 PCUMS tons.