Tuesday, January 17, 2017 | ISSN 0719-241X

Is bigger better?

Risk management impact of the Panama Canal Expansion
Edition of July 05, 2016

The Panama Canal Expansion project was a response to the needs of a changing industry, focused on modernization alternatives to optimize operations, like the birth of the Panamax and Post-Panamax containerships, which can carry up to 13,000 TEUs. At a simple glance, this solution seems an all-around excellent idea. Larger locks allow bigger ships with more cargo, lowering transport costs and affecting the overall final price, which benefits the entire economic cycle, right? On second thought maybe not so much.

The larger locks are a solution to let in this new trend in vessel size and capacity, but with it come other costs that cannot be overlooked, such as the risk management impact due to higher insurance costs.

According to a report on risk management impact by Allianz Insurance, the 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). In layman's terms, the increase in activity is in direct relation to the increase in liability, and managing the impact of that risk is essential to the industry’s good health.

Ensuring the cargo

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

This affects directly the value of transported goods, as insurance costs rise due to the risk accumulation. “The value of insured goods transported will increase with the expanded Canal, as will the risk accumulation,” an expert explains in the report. “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.” Put simply: the larger the ship, the higher the insurance cost. “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 US$1.25bn in insured goods passing through the Canal in just one given day,” the report reads.

Perils of the trade

Some of the most common perils transported goods are faced with are natural disasters, such as typhoons or hurricanes that can jeopardize the cargo during the trajectory. Collisions, machinery damage/failure and piracy are also among the causes that raise the insurance factor.

The impact of risk management in the new Panama Canal will redefine the expanded route’s value, as a variable that had not been initially considered.

By MundoMaritimo

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