The good, the bad and the ugly: Climate change's impact on global shipping routes

Authored by AXA XL’s Anne Marie Elder and Neil Cole

Global trade largely is borne by the world’s oceans. About 80-90% of goods move by ship. Shippers have always faced risks associated with ship maintenance, protection of cargo, inclement weather, fuel costs and route planning, but all those exposures have been amplified by global warming and the effects of climate change.

Changing sea levels and an increase in frequency and severity of natural catastrophes have contributed to the increased losses experienced due to damage to ships and goods and the need to divert or lengthen journeys. Climate change has also impacted the routes available to shippers, in both positive and negative ways.

Here’s how our changing climate will impact shipping routes in just the next few years:

The Good:

Increases in greenhouse gas concentrations is the major driver of climate change and the associated impacts around extreme weather Some of the increase heat produced by a changing climate is absorbed by the oceans increasing ocean temperatures. This together with the impact rising temperatures has on polar ice coverage causes sea-levels to increase. But the silver lining for shippers is that the absence of ice means a new path to the other side of the world.

Two new Arctic trade routes are emerging: the Northern Sea Route, and the Northwest Passage.

The Northern Sea Route (NSR), which travels along the Russian border, may be completely ice-free by 2030. This route cuts 9,000 km off a one-way trip between East Asia and Europe, potentially cutting travel time by about two weeks. This saves fuel and reduces the overall environmental impact of the journey, although the introduction of ships to the territory could negatively impact the local environment.

The Northwest Passage, which runs along the Canadian border, likewise significantly cuts travel time from North America to the Bering Strait.

However, the accessibility of these Arctic routes is highly variable and depends on the extent of ice melt, which varies seasonally and annually. Navigating these waters involves risks due to the unpredictable ice conditions and the lack of established search and rescue infrastructure in these remote areas.

The Bad:

Other travel routes, however, will continue to be negatively impacted by a changing climate. The Panama Canal has already seen reduced water levels thanks to drought. Each time the locks are opened, freshwater leaves, and the water level in the canal drops eventually being replaced by more freshwater flowing in. However, a decrease in rainfall currently being experienced in Central America means less water for the canal and large ships are already finding it increasingly difficult to pass through. And some container ships must carry fewer containers per trip due to draft limitations. However, container ships have felt less of an overall impact as they have priority status to pass through the Canal.

Canal authorities have already imposed restrictions on vessel weights and cut daily traffic from 36 ships to 27. Less water also means longer passage times, resulting in big backups at either end of the canal. The current wait time to cross is nearly two weeks.

The impact to trade thus far has been manageable but will likely worsen if rainfall levels in the region don’t recover. Longer wait and travel times mean increased costs for shippers who must utilize more resources to complete a journey, and shoulder increased risk as they hold on to cargo for longer periods of time.

Increasingly severe weather events, such as hurricanes and typhoons, also pose new challenges for maritime operations. Ports and coastal infrastructure are at heightened risk of flooding and damage, which can disrupt supply chains and cause delays. The alteration in weather patterns also necessitates changes in route planning and vessel design to ensure safety and efficiency. Ships may need to be fortified to withstand more extreme weather conditions, and routes might need to be adjusted to avoid areas prone to severe storms. These adaptations require significant investment and pose operational challenges, but they are essential for the safety and reliability of global shipping in the face of climate change.

The Ugly

The impact of climate change on shipping routes is just starting to take shape, but if these trends continue, they will present big challenges for shippers and the insurers who indemnify them, particularly when it comes to use of the Northern Sea Route.

Eight nations currently claim territory in the Arctic Circle. The region is governed by international bodies such as the UN Convention on the Law of the Seas, the Artic Council and the International Maritime Organization, but questions will arise over who controls the route as its valuable resources become more readily accessible.

Resource competition may lead to political and military conflict in the region. Russia is already looking to militarize the Arctic with the re-opening of 50 pre-Soviet bases.

Disputes may also arise over regulation of the route including technical shipping requirements. Governing nations will also have to determine who is responsible for providing infrastructure along the route and vital services such as search and rescue. Critically, the environmental impact of the new route must also be considered. The presence of ships and possible mining operations may alter the physical and chemical properties of the water, affecting marine life and ecosystems with potential long-term impacts on biodiversity.

How will Marine insurers respond?

In addition to changing routes, cargo shippers are feeling the effects of climate change in the form of new regulatory requirements.

IMO2050, known as the “Paris Agreement for Shipping,” is the UN International Maritime Organization’s initiative to reduce annual greenhouse gas emissions in shipping by at least 50% by 2050. Already in affect is IMO2020, an environmental rule effective January 1, 2020 that regulates how much sulfur a ship can give out in its exhaust, cutting the limit from 3.5% to 0.5%.
To meet these new standards, cargo shippers are experimenting with new fuel sources, new on-board technology to optimize energy usage, as well as more efficient ship designs. All of which impacts risk profile. 

Marine insurers are responding to new shipping routes and the evolving maritime landscape with a range of strategies and considerations:

Investment in Loss Prevention Technologies: Marine insurers are turning to technology, digitalization, and artificial intelligence to improve loss prevention services. This includes deploying sensors to detect problems like shipboard fires, often caused by cargo, and using digital twins for simulations. Such technological advancements are crucial for adapting to changing risks and enhancing maritime safety.Focus on Climate Change and the Green Transition: Insurers are preparing for more claims related to extreme weather and the risks associated with the transition to cleaner fuels. This includes understanding the new risks, such as toxicity and fire hazards from alternative fuels, and adapting casualty handling aspects like salvage and pollution clean-up. Crew training and upskilling are also essential to manage these emerging risks.Collaboration and Consultation with the Shipping Industry: Insurers are engaging in ongoing dialogues with the shipping industry to understand and adapt to changing risks. This includes discussions on marine cyber risks, digitization, automation, and piracy. Collaboration with the industry helps in shaping insurance policies that are more aligned with the current needs and challenges of the maritime sector.

Final thoughts

For insurers, keeping up with clients’ risk comes down in part to data. At AXA XL, that means updating systems to capture the information needed from clients to calculate energy efficiency. It also means recognizing the changing needs of our clients and working with engineers to understand the risks and benefits of new technologies designed for decarbonization, consulting with marine experts to understand the climate impact of new trade routes, and continually reassessing the carbon footprint of the marine book of business as a whole.

Undoubtedly this will lead to honing of risk selection criteria and potential adjustments in pricing, as well as the development of new and innovative solutions to help marine clients face the challenges ahead and adapt to the demands of a changing climate.