It wasn’t so long ago that risks in the maritime industry were largely predictable and limited mostly to natural calamities, equipment failures, and human error. Most commercial marine insurance policies were designed to protect against these risks, and the coverage was sufficient for the most part.
But over time, the evolution of global trade and the advent of new technologies brought about significant changes in the shipping industry, particularly concerning risks. This, in turn, has given rise to the question: “Has risk management in the shipping sector evolved sufficiently to meet the new challenges?”
Crucial areas of improvement in risk management
To be sure, incidents such as the COVID-19 pandemic and the MV Ever Given mishap in the Suez Canal showed the effectiveness of existing risk management efforts. After all, without significant resilience in the maritime insurance sector, the shipping industry would be in a far worse state. Even so, there are still many areas in which risk management policies and implementation could be improved.
One other aspect that has changed is how industry leaders implement risk management. Previously, the involvement of most managers and administrators extended only to picking and choosing appropriate strategies. Nowadays, senior officers are more likely to adopt a hands-on approach, becoming more closely involved in the finer details of commercial shipping risk management.
Even with the significant increase in risk discussions across the board, there are still lapses in documentation and formalization. Even now, relatively few businesses have a well-formulated risk management approach, with much more effort required in the areas of formal identification, evidence gathering, and exposure reduction.
The pandemic, in particular, has had a massive impact on risk management processes, not just in shipping but in many other sectors as well. Consequently, the suitability and effectiveness of risk management processes and systems are coming under increased scrutiny.
Qualities of effective risk management
Some characteristics that have been identified as being crucial to effective risk response are:
- Dynamism and relevance. Commercial shipping risk management should be dynamic as well as updated. But efforts should go beyond merely updating risk registers for upcoming board reviews. Instead, your client should review and update these periodically to identify new and emerging risks as well as those that evolve over time. Shippers should also focus on improving mitigation and enhancing the effectiveness of their risk management efforts.
- Embedding and implementation. It isn’t enough to document risk management efforts‒ they have to be put into practice as well. At the same time, your clients should exert extra effort in incorporating commercial shipping risk management processes into management and utilizing these when formulating crucial decisions.
- Consistency and scaling. All risk management processes at the top level should be consistently supported at the operational level. As the importance of particular risks increases, companies should implement a clear and straightforward plan of action for escalating them upwards.
Documentation and embedding are crucial aspects of commercial shipping risk management. Shipping firms can better attract investors‒particularly those with an aversion to risk‒by displaying appropriate consideration and effective management of risk exposures inherent in the business. Doing so also makes shipping firms more attractive to financers, charterers, insurers, and other industry stakeholders.
The importance of assessing risk velocity
Risk assessment has traditionally relied on two specific variables:
- Risk event impact (typically assessed in terms of financial effect)
- The likelihood of risk reoccurrence
Nowadays, a third variable has increasingly come into play: risk velocity.
Risk velocity refers to the amount of time in which a particular risk exposure could affect a company. This is typically measured as the period between an event’s occurrence and where its effects are clearly noticeable within the organization.
Of course, it is up to the business’s officers to decide whether to include risk velocity assessment in their risk rating systems or not. Nevertheless, it is vital to consider the speed at which the organization will be affected by the risk impacts. At the very least, this will help businesses determine how much time they have to implement risk management measures and enhance their mitigation efforts.
Shipping companies can benefit considerably from the use of the right risk management software. For many firms, the use of such software has proven to be the single most crucial factor in developing and embedding an effective risk management system. Regardless of which solutions your clients choose to adopt, effective implementation is the best way to deal with inherent risks exposures.
About Merrimac Marine Insurance
At Merrimac Marine, we are dedicated to providing insurance for the marine industry to protect your clients’ business and assets. For more information about our products and programs, contact our specialists today at (800) 681-1998.