Alternative ship fuels raise safety concerns

The use of alternative fuels and technologies in shipping is growing as the industry moves to reduce greenhouse gas emissions, but added safety risks are a concern and could reduce the availability and raise the cost of marine insurance coverage.

Risks associated with the transition to low and zero-emission fuels will need to be carefully managed, as shipowners and operators face increased pressure from regulators, investors and other stakeholders to decarbonize their fleets, experts say.

International Maritime Organization regulations aim to reduce carbon emissions in international shipping by at least 40% by 2030 and 70% by 2050 from 2008 levels, while an initial target for a 50% cut in annual greenhouse gas emissions by 2050 could be revised in July. 

Ships transport around 80% of global trade and account for about 3% of global greenhouse gas emissions, according to the World Economic Forum.

While most ships are still powered by internal combustion engines and run on conventional fuel oil or diesel, a growing number have switched to liquefied natural gas. Others use biofuels or methanol, and other alternatives, including ammonia and hydrogen, are being tested. There are also electric-powered vessels. 

Decarbonization will transform how the shipping industry operates but comes with additional risks that may have unintended consequences, said Rahul Khanna, London-based global head of marine risk consulting at Allianz Global Corporate & Specialty SE, a unit of Allianz SE.

Uncertainty over the availability and cost of alternative fuels raises the likelihood of supply chain risks, and as new technologies for ships using alternative fuels are introduced, the risk of machinery breakdown claims could potentially increase — at least initially, Mr. Khanna said. 

Other concerns include the toxic, corrosive and combustible nature of some fuels, handling and storage challenges, lack of port and refueling infrastructure, and crew safety exposures, sources said.

The insurance industry is trying to help policyholders navigate the new risk environment and providing capacity for new technologies, said Mike Gosselin, London-based global leader, energy and transition risk, at Liberty Mutual Insurance Co. 

“However, it is challenging because for some of this we don’t have 20 years of actuarial data. We’re basically leaning into the risk and figuring it out,” Mr. Gosselin said.

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Since alternative fuels are not yet in widespread use in the shipping sector, direct feedback from insurers has been limited so far, said Chris Law, New York-based senior vice president-marine risk engineering and loss control for Aon PLC.

“I think it’ll be insurable. It’s just a question of getting underwriters comfortable that there isn’t an elevated risk profile associated with new fuels,” he said.

Regulatory, classification society and flag administration requirements ensure vessels are built and operated to certain standards, giving insurers greater confidence, he said.

As with any new technology there’s a learning curve, but the net zero targets being set by regulators are accelerating the pace at which the industry needs to understand how alternative fuels perform and how to manage them, said Kelly Malynn, ESG strategic lead for the marine division, at Beazley PLC in London.

“It’s the right thing to do, but that concentrates and increases the potential risks,” Ms. Malynn said.

Insurance pricing changes are not yet needed because only a small proportion of marine policyholders are using alternative fuels and those tend to be larger companies with established safety procedures, operating brand-new vessels that are high value anyway, she said. 

The transition to alternative fuels will have implications for both marine hull and liability insurance provided by protection and indemnity clubs, said Stephen Harris, London-based senior vice president in the marine, cargo and logistics practice of Marsh Specialty.

Eventually it will become a major consideration as insurers decide which risks they want to write and how much premium to charge, “but we haven’t seen any evidence yet that insurers are discounting insurance for those that use cleaner fuels,” Mr. Harris said.

Since Jan. 1, IMO rules require individual ships to be tested for carbon emissions during annual surveys and be graded on a scale of A through E on performance, he said. While shipowners can work to improve the grades, “those E vessels are going to find it increasingly tough to find insurers with the appetite to cover them,” he said.

Different fuels change the risk profiles of vessels and are among the factors that underwriters will consider when assessing a risk, said Charlie McCammon, Philadelphia-based vice president in the marine risk consulting practice at Willis Towers Watson PLC.

Liquefied natural gas, for example, is considered a mature alternative fuel option, and information provided by classification societies, which insurers use to evaluate vessels, has determined that LNG is a “manageable risk,” Mr. McCammon said. “It’s always possible to find insurance for those types of vessels,” he said.

With fuels like ammonia and hydrogen, there’s a lack of historical data and experience is untested, said Jarek Klimczak, New York-based senior risk consultant, marine, at Axa XL, a unit of Axa SA.

“It’s a little bit like experimentation, and over time we’ll build actual experience,” Mr. Klimczak said.

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Controls, training vital in moves to decarbonize world’s fleets

Crew training and establishing proper safety control and management procedures will be critical as shipowners and operators look to deploy alternative fuels, experts say.

Safety management procedures need to be fuel-specific, said Kelly Malynn, ESG strategic lead for the marine division at Beazley PLC in London.

“You may need to have different fire detection and management systems and training depending on the fuel you’re using, because the fuel may behave differently in a crisis scenario,” Ms. Malynn said.

“It’s about ensuring that knowledge is there for these newer fuels.” 

Fuels have different safety and exposure profiles, said Chris Law, New York-based senior vice president-marine risk engineering and loss control for Aon PLC. Hydrogen, for example, is very combustible, he said. 

“There are going to be all sorts of additional safety controls around how you transfer hydrogen, how you store it on board, how you monitor for potential leaks,” Mr. Law said.

Training crew to have the knowledge and skills to handle and maintain alternative fuels is important, said Jarek Klimczak, New York-based senior risk consultant, marine, at Axa XL, a unit of Axa SA.

“The entire staff that operates the vessel onboard and onshore needs to be trained,” to mitigate risks of misusing the fuel, he said.

Changes in maintenance programs may also be needed due to the different fuel properties, Mr. Klimczak said. “Shipowners will need to comply with requirements and guidance from the engine manufacturers,” he said.