16 October 2022
Climate change: Extreme weather disrupts maritime insurance in Brazil
In the space of a few months, Brazil recently faced the most extreme of weather conditions – flooding and landslides that took the lives of hundreds of people, only to be followed sharply by severe water shortage. The impact of natural disasters in Brazil is rising and has been for the last 50 years. Roughly 85% of its natural catastrophes are caused by flash floods, landslides and prolonged droughts, and around 80% of Brazil’s population live near the coastline.
In July, the World Metrological Organization (WMO) issued a report stating that extreme weather and climate change impacts including mega-drought, extreme rainfall, land and marine heatwaves and glacier melt are affecting the Latin America and the Caribbean region, from the Amazon to the Andes and from Pacific and Atlantic Ocean waters to the snowy depths of Patagonia.
Extreme rainfall
Among the WMO’s key findings were the substantial damage caused by extreme rainfall in 2021. There were considerable losses, including hundreds of fatalities, tens of thousands of homes destroyed or damaged and hundreds of thousands of people displaced. Floods and landslides in the Brazilian states of Bahia and Minas Gerais led to an estimated loss of USD 3.1 billion.
At the start of the year at least 24 people died after heavy rains in Sao Paulo, while in February 231 people died after heavy rains in Petropolis, Rio de Janiero, triggering floods and landslides that destroyed parts of the city. In late May, heavy rains in Pernambuco killed at least 106 and left 5,000 people displaced from their homes.
Brazil's ports and navigation conditions, at times, have been severely disrupted by natural disasters. The Intercontinental Panel on Climate Change Port Survey 2022 found that just over half (53%) of ports were already experiencing extreme weather events more frequently while 41% had experienced an event that was ‘somehow exceptional, unprecedented or otherwise out of the ordinary in the last five years’.
Natural disasters profoundly impact shipping. Recent events have caused delays, interfered with business operations, and resulted in material loss with an impact on the local economy. Freight shipping rates always increase post-natural catastrophe. If roads are closed, alternative, sometimes longer, delivery times might be necessary, increasing fuel consumption, driver on-duty time, not to mention the depreciation of potential consumables.
Floods and landslides in the Brazilian states of Bahia and Minas Gerais led to an estimated loss of over
Terminal impact in the south
Brazil has experienced a series of extratropical cyclones, which normally form in the South Atlantic, appearing closer to shore than before. This has produced very strong winds on the southern coastline leaving terminals more at risk.
Terminals are subject to equipment instability and port blockage in some cases. It is not uncommon to see port terminal equipment falling during a storm due to lack of maintenance on brakes and/or staff negligence to properly secure the equipment. Terminal warehouses can also lose their roofs and suffer cargo damage – terminal policies in Brazil do not exclude damages caused by acts of god.
Last year Southern Brazil also experienced a very cold winter that produced treacherous city road conditions and interrupted cargo flow by trucks to some terminals. Trade disruption cover could mitigate this issue.
Southern Brazil also has a developed a shipyard industry along the river Itajaí-Açu, known to flood from time to time. The more constructions that appear along the river, the less space the river has for naturally overflow; therefore, river flooding becomes more intense in some areas.
Worst drought in almost a century
Along with affecting the production of crops that are vital to the Brazilian economy – coffee, corn, sugarcane and oranges – climate change is worsening navigation conditions on rivers, especially in the dry season. Brazil recorded it lowest rainfall levels in the last 91 years during September 2020 and June 2021, according to the Ministry of Energy Committee. The drought had a significant impact on soy and corn barge movements along the Tiete-Parana waterway. Government measures to save water and direct it to power generation disrupted navigation on the waterway, which is part of Brazil’s fourth-largest waterway for cargo transport.
Droughts incur financial losses, delays in shipment and risk of damage to vessels as barges have to carry less to reduce their draft, and vessels may run aground and form logjams in river ports. As a result of lower water levels in the Parana River basin, cargo ships were also forced to carry 30% less gain – for a panamax this equates to 16,000 tons. Vessels also completed their loads at alternative ports, further increasing costs. When rivers can no longer be used to move goods, companies must resort to roads, further raising the freight costs.
As a result of lower water levels in the Parana River basin, cargo ships were also forced to carry 30% less gain – for a panamax this equates to
Insurance implications
Maritime insurance in Brazil is heavily dependent on international support and is suffering from the impact of global maritime disasters. The market had been affected by the increase in reinsurance costs (after several natural disasters that made Lloyd’s push for syndicates to review their business plans) and P&I increases (burden of mutuality).
Traditionally, Brazil has always been marketed as a country that does not experience natural disasters to the extent common in other countries, such as earthquakes, volcanoes and hurricanes. While this remain true, we are seeing more events such as heavy windstorms and floods that are affecting infrastructures and markets are starting to react by restricting cover for some acts of god.
Environmental pressures
As the world turns to renewable energy sources to combat climate change, shipowners must still contend with rising sea levels and harsher weather conditions at sea. Commonly-cited reasons for weather-related claims include containers falling overboard due to strong winds, delayed cargo, and damage to containers. Utilising highly predictive weather intelligence and vessel motion forecasting platforms can optimise vessel performance and minimise risk of loss.
The International Maritime Organization confirmed on 28th October, 2016, the maximum allowable sulphur content in shipping fuel has decreased from 3.5% to 0.5%. This was implemented as a worldwide action at the start of 2020. Danish giant Maersk has said that the burden of this cost would have a direct impact on customers. The IMO 2020 regulation disrupted the established business paradigm, according to Maritime Transport Research. While it is anticipated to have a long-term positive impact on the environment, it created a considerable financial burden for maritime shipping companies.
In July the IMO said Brazil was developing a new National Maritime Policy reflecting and integrating all the policies related to the use of the sea. An Inter-Ministerial Committee established in 2021 is responsible for the development of this policy.
Shipowners have been exploring solutions to reduce the emission of sulphur levels while trying to avoid large increases in shipping costs. Shipowners analysing the cost of changing all bunkers to VLSFO face two issues: cost and uncertainty. Will refineries deliver the amount of VLSFO required, and how easily available will it be for bunkering globally? Some have opted to install scrubbers, continue to use MGO for their operation and move straight to alternative fuels in the future. Their new vessels could be built with areas for future LNG use as fuel, while they study the use of ammonia and additional technologies that will generate a greener energy.
While shipowners are undoubtedly exploring alternative fuels to reduce the impact on the environment, this is not a matter for shipowners alone. Development of new technology and the building and use of greener vessels demand investment and usage will be more costly since the entire surrounding infrastructure must be developed. Where will fuel be available with new technology? Will there be shipyard availability to fix new technology such as wind turbines on vessels?
Indeed, the path to net zero requires cross-industry collaboration, and Gallagher is proud to be a signatory of the Poseidon Principles. Andrew James, Executive Director, Gallagher says Gallagher is “committed to working closely with clients, and other stakeholders within the marine insurance sector, to support the shipping industry’s journey to achieving a net zero target”.
Andrew James, Executive Director, Gallagher says "we are committed to working closely with clients, and other stakeholders within the marine insurance sector, to support the shipping industry’s journey to achieving a net zero target”.
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