Insuring the maritime sector’s voyage to net zero

Policy debates about reducing carbon emissions from transport usually focus on planes, trains and automobiles and less often focus on the world’s merchant fleets.

The International Maritime Organization (IMO), which adopted its first emissions reduction strategy in 2018 and unveiled a revised version last year, aims for the international shipping industry to reach net zero by around 2050. That means reducing its greenhouse gas (GHG) emissions at least 20% by 2030 and at least 70% by 2040 using 2008 as the baseline.

Like other forms of transport, shipping must use less carbon-intensive fuels, which already – or will shortly – exist. But shipping is not yet on track to reduce its emissions at the scale the IMO wants. For its clean energy transition to pick up steam, insurers are critical, not least in providing cover for ships with untried propulsion systems, but also in drawing up the guidelines for the safe use of these fuels.

The IMO highlights shipping’s contribution to global anthropogenic emissions increased from 2.76% in 2012 to 2.89% in 2018 and the UN Conference on Trade and Development (UNCTAD) estimates maritime emissions surpassed 800 million tonnes of CO₂ last year.

According to IMO data, taken from nearly 29,000 vessels, the sector consumed about 213 million tonnes of fuel in 2022. An IMO dashboard currently says 99.31% of ships in operation use conventional fuels, while the UNCTAD gives the slightly lower figure of 98.8% for 2023.

After oil, after gas

The IMO’s 2023 strategy calls for the uptake of “zero or near-zero” emissions technologies, with fuels and/or energy sources to represent at least 5% (and striving for 10%) of the energy used by international shipping by 2030.

Getting there from here will be difficult. As Jean-Marc Bonello, principal consultant at marine consultancy UMAS, tells Insurance Day, shipping’s use of clean fuels at present is “virtually zero”.

Jean-Marc Bonello, UMAS

There are two main types of alternative marine fuels: biofuels and hydrogen-based fuels.

Biofuels, such as biodiesel and biomethanol, are any fuels produced from recent organic matter (as opposed to ancient fossils), such as agricultural products or waste. This category includes “advanced biofuels”, which use fewer resources that might otherwise be used for agriculture.

Hydrogen-based fuels include hydrogen itself or hydrogen-containing ammonia (NH₃), which is conventionally produced from natural gas. Hydrogen and ammonia fuel can be “green” forms of electricity generation. Alternatively, it is possible to decarbonise fossil fuel-powered hydrogen or ammonia production using carbon capture, producing what is called “blue” hydrogen or ammonia.

“With increased regulatory pressure and customer demand for a more climate-aligned service, a low-emission vessel becomes less susceptible to changes in regulation that might make it obsolete or a stranded asset due to environmental credentials”
_{Jean-Marc Bonello
UMAS}

Not all of these fuels are in commercial production yet and very few ships run on any of these power sources at present. IMO figures show nearly 5% of ships on order will use methane, hydrogen or ammonia – the vast majority of these will use methane.

“The very little innovation that is currently in operation on the water comes in the form of drop-in fossil fuels based on biogenic feedstocks, such as waste agricultural products in the shape of biodiesel, biomethane and biomethanol,” Bonello says.

The Global Maritime Forum (GMF) says tracking actual consumption of “well-to-wake” zero-emission shipping fuels poses challenges, “particularly in distinguishing vessels consistently using these fuels versus those merely capable”. A Copenhagen-based non-governmental organisation working to encourage sustainability in the maritime sector, the GMF tells Insurance Day nearly 60 medium to large vessels run on biofuels at present, including Laura Maersk, which entered service last year. This vessel can also run on conventional diesel.

Will goals be left unmet?

In the short term, alternative fuels are likely to continue to form a negligible share of marine power sources. Analysts using an S&P Global scenario estimate “low-carbon supplies” would only comprise 2.2% of the 328 million tonnes of fuel shipping will use in 2030.

In a report submitted to the IMO in 2023, researchers estimated on current trends the marine sector was nowhere near meeting the interim 2030 goal. At best, the sector would reduce its emissions 4% from 2008 levels and, at worst, it would increase them more than one-third.

The research, by Ricardo Energy and Environment and DNV, concludes “increased policy ambition” could mean alternative fuel development and production would make it possible to reduce marine emissions 50% or even 80% from 2008 levels. “Several energy-efficiency technologies are already mature with potential for greater roll-out,” their report says. Biofuels are already available and will be “fully mature” technologies before 2030, as will green and blue hydrogen fuels, it adds, and green and blue ammonia fuels should be fully available before 2035.

There are already marine engines that can run on biomethane, e-methane and methanol, the report continues. Its authors expect hydrogen-, ammonia- and biodiesel-powered engines will be commercially viable by the end of the decade; some marine engines can use a mix of biodiesel and conventional diesel.

Bonello points out the first ammonia-ready vessels are projected to be on the water in 2026 or 2027, assuming existing orders are fulfilled. “At the moment, these are mostly bulk vessels with dual or triple fuel capability,” he adds.

The European Maritime Safety Agency (EMSA) published a series of reports in 2023 on the viability of hydrogen, ammonia and biofuels for maritime transport. These reports concluded by 2040 there would be enough renewably sourced electricity to meet maritime demands for green hydrogen and green ammonia, although other sectors also use these fuels.

In its 2023 reports, EMSA estimated there would be enough biomass in the EU to produce between 6.3 and 8.0 exajoules of energy by 2030, while the “international maritime transport sector” used 12 exajoules of energy in 2021.

But the transition will be expensive. UNCTAD estimates decarbonising the world’s fleet by 2050 could require an investment of between $8bn and $28bn annually. The associated infrastructure would be even costlier, at $28bn to $90bn each year. UNCTAD says if the marine sector does nothing then its emissions would be 2.3 times the 2008 level by 2050. Full decarbonisation could double yearly fuel costs, it adds.

Role of marine insurers

In December 2021, a group of marine insurers adopted the Poseidon Principles for Marine Insurance, which are linked to the IMO’s net-zero goals. The principles require them to regularly measure the carbon intensity of the fleets they insure according to IMO metrics against their “alignment… with a decarbonisation trajectory that meets the corresponding IMO ambition”.

The Poseidon Principles apply to insurers who write or sponsor hull and marine policies; as such, brokers, protection and indemnity (P&I) clubs, insurance associations and others only have affiliate membership in the principles’ governing body. Signatories include Skuld, Axa XL, Scor and Swiss Re Corporate Solutions, while brokers WTW, Gallagher and Lockton are among the affiliates.

One obvious driver of insurers’ interest in reaching net zero is the risk posed by extreme weather events. “Natural disasters are among the top causes of marine insurance claims in both frequency and severity, with climate-related risks expected to persist and potentially increase,” Lars Lange, secretary-general of the International Union of Marine Insurance (Iumi), says.

Lars Lange, International Union of Marine Insurance

Lange tells Insurance Day retrofitting ships with more advanced propulsion technologies “will increase the value of the global fleet and, consequently, the level of risk to be covered”.

Insurers will also need to be willing to grant policies for new ships using untested fuels. Christian Ponzel, a spokesperson for German insurance association Gesamtverband der Deutschen Versicherungswirtschaft, tells Insurance Day the insurance industry has an important role to play, both in supporting decarbonisation and in developing safe and efficient alternative fuels, not least by insuring operators as they adopt “new, sometimes immature” fuel technologies.

Bonello says underwriters must recognise alternative risks create new perils while in other ways making ships more secure. “With increased regulatory pressure and customer demand for a more climate-aligned service, a low-emission vessel becomes less susceptible to changes in regulation that might make it obsolete or a stranded asset due to environmental credentials,” he says.

“Guidelines for the safe use of ammonia and hydrogen as propulsion technologies have already been published and most class societies have issued a range of relevant notations”
_{Lars Lange
International Union of Marine Insurance}

Insurers will also play a role as investors that finance research and development into new marine fuels. GMF says it may be worth investigating “an alternative fuel version” of the International Oil Pollution Compensation Fund, an insurance pool that pays out compensation for oil spills.

Anna Erlandsen, chief strategy and sustainability officer at Skuld, tells Insurance Day the Oslo-based P&I club is participating in two pilots on fossil-fuel alternatives – one testing shipboard carbon capture and storage and the other nuclear propulsion.

Another reason insurers are involved is because new fuels can be dangerous to handle and store. Hydrogen is highly flammable, while ammonia, as the EMSA report highlights, has a “relatively narrow range of flammability” compared with some other fuels being considered for the shipping industry. Ammonia is, however, “toxic and very reactive”.

Anna Erlandsen, Skuld

In a January 2024 note, Marsh technical analyst Stephen Harris said hydrogen is “mainly untried and untested” in a marine environment, while ammonia can be “toxic and highly caustic if not handled correctly, posing a hazard to crews, marine life and the engine”. Both fuels must be stored at sub-zero temperatures – hydrogen at as low as -273°C – and Harris says there is no data about what could happen with these fuels “under harsh maritime sea conditions over lengthy periods”.

IMO spokesperson Natasha Brown tells Insurance Day there are specific risks linked with different fuel types depending on the nature of the fuel, how it must be handled and so on. “This is why IMO has been developing interim safety guidelines for various fuel types,” including hydrogen and ammonia, she says.

“Skuld is gaining knowledge about the various types of alternative fuels at an early stage, [which] makes us better equipped to understand the risks related to each fuel type and to support the transition by sharing insight and experience across our client base”
_{Anna Erlandsen
Skuld}

Ponzel says collaboration on these standards must involve “extensive co-operation and knowledge sharing between owners, classes, flag states, insurers and others to reduce the risks to ship, cargo, crew and the environment when using new fuels”.

Erlandsen says Skuld’s participation in pilots allows it to better understand the risks of novel fuels. “Skuld is gaining knowledge about the various types of alternative fuels at an early stage,” she says, which “makes us better equipped to understand the risks related to each fuel type and to support the transition by sharing insight and experience across our client base”.

Lange says insurers will have to work with companies, regulators and other actors to establish safety protocols for using fuels like ammonia and hydrogen. He adds Iumi is already working with the IMO and other bodies – including the International Association of Classification Societies – to develop manuals for the safe handling of new fuels.

“Guidelines for the safe use of ammonia and hydrogen as propulsion technologies have already been published,” Lange adds, “and most class societies have issued a range of relevant notations.”