By Dr Pia Rebelo

Diminishing ice shelves in the Arctic caused by climate change are allowing for new maritime routes in previously unnavigable marine spaces. This coincides with increasing oil and gas exploration plans in the arctic region which will no doubt require maritime services. The shipping industry may also want to capitalise on these newly opened routes as they provide shorter sailing times which can eventually result in fuel savings and less time at sea for seafarers. In a recent article authored by Dr Pia Rebelo and Mr Cyril Uchenna Amaefule published in the Environmental Law Review (ELR), the unique risks and hazards of Arctic shipping are discussed from a marine insurance perspective. While the authors do not necessarily advance an argument for increased economic activity in this ecologically sensitive region, nor is climate change viewed as an economic advantage, they do posit that insurers require better risk management frameworks to safeguard against the multitude of risks that are associated with artic shipping and to address some of the gaps in existing regulatory frameworks.

It is argued in the ELR article that in order for arctic shipping to become commercially practical, marine insurers require improved data and risk management methodologies in order to better calculate the premiums of Hull & Machinery (H&M) and Protection & Indemnity (P&I) insurance policies for ships travelling through the Arctic. Until such risks can be assessed, evaluated, and managed; marine insurers are likely to be cautious gatekeepers of arctic shipping pursuits. To date, insurers have paid out more in ship damage that has occurred in the Arctic than they have collected in premiums, which in itself is problematic. For Hull & Marine (H&M) insurers, bespoke policy plans will need to consider challenges caused by the extreme environment. Navigational concerns include, uncertain ice conditions, rapidly changing weather, extremely low temperatures, extended periods of darkness, communication failures due to high latitude, remoteness, emergency preparedness, and limited access to salvage services (Arctic Council, 2020). All of these factors can result in structural damage due to collisions (both ice and ship-to-ship), loss of propulsion, restrictions on manoeuvrability, and loss of entire ship. From a Protection and Indemnity (P&I) insurance standpoint, arctic shipping poses a number of problems with respect to crew safety and occupational hazards, major pollution incidents, wreck removal and salvage, and the impact on third party communities living in remote arctic regions.

In order to mitigate some of these risks, the International Maritime Organisation (IMO) adopted the Polar Code. The Polar Code was implemented via amendments to: the International Convention for Safety of Life at Sea (SOLAS) by the addition of new chapter XIV; to the International Convention for the Prevention of Pollution from Ships 73/78 (MARPOL) via amended Annexes I, II, IV and V; and the addition of Chapter V regulation 4 of the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers (STCW) and STCW Code. In the ELR article, the authors evaluate these regulatory developments with the result that many pertinent factors remain unaddressed. Inadequate attention has been given to infrastructure shortcomings, communication issues, rescue operations, and concerns with crew. While the Code provides a ‘zero-tolerance approach’ to pollution by oil and noxious liquid substances in bulk, the discharge of sewage is still permitted under certain conditions. Another operational risk is that of increased GHG emissions from energy-intensive operational factors such as higher hull resistance and the possible use of ice-breaking services. The IMO has allowed for special adjustments to its Carbon Intensity Indicator measure for arctic shipping, yet this has the result of enhanced climate risks and does not account for ‘black carbon emissions’ which have further warming impacts.

The authors argue that despite regulatory improvements, the Polar Code remains a hindrance to the acceleration of new economic activities in the Arctic. Yet despite having a largely inadequate risk assessment framework, arctic shipping activities have seen an increase of 7% per annum from 2010 to 2020 (Müller, 2020). Currently, Norway leads all Arctic states in respect of traffic increases due to investments in LNG infrastructure and associated transport in its northern waters and Barents Sea. Russia’s Novatek is also set to include Arctic LNG2, which despite sanctions, started operating in December 2023 (Bloomsbury). It is worth noting that Norway benefits from having an ice-free area within its Arctic EEZ for most of the year. Newly opening shipping routes are more likely to be ice-covered to varying degrees. Marine insurers will need to be cautious and are likely to undergo a transition period in developing appropriate risk management frameworks with supporting methodologies. Despite the prospects of increased economic opportunity in the Arctic region, marine insurers should also seek to balance these prospects with the stark reality that increased oil and gas extraction is inconsistent with the Paris Agreement’s 1.5 °C mandate. The ability of the insurance sector to manage the mounting risks of climate change requires greater attention more generally. By way of example, climate litigants are utilising increasingly creative arguments in a wave of cases against both governments and fossil fuel companies. Marine insurers are likely to grapple with similar uncertainty in addition to an inherently unique set of physical risks stemming from the Arctic environment itself.