Heavy weather means risky business

With hundreds of ships, drilling rigs and oil platforms battling the elements, the Maersk Group is constantly at risk from stormy seas and extreme weather conditions. So it’s no surprise that risk management is high on the agenda for the Group.

In February 2014, over 500 containers were lost overboard when Svendborg Mærsk was caught in a violent storm in the Bay of Biscay.

The flooding of Emma Mærsk

In February 2013, the 14,000-TEU Emma Mærsk lost power in the main engine when a failure in one of the stern thrusters caused tens of thousands of gallons of salt water to flood into the engine room. The crew worked quickly and managed to position the vessel safely alongside the Suez Canal Container Terminal, and luckily no one was hurt. Emma Mærsk was towed to Palermo for repairs and faced months out of service.

The total bill for repairing Emma Mærsk was USD 60 million; USD 18 million was paid by Maersk Insurance and USD 42 million by external insurers.

As Svendborg Mærsk left the English Channel, heading south into the Bay of Biscay on 14 ­February this year, the captain and crew were ready to tackle some rough weather. But they could not have anticipated the extremes they were met with. Caught in the path of a violent storm, the ship was battered by strong winds and tossed by high swells and 10-metre waves. As the vessel rolled on its side – at one point to a terrifying 41-degree angle – hundreds of containers were washed overboard and swept away into the angry sea.

Luckily none of the crew was seriously injured during the storm and Svendborg Mærsk suffered only minor damage, but with 517 containers lost overboard and another 250 damaged it was the largest container loss in Maersk Line’s history. The financial cost of the incident is still being assessed, but could be as high as USD 10–15 million.

The Svendborg Mærsk incident highlights just how vulnerable the Group is from extreme weather and unpredictable seas. “As one of the most asset-heavy companies in the world, we have a lot of steel – platforms, drilling rigs and ships – out there and exposed to sea and heavy weather,” says Lars Henneberg, Head of Risk Management, Maersk Group.

Lars Henneberg, Head of Risk Management, Maersk Group says the Group’s approach to risk management has changed in recent years.

The third biggest payout in the energy sector
An accident in Maersk Oil resulted in one of the biggest insurance payouts ever in the energy sector globally. In February 2011, 175 miles northeast of ­Aberdeen, Gryphon FPSO (floating production, storage and offloading unit) was hit by a violent storm. Four anchor chains broke and the vessel moved 180 m off-station, causing severe and complex damage to the subsea architecture. Following the incident, Gryphon was out of action for over two years. In the end the insurance claim was close to USD 1 billion, covering physical damage and the loss of production income.

“Maersk Oil made a root cause analysis of what went wrong, and a loss prevention programme to assess how to improve the mooring system for other FPSO units in the Group. Maersk Oil was very open about what happened and the findings were shared across the Group and with the rest of the oil industry,” says Henneberg.

As a result, insurance costs have always been high on Maersk’s agenda. In 2010 it was estimated that the Group was spending USD 300-350 million per year on insuring its assets.

But the last few years have seen a major shift in the way the Group manages risk. An in-house insurance company, Maersk ­Insurance, was established, meaning that today most of the Group’s risk is insured internally, leading to a ­dramatic decline in the amount paid out to insurers of around USD 100 million per year.

“We have a big balance sheet and can retain a lot of risk ourselves,” explains Henneberg. “It means we don’t have to pay a premium to the external insurance market.” Typically, losses below USD 1 million are taken on by the business unit, while the Group will take on losses of up to USD 50 million.

Changing the mindset

With substantially more risk retained in the Group, this has entailed a step change in the way the Group approaches risk in general.

“Insurance is not the solution to protecting our assets,” says ­Henneberg. “We need to do something about our losses and not let others pay for them.”

“It is a change in mindset, as today we focus less on risk transfer or buying insurance, and more on risk improvement. This means loss-prevention activities, assessing our exposure to certain risks and how prepared we are for when things do go wrong.”

To support this, an ongoing risk assessment programme examines areas of concern on a yearly basis. This year the focus has been the security situation at oil assets in West Africa and how to mitigate the threat of piracy. A major study has also been launched into the risk picture surrounding the new breed of mega vessels entering Maersk Line’s fleet.

Also being analysed are the Group’s cargo acceptance procedures and risks posed by container contents. “There are procedures for declaring what is in the containers, but as they are not x-rayed it’s difficult to verify,” says Henneberg. This has resulted in some dangerous situations. In August last year for example, a container full of chemicals spontaneously self-combusted on board Maersk Kampala, ­causing a serious fire which burnt for seven days before it was finally extinguished. The fire damaged 250 containers and put the vessel out of action for two months.

Learning the lessons
Learning and sharing the lessons from when things go wrong is an important part of risk management. Following the Svendborg Mærsk incident, new procedures have been introduced, making it mandatory for all vessels to apply weather routing when forecasted weather exceeds wind force eight, and to deviate or postpone the voyage if the wind force is higher than nine.

While the final bill is still being calculated months after the event, the accident was a stark reminder of the constant risk faced by all of the Group’s assets from extreme and unpredictable weather conditions. Being ready for such risks and being able to mitigate them as much as possible is firmly on the Group’s agenda.