COVID-19 will see historic losses across the global insurance industry

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1^st January 2024.

The EU ETS is limited by a 'cap' on the number of emission allowances. Within the cap, companies receive or buy emission allowances, which they can trade as needed. The cap decreases every year, ensuring that total emissions fall.

Each allowance gives the holder the right to emit:

One tonne of carbon dioxide (CO2), or;
The equivalent amount of other powerful greenhouse gases, nitrous oxide (N2O) and perfluorocarbons (PFCs).
The price of one ton of CO2 allowance under the EU ETS has fluctuated between EUR 60 and almost EUR 100 in the past two years. The total cost of emissions will vary based on the cost of the allowance at the time of purchase, the vessel’s emissions profile and the total volume of voyages performed within the EU ETS area. The below is for illustration purposes:
~A 30.000 GT passenger ship has total emissions of 20.000 tonnes in a reporting year, of which 9.000 are within the EU, 7.000 at berth within the EU and 4.000 are between the EU and an outside port. The average price of the allowance is EUR 75 per tonne. The total cost would be as follows:
~~9.000 * EUR 75 = EUR 675.000
~~7.000 * EUR 75 = EUR 525.000
~~4.000 * EUR 75 * 50% = EUR 150.000
~~Total = EUR 1.350.000 (of which 40% is payable in 2024)
For 2024, a 60% rebate is admitted to the vessels involved. However, this is reduced to 30% in 2025, before payment is due for 100% with effect from 2026.
Emissions reporting is done for each individual ship, where the ship submits their data to a verifier (such as a class society) which in turns allows the shipowner to issue a verified company emissions report. This report is then submitted to the administering authority, and it is this data that informs what emission allowances need to be surrendered to the authority.
The sanctions for non- compliance are severe, and in the case of a ship that has failed to comply with the monitoring and reporting obligations for two or more consecutive reporting periods, and where other enforcement measures have failed to ensure compliance, the competent authority of an EEA port of entry may issue an expulsion order. Where such a ship flies the flag of an EEA country and enters or is found in one of its ports, the country concerned will, after giving the opportunity to the company concerned to submit its observations, detain the ship until the company fulfils its monitoring and reporting obligations.
Per the EU’s Implementing Regulation, it is the Shipowner who remains ultimately responsible for complying with the EU ETS system.

There are a number of great resources on the regulatory and practical aspects of the system – none better than the EU’s own:

‍https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02003L0087-20230605

‍https://climate.ec.europa.eu/eu-action/transport/reducing-emissions-shipping-sector_en

‍https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/what-eu-ets_en‍

Lloyd’s has today 14 May 2020 issued the following press release on the projected losses to Lloyd’s and the global insurance markets:

“Lloyd’s market set to pay out up to US$4.3bn to customers.

Lloyd’s, the world’s leading (re)insurance market, today revealed that it will pay out in the range of $3bn to $4.3bn* to its global customers as a result of the far-reaching impacts of COVID-19. This is on a par with 9/11 in 2001 and the combined impact of hurricanes Harvey, Irma and Maria in 2017, all of which led to similar pay outs by the Lloyd’s market**. These losses could rise further if the current lockdown continues into another quarter.

Lloyd’s believes that once the scale and complexity of the social and economic impact of COVID-19 is fully understood, the overall cost to the global insurance non-life industry is likely to be far in excess of those historical events.

To understand the impact of the pandemic on the global non-life insurance industry, Lloyd’s undertook an economic study of the potential losses. This looked at both underwriting losses through the Profit and Loss Account, as well as the reduction in the value of investments which insurance companies hold to fund future claims payments. The economic study took account of the current pay out estimates assuming continued social distancing and lockdown measures through 2020¬, as well as the forecast drop in GDP globally.

The estimated 2020 underwriting losses covered by the industry as a result of COVID-19 are approximately $107bn, on par with some of the biggest major claims years for the industry, such as when three catastrophic windstorms have struck (2005: hurricanes Katrina, Rita and Wilma; 2017: hurricanes Harvey, Irma and Maria). Importantly, these natural catastrophes were geographically contained events, occurring over the course of hours and days – vastly different in nature to the global, systemic and longer-term impact of COVID-19.

In addition, unlike other events, the industry will also experience falls in investment portfolios of an estimated $96bn, bringing the total projected loss to the insurance industry to $203bn.

John Neal, CEO of Lloyd’s, said:

“The global insurance industry is paying out on a very wide range of policies to support businesses and people affected by COVID-19. The Lloyd’s market alone is currently expected to pay claims amounting to some $4.3bn, making it one of the market’s largest pay-outs ever. What makes COVID-19 unique is the not just the devastating continuing human and social impact, but also the economic shock. Taking all those factors together will challenge the industry as never before, but we will keep focused on supporting our customers and continuing to pay claims over the weeks and months ahead.

“Alongside making record pay outs, we have been turning our attention to what more we can do to support business and society through this incredibly difficult time. In addition to our £15m package of charitable donations, we have set aside £15m in seed capital to explore how the industry can create or house structures which support economic recovery and mitigate against future events of this magnitude. We are also working with our Advisory Committees to develop a number of initiatives to support our customers and economic recovery in the short, medium and long-term.”

In addition to managing wide-ranging pay outs across sectors and geographies, the experts, entrepreneurs and innovators drawn together by the Lloyd’s market have already started creating new policies to support the immediate health response as well as the longer-term exit strategy. This includes the search for diagnostics, treatments and vaccinations, where one Lloyd’s syndicate^ is insuring more than 100 individual clinical trials taking place around the world investigating all stages of COVID-19.

Sitting alongside the £15m package of support for charitable organisations responding to the pandemic, Lloyd’s is also repurposing existing innovation initiatives in its Innovation Lab and Product Innovation Facility to help fast track development of insurance products to support the response to COVID-19.

Lloyd’s plans to announce a series of further initiatives in the coming weeks as it continues to work with government, industry and business to support the short, medium and long-term response to COVID-19. One initiative under consideration includes establishing a ‘Recover Re’ insurance vehicle offering “after the event” cover for pandemic related business recovery, including the current COVID-19 pandemic.”

Source: LLOYD’S – https://www.lloyds.com/news-and-risk-insight/press-releases/2020/05/covid19-will-see-historic-losses-across-the-global-insurance-industry

COVID-19 will see historic losses across the global insurance industry

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1st January 2024.

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1^st January 2024.