Poseidon Principles for Marine insurance

POSEIDON, in Greek mythology was the God of the Seas and rivers. He brought about storms, floods and earthquakes leading to massive destruction. Yet he was not a negative force and was the one who protected seafarers. The Romans knew him as Neptune. Now in 2021 what marine insurance principles has he enunciated bearing his name? Well, he has not laid down the principles. It was the IMO which recognized in 2018 that Climate risk could destroy the world over time unless pro-active steps were taken to reduce carbon footprints and global warming. The IMO set out its ambition for decarbonization or reduction of carbon footprints in the maritime area and this led to the launch of the Poseidon Principles in June 2019. So what was the ambition of the IMO? To reduce the annual GHG emissions by at least 50% in 2050 compared to 2008 figures.

Groups were formed to look at different areas of the maritime industry where Poseidon Principles could be initiated to meet the long-term ambitions of the IMO towards decarbonization. In October 2020, the Sea Cargo Charter which must apply to all bulk chartering activities came into vogue. The 4 principles laid down were Assessment, Accountability, Enforcement & Transparency. Enforcement meant adding the Sea Cargo Charter clause in all charter parties. Around the same time, insurance providers formed a drafting group to create a set of similar principles for banks who lent money to the shipping industry. Lenders, lessors, guarantors, around 28 of them are now signatories to the Poseidon Principles. Now in December 2021, the Poseidon Principles for Marine insurance have been adopted by 6 leading marine insurance providers who deal in Hull & Machinery insurance or provide P &I cover. Again, the 4 principles laid down are Assessment, Accountability, Enforcement & Transparency. The insurers aim to bring down the carbon footprints in their portfolio to targeted levels by 2050.

Assessment: The signatories will measure every year their portfolio’s carbon intensity & the decarbonization trajectory. The decarbonization trajectory is defined as the number of grams of carbon-dioxide a ship emits to move one ton of cargo over one nautical mile. Over a period of time, this measure should show a downward trajectory.

Accountability: It is recognized that submission of data will be crucial. The signatories agree to abide by the IMO Data Collection System which will be used for collecting & analyzing emission data of all ships of Gross tonnage of 5000 and above and involved in international trade.

Enforcement: Compliance with the Poseidon Principles will be enforced by standard covenant clauses in all business contracts, so that data collection and the intention to decarbonize need not be spelt out every time.

Transparency: The signatories commit to acknowledging that they are signatories, collecting and submitting data in a transparent manner and the Poseidon Secretariat, at the end of the year will publish data relating to all signatories.

Laudable objective indeed!The world has to be saved and shipping is one of the areas where decarbonization has to be implemented. Will there be any downside or problems faced by exporters/importers? Will cargo insurers too sign up or coaxed to sign -up for the Poseidon principles? Decarbonization, even if gradual comes at a steep cost in terms of change in vessel fuel, alterations to machinery and even possibly reducing loads per vessel. The world, reeling under the impact of Covid-19 and the attendant lockdowns is gasping for breath. Businesses are limping back gradually and containers are hard to find.( Plz read my post Oh………for a box!). Freight rates are already high and further increases may hit businesses hard. Another issue is with the ‘ covenant clauses’. In due course, vessels not meeting the stated norms or not achieving the desired decarbonization trajectory may find it difficult to find insurers or made to shell out hefty sums as premiums, apart from facing reduced coverages. Maybe right, but one needs to look at the industry as a whole, the number of families it sustains and suddenly if a company goes down under, over-burdened by costs, imagine the human tragedy which can follow. A comparative could be the insurers’/reinsurers’ dislike for thermal power plants and coal-based assets. Coal is polluting no doubt, but look at the massive investments in this industry and the millions of people employed here. Looking to shut them down by throttling their insurance requirements is certainly not the way forward. Another concern is that Poseidon Principles may gradually be brought into play for cargo interests too and cargo insurers may refuse/charge hefty premiums for cargo considered to be enhancing carbon footprints.

One cannot help feeling that apart from the need to tackle Climate risk, there is politics at play too. Developed nations increased their industrialization, pollution and carbon footprints beyond acceptable norms in a bid to out-beat one another. Now when the heat is on ( pun intended) from Nature and from developing countries growing faster, the discussion moves to decarbonization. So what, if some industries, some countries are squeezed out? We will remain in a less polluted world, appears to be the motto. Better way to tackle climate risk will be to have the insurance and banking industry reward those who reduce those who reduce carbon footprints, by way of favorable lending terms & cheaper premiums ….. a positive spin, rather than take a negative approach.