The FSO Safer insurance deal: A ticking time bomb – Howden broker interview

In the last week of July, Nautica, an oil tanker bought by the UN Development Programme (UNDP), began to remove an estimated 1.1 million barrels of oil from the FSO Safer off the coast of Yemen.

This latest news begins to bring to a close fears of a potential $20 billion environmental catastrophe in the Red Sea, should the ship begin to break up.

Insurance broker Howden played the crucial role of dealmaker to prevent an environmental catastrophe in the Red Sea, as the London market came together to insure the UN’s efforts to transfer oil from the derelict FSO Safer.

FSO Safer is an Ultra Large Crude Carrier converted into a floating storage and offloading facility. The abandoned ship has been moored 4.8 nautical miles off the Yemeni coast since 2015, during which time the country’s civil war has prevented repairs or maintenance work.

Harry Byrne, regional marine practice leader, Middle East & Africa, for Howden, spoke to Airmic News about the vital role played by his team at Howden, and the London market more broadly, in working against the clock to prevent an ecological disaster.

“Time plays a really important role in this story. It was all so complex and it happened quite slowly at first, but then, suddenly, it needed to be done the next day,” Byrne said.

Byrne’s team at Howden won the tender to broker insurance protection for all aspects of the ship-to-ship (STS) transfer of the oil, acting for the UNDP and tasked with finding a panel of specialty insurers to underwrite an insurance policy unlike any other.

“The sheer volume of information that had to be processed is what stood out about this deal. On a typical marine and energy programme, you might have 10 underwriters for a large risk; on this one, I think we spoke to about 100,” Byrne said.

“The scale of the deal required collaboration on many levels, involving 15 markets, and each market, for the most part, participated on the entirety of the risk. Meetings involved three sets of underwriters for each representative for each company,” he continued.

“There were nine sections of coverage and at least three separate classifications, marine hull, marine cargo and the liabilities, with a fourth, war risk, written within the marine parts,” he added.

In the Lloyd’s market, AXA XL was reportedly the overall lead insurer, setting the terms for the other following syndicates subscribing to the deal, as well as agreeing to manage claims. Beyond Lloyd’s, in the company market, Fidelis MGU was the other ‘lead’ insurance firm, supplying the largest individual share of capacity to take on the risks.

London success story

Byrne said he believes that the rescue could only have been achieved in the London market. All but one of the capacity providers involved were London market firms, plus one Middle Eastern insurer, he explained.

“We believe that London was the only solution for this sort of placement, given the technicality, given the different lines of business and given that it’s not within the normal scope of underwriting appetite,” said Byrne.

“Something like this wouldn’t have been done in the US. It wouldn’t have been able to be achieved because of the way they structure their placements, nor in any other of the global insurance hubs,” he said.

“Traditional London marine market leaders took a big chunk of this risk. They wanted not just to help out, but to prove the relevance of the London market,” he said. “We asked underwriters to write a significant line size; most underwriters involved were writing 10% or thereabouts across the programme,” he added.

Risk of explosion

The number one risk highlighted by the marine surveyor, bMC Group, in the initial stage, was an explosion risk, Byrne explained. This was because the ship’s oil tanks had been about one-third full for seven years without anybody to manage them. Oil is a reactive substance and, left unattended, separates into its thicker and thinner parts – giving off gas that is extremely flammable.

“The explosion risk existed for several days during the initial work, once the first people went on board the vessel,” Byrne said.

“Usually a tanker has a system called an inert gas system in operation, but of course the systems on the ship were down. [Marine salvage company] SMIT brought mobile pumps and generators on board with it, to dispose of the gas that represented a catastrophic risk.”

During the oil transfer, the risk profile shifts so that the primary threat becomes one of the hull cracking – and all the environmental pollution consequences stemming from that.

“Obviously, the number one concern, globally, is the risk of pollution. An explosion or a crack in the vessel’s hull are the two quickest routes to a pollution event,” Byrne said.

“Once the STS transfer of the oil began, steps were taken to reduce the stress on the ship’s hull, to reduce the risk of a crack,” he explained. “Fluid-dynamics mean if they empty one tank along one side, the stress on the steel adjusts accordingly. Therefore, as one tank is emptied, they need to fill other tanks, to keep ballast and maintain buoyancy and stability.”

Despite the severity, the surveyors were confident that the risk was low.

“The distribution of the oil on board the ship was, fortunately, largely in the compartments down the centre-line, the strongest part of the ship,” Byrne said. “A crack might develop in the hull, but if one tank were to spill, this would not represent a large pollution event in comparison to historical incidents.”

Final puzzle piece

The internationally-recognised Yemeni government and the Iran-backed Houthi rebel government have disputed ownership of, and responsibility for, the oil since 2015. Negotiations required both sides to agree to the UNDP’s role.

The UN had been working on a solution to the FSO Safer problem for several years before coming to the insurance industry. Howden’s involvement stemmed from its Climate Risk and Resilience team, which had an existing relationship with the UNDP.

“Insurance has been a very important piece of a much bigger puzzle,” said Byrne. “Our job was primarily to be a risk consultant and advise the UN on their exposures for this project. We also had to manage the market’s appetite, against what the UN have in terms of budget to spend, because they’ve had to fundraise to make this thing happen."

Howden passed broking fees from the market back to UNDP to support the economics of the overall operation.

“We confirmed to the UN that we would pass any normal market brokerage in respect to the FSO Safer package back to them to make sure they had the most affordable net premium. The way we approached it was that there wouldn’t be any additional earnings paid to Howden – they liked this transparency,” he said.

The risks involved, on the other hand, were far from transparent. There was scant prospect of arranging all-risks coverage for the FSO Safer, for instance. Some “reduced coverage” was placed for the ship, which was expected to be in a state of disrepair.

“Representatives of the Yemeni oil company had reportedly made monthly visits to check that nothing had catastrophically gone wrong, but there was no concrete evidence for us to provide to underwriters that the ship was in good or bad physical condition,” Byrne said.

The amount of different protections to arrange was also extensive. Coverage was needed for the Nautica (now renamed Yemen), for FSO Safer itself, for the large volume of oil on board the ship, for the process of the STS transfer and for the liabilities involved.

“You have to think about that liability in different ways because you’ve got liabilities from vessels, liabilities from the oil and pollution, liabilities to the crew members, and then the war risks situation, which sits above everything,” Byrne said.

This put great onus on the work of the surveyors at bMC Group, providing the underwriters with an additional set of eyes to review the programme. The surveyors provide daily updates to the insurance firms, for the underwriters to check on the status of the work and who’s doing what, and reports on technical specifics, related to the risks involved.

“The level of detail they were able to provide gave people more comfort. Without buy-in from the market that the surveyors knew what they were doing, we wouldn’t have been able to place it at all,” said Byrne.

The team effort, therefore, goes far beyond the insurance part of the puzzle, he stressed. “The overall project is a story of collaboration of, I would hazard a guess, up to 100 different contractors working on behalf of the UN,” Byrne said.

Since the teams have begun working on the FSO Safer, the news has been good, he revealed.

“The first reports conducted suggest that she’s in a better state than she could have been,” Byrne said.

The FSO Safer will eventually be moved and scrapped, once drained of her dangerous cargo, but the careful process could still take many weeks or months to come, Byrne suggested.

“She’s still at her mooring; they won’t move her until she’s completely empty of oil,” Byrne said.

Now that the work to remove the oil is underway, the rescue story is drawing to a close, to the satisfaction of the insurance professionals involved in underwriting the process.

“Whether this risk could be solved was a genuinely interesting question, and insurance doesn’t always get to answer these sorts of questions,” Byrne concluded. “It’s been such a positive thing to be part of.”