It has been a tumultuous year for the bunker industry, with significant events that have ramifications for insurers and the insured. New sulfur restrictions in fuel will take effect in January 2015, prompting suppliers to find alternatives like LNG. Cybercrime has also become a major threat, with hackers targeting the bunker industry through scams and attacks that can cause widespread damage. Two major bankruptcies, including the largest independent bunker supplier OW Bunker, have profoundly reduced the available credit insurance capacity for the industry. These issues present complex challenges for effectively managing risk.

1. www.bunkerspot.com Volume 11 Number 6 December 2014/January 2015
THE END GAME
THE RISE AND FALL OF OW BUNKER

2. 2
014 has been a tumultuous year for the bunker industry. Most
notably there have been changes to marine fuel requirements,
turmoil with the underestimated risks of cyber terrorism and
crimes, and two high profile bankruptcies, including that of the
largest independent bunker supplier in the world. All of this has had
significant ramifications for the insurance market and, in particular,
the insured. Each issue comes with its own set of unique complexities
in regard to risk. To effectively deal with rising concerns on all these
fronts, it is necessary to understand the nature of the challenges and
the implications for protecting assets while allowing for continued
growth.
As of 1 January 2015, new sulphur restrictions will become law in
a number of key ports around the world. As a result, bunker suppliers
have had to anticipate the new demands by looking for alternatives
that minimise risk. This has included changing the fuels they supply,
creating new, hybrid fuels, and/or relying on their customers to
seek alternative solutions such as fitting scrubbers, managing fuel
switching, or burning only distillates. However, many suppliers are
turning to liquefied natural gas (LNG), which appears to be safe,
clean, inexpensive and, consequently, a desirable alternative fuel for
shipping. In addition and importantly, LNG has no particular restrictions,
Optimum
protection
It has been an eventful
year for all the
wrong reasons, with
consequences for insurers
and the insured alike.
What steps can operators
take to protect themselves
against the unexpected?
‘What makes cyber crime so insidious and
industries so vulnerable is that it takes very
few people to perpetrate widespread damage
and they can be oceans away from their target’
insurance
66 www.bunkerspot.com Bunkerspot December 2014/January 2015

3. exclusions, or limitations as may be applied
to liability and cargo insurance policies and,
currently, there are no additional premium
charges for LNG deliveries. Currently, as
statistical data is limited, underwriters are
recommending that the bunker industry
follows ‘industry best practices,’ in regards
to the use of LNG. As a result, LNG appears
to be a good, workable solution to satisfy
the upcoming restrictions, to limiting risk
and minimising the escalation of premiums.
Other challenges facing the bunker
industry are the underestimated but very real
risks and consequences of cyber terrorism and
crimes. Until recently, cyber issues have been
on the periphery, more the domain of Silicon
Valley than that of the marine energy industry.
However, cyber terrorism and crime have
becoming increasingly significant problems
in both the maritime and port domains. That
is, no industry is immune. Several ports have
now suffered serious attacks and the interna-
tional bunker industry is being targeted.
For example, in October 2014, World Fuel
Services (WFS) was the victim of a cyber scam
which has cost the company approximately
$18 million to date. Hackers pretending to
be the United States (US) Defense Logistics
Agency created a fake fuels supply tender.
The company purchased and supplied
the fuel to a tanker before discovering the
agency had no knowledge of the transaction.
And this is only one method by which
hackers can breach security. Take two other
recent incidents: one where hackers shut
down a floating oil rig by tilting it through
software manipulation and another where
computer malware so crippled a rig’s system
that it took 19 days to make it operational again.
Cyber terrorism has even changed the
nature of smuggling. Pirates can choose
targets by viewing navigational data online,
prompting ships to either turn off their
navigational devices or fake the data so
it looks like they are elsewhere, leaving
ships more vulnerable and adding to costs
through the need of increased manpower.
Hackers also infiltrated computers
connected to the Port of Antwerp where
they located specific containers in which
they had smuggled drugs. The hackers
were then able to steal the containers
and delete all records of their existence.
In part, what makes cyber crime so
insidious and industries so vulnerable is
that it takes very few people to perpetrate
widespread damage and they can be oceans
away from their target. Currently, cyber
terrorism and crime insurance is not seen as
essential. While the data on the full extent of
cyber problems in the marine energy industry
is limited, given its relatively recent emergence,
it is clear from trends in related industries that
these issues should not be underestimated.
How, then, can insurance help protect
companies in the bunker industry? As so
often is the case in the insurance market, the
answers are in the details. Currently, there
is an exclusion in most traditional insurance
policies – Cyber Attack Exclusion clause
(CL380) – that is designed to avoid cyber
risk entirely. Insurers feel that underwriting
these risks requires a specialised expertise
and the standard exclusion allows them
to either avoid the risks entirely or have
them underwritten in a separate business
unit staffed by specialist underwriters and
backed by separate reinsurance. In other
words, a company cannot presume cyber
risk is covered under its standard policies.
However, a growing number of insurance
companies now offer policies aimed at
covering the costs of a security breach or
privacy failure. Although policy language
varies somewhat, the intention is to cover
some combination of third party liability loss;
direct first-party costs of responding; lost
income and operating expense; threats to
disclose data or attack a system to extort
money and online defamation; and copyright
and trademark infringement. As the insurance
market evolves to understand the threat of
cyber risks, it is likely that competition between
insurers will lead to broader coverage options.
Finally, one of the most pressing and
complicated issues now facing the marine
bunker industry is the fallout from two recent
costly bankruptcies, that of OW Bunker and
Vanguard Energy. These incidents have directly
impacted a whole sector of the insurance
market, specifically credit insurance. This
means the already limited capacity available
from credit insurers for the bunker industry has
been profoundly reduced. In fact, several of
the key insurers have now stopped accepting
new bunker business altogether. In addition,
the bunker industry will most likely see a rise
in premiums and limits, and risk management
policies will be heavily scrutinised and audited.
For those companies who do not have
insurance already, it may become a real
struggle to find coverage. Adding to the
difficulties is that banks will undoubtedly start
to review their interest for lending to companies
without insurance coverage, creating a further
squeeze on liquidity in an already tight market.
While the solution to these difficulties is not
simple, there are some ways to ameliorate
them. One is to anticipate what insurers
and even banks might require, in terms of
accountability and risk management policies,
both on paper and functionally. Second,
following the lead of other industry sectors
that have faced a reduction in insurer interest
and have, therefore, have been pushed to
consider the option of self-insurance, captive
insurance companies offer a viable alternative.
‘Until recently,
cyber issues
have been on
the periphery,
more the
domain of
Silicon Valley
than that of the
marine energy
industry’
‘Several ports have now
suffered serious cyber attacks
and the international bunker
industry is being targeted’
Michael Newman and N.F. Newman,
PhD
International Energy Insurance
Brokers
Tel: + 1 213 236 3674
insurance
67www.bunkerspot.comBunkerspot December 2014/January 2015