BitBytes: And they just keep getting bigger and bigger!
In today's edition of The Wall Street Journal there was a story about the size of the latest generation of container ships.
These mammoth structures can carry more in a single load than several smaller vessels, with even larger ones on the design boards. Due to the collapse in financial markets and the global recession, the shipping industry has also seen massive falls in rates for shipping.
These developments raise some interesting questions. In terms of risk, the larger vessels become, the smaller the number of ports that can actually accommodate them. This also has a commensurate effect on the infrastructure and hinterland of the ports that are able to accommodate these giant vessels. This also implies that global trade patterns adjust to take advantage of the transit routes taken by the ships.
There are big implications in terms of global trade disruption if any of the ingredients in the mix fail for whatever reason (e.g. natural disaster, terrorism or mechanical failure). This development also challenges the presumption of insuring such risk: that risk is acceptable if the risk to be insured is dispersed amongst a wide enough pool of parties paying premiums to cover any claims. This approach ensures that an adequate pool of capital is always available against the probability that any claims will only come from a small number of insured parties.
In the shipping market this has always worked out, because the size of vessels has ensured that any cargo covered by a broker under a blanket policy will probably be dispersed across a large number of vessels. Therefore they would be unlikely to face claims on a large scale, as the chances of several vessels getting into difficulty at once has always been quite small.
Is this likely to be the case now, though, with more cargo volume being packed into a smaller number of ships?
Fortunately, some smart individuals have been thinking about some form of early warning system as a solution to this problem for a while now. We think it is certainly worth consideration.