Estimated incident cost savings in shipping due to inspections

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Abstract

The effectiveness of safety inspections of ships has been analysed from various angles, but until now, relatively little attention has been given to translate risk reduction into incident cost savings. This paper provides a monetary quantification of the cost savings that can be attributed to port state control inspections and industry vetting inspections. The dataset consists of more than half a million ship arrivals between 2002 and 2007 and contains inspections of port state authorities in the USA and Australia and of three industry vetting regimes. The effect of inspections in reducing the risk of total loss accidents is estimated by means of duration models, in terms of the gained probability of survival. The monetary benefit of port state control inspections is estimated to range, on average, from about 70 to 190 thousand dollars, with median values ranging from about 20 to 45 thousand dollars. Industry inspections have even higher benefits, especially for tankers. The savings are in general higher for older and larger vessels, and also for vessels with undefined flag and unknown classification society. As inspection costs are relatively low in comparison to potential cost savings, the results underline the importance of determining ships with relatively high risk of total loss.

Highlights

► Incident cost savings due to ship inspections are quantified in monetary terms for five ship types. ► The data are a unique combination of more than half a million ship arrivals with insurance values. ► Insured values comprise hull and machinery, cargo, and third party and pollution liabilities. ► Port state control inspections save on average 70–190,000 dollars (median: 20–45,000 dollars). ► Savings are higher for older and larger vessels, and undefined flag and classification society.

Introduction

World trade depends heavily on the services of the shipping industry. According to the United Nations Conference on Trade and Development [UNCTD, 2009],1 80% of the volume of world merchandise trade is carried by sea. For 2008, this translates to over eight billion of tons of cargo and a total of 32.7 trillion ton-miles (i.e., tons of cargo multiplied by the average transport distance). Due to an increase in world trade, the number of vessels has grown by approximately 16% over the last ten years, see [Lyold, 1999]. Still, the incident rate of ship-accidents is relatively low, according to Bijwaard and Knapp (2009). A minimum safety level of ships is maintained by the complex regulatory framework of the International Maritime Organization (IMO), with over fifty conventions regulating all aspects of international shipping. There are, however, some loopholes in the system. In particular, substandard shipping activities can create distortion of competition among ship owners, which can lead to incidents.2 Shipping incidents tend to carry very high economic costs, due to the large asset values and the high operational risks involved in shipping.

Enforcement of an acceptable level of safety in shipping is attempted through various types of safety inspections. Mandatory inspections are normally performed by classification societies3 on behalf of the flag state administrations, in order to issue and maintain ship certificates required by the legislative framework of IMO. Non-mandatory inspections can be divided into inspections performed by industry and by port state control (PSC). Industry inspections are performed by vetting inspection regimes. If a vessel does not obtain an acceptable vetting inspection report, it will not obtain cargo. Port state control is a right that allows port states to inspect a vessel calling a port under its jurisdiction. There are currently ten PSC regimes, which are grouped by regions. If a PSC inspection detects violations from minimum safety standards, the vessel can be detained and deficiencies need to be rectified before it can proceed. Detention is normally associated with high costs for ship owners, due to increased idle time in port and loss of business.

The effectiveness of safety inspections in shipping has been analysed in the literature from various angles, among others, by Payoyo (1994), Knapp and Franses, 2007a, Knapp and Franses, 2007b, Knapp and Franses, 2007c and Carriou et al. (2008). Until now, research in this area has been focused on the determination of relevant risk factors and on the estimation of the reduction of the probability of incidents. Our main objective is to extend this analysis by proposing methods to translate the risk reducing effects of safety inspections into a monetary value. These estimated cost savings of inspections will be of interest, for example, for maritime administrations, ship owners, and the maritime insurance market.

The paper has the following structure. Section 2 describes the dataset and the various components needed to calculate monetary base values for the costs of incidents. Section 3 contains econometric models to estimate the risk reducing effect of inspections. Section 4 presents the total estimated cost savings due to port state control inspections, which are based on the cost figures of Section 2 and the reduced risk estimates of Section 3. Section 5 concludes. The working paper of Knapp et al. (2010) provides more detailed results.4

Section snippets

Data sources

In our empirical analysis, we combine data on an individual ship level obtained from various sources, on port arrivals, port state control inspections, industry vetting inspections, incident data, and insurance data, as well as various other data needed to estimate incident costs.

Notwithstanding the political aspects of arrival and inspection data on an individual ship level, we obtained the generous cooperation of the United States Coast Guard (USCG) and the Australian Maritime Safety

Models and estimation results

We use a combination of duration analysis and binary logistic regression on individual ship data to estimate hazard rates, the probability of having a total loss accident, and the effect of inspections on this probability. In our duration models, we use a period of one year to account for the effect of inspections on the safety of a ship. The estimated hazard rates are translated into survival gains of inspections, which are combined with the total insured value (TIV) to determine the total

Cost savings due to inspections

The total estimated cost savings (TECS) of inspections owing to reduced risk of total loss incidents are calculated for each ship arrival in the dataset, by means of the following steps. First, we estimate the four components of the total insured value (TIV) described in Section 2.2. TIV represents the total insured value for a life ending incident, that is, the maximal value at stake in case of a 100% total loss of all value involved in the ship, its cargo, crew and passengers, as well as

Conclusion

We use a unique dataset of vessel arrivals and of both port state control and vetting inspection information to quantify the reduction in risk due to inspections. The total estimated cost savings (TECS) of the prevention of incidents are based on the total insured value (TIV), which represents the total value that can be insured and which comprises hull and machinery, cargo values, third party liability, and pollution liability limits. The risk reduction owing to inspections is determined by

Acknowledgements

We thank the United States Coast Guard and the Australian Maritime Safety Authority for their arrival and inspection data. We also thank RightShip, CDI, and OCIMF for the vetting inspection data, and Lloyd's Register Fairplay for the casualty data. We acknowledge two anonymous data providers from the P&I Clubs. We thank in particular Mr. Andrew Higgs for his very valuable input in determining the components of TIV, and Capt. John Koster from the USCG for his initial ideas that have inspired our

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The views expressed in this article represent those of the author and do not necessarily represent those of the Australian Maritime Safety Authority (AMSA).

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