Blockchain Technology in Maritime Trade

February 21, 2019

MONTHLY ANALYSIS

The cost and size of the world’s trading ecosystems continue to grow in complexity. More than $4 trillion in goods are shipped each year, and more than 80% of the goods consumers use daily is carried by the ocean shipping industry. The maximum cost of the required trade documentation to process and administer many of these goods is estimated to reach one-fifth of the actual physical transportation costs. According to the World Economic Forum, by reducing barriers within the international supply chain, global trade could increase by nearly 15%, boosting economies and creating jobs. – IBM

Indeed, shipping is the lifeblood of the global economy, transporting approximately 90% of global trade, Allianz emphasizes in its Safety and Shipping Review 2018. There are over 50,000 merchant ships trading internationally, carrying every kind of cargo. Although total losses have declined by 38% over the past decade (driven by improved ship design over the past decade, technology, and advances in risk management & safety), the maritime industry still sees a number of losses every year – there were a total of 94 shipping losses in 2017. According to Allianz, cargo vessels accounted for over half of all total losses during 2017 – an increase of 56% YoY.

The industry’s struggle with losses has far-reaching implications, involving astronomical premiums as a result of insurance claims. According to the International Union of Marine Insurance (IUMI), which represents 42 national and marine market insurance and reinsurance associations, global marine insurance premiums totaled $28.5 billion in 2017. Marine cargo insurance is defined as a class of property insurance that insures property while in transit against loss or damage arising from perils associated with the navigation of the sea or air and subsequent land and inland waterways. Premium income for marine cargo insurance was estimated to be at $16.1 billion in 2017, representing a 6% increase from 2016.

Allianz explains that despite decades of improvements in maritime safety regulation, training, technology, and risk management, fatal accidents at sea persist. And human behavior is often a factor. About 75% to 96% of marine accidents can be attributed to human error.

Furthermore, Allianz Global Corporate & Strategy’s analysis of almost 15,000 marine liability insurance claims between 2011 and 2016 found that human error is a primary factor in 75% of the value of all claims analyzed – equivalent to over $1.6 billion of losses.

Some of the common issues resulting in losses include:

  • Inconsistent data and inequitable sharing of information across supply chains

  • Continued blind spots across organizations and geographic boundaries

  • Complex, cumbersome, and often expensive peer-to-peer messaging

  • Too many manual, time-consuming processes that increase costs and delay cargoes

  • Inefficient clearance processes which can open the door to fraud

Gard emphasizes that maritime incidents tend to be complex, complicated, and time-consuming. They usually occur without warning and require quick decisions, which can have a major impact on the future handling of the incident and on the merits of the consequent claims and liabilities.

With losses and insurance premiums counting in billions, the approach to facilitating maritime trade is bound to change. In 2017, 10.7 billion tons of goods were loaded worldwide. Maritime trade is a highly complex industry and shipping includes (but not restricted to) the following activities:

  • Booking cargo for specific vessels in advance

  • Ensuring that all cargo booked is planned on the intended vessels

  • Ensure that the cargo that is planned on the vessels is actually shipped

  • Ensure that the stowage planning is done properly on the vessel to optimize the vessel loading

  • Ensure that all containers loaded have their Verified Gross Mass (VGM)

  • Ensure safe loading and discharging of the cargo

  • Issuing bill of lading and other documentation for all cargo loaded

The journey itself aside – which involves a whole set of both controllable and uncontrollable risks – activities that accompany every shipment create a complex and cumbersome chain of events that are necessary for a successful maritime trade. According to the Chartered Insurance Institute, a typical liability insurance coverage purchased by a shipowner based on the operation of a vessel and falls into the following categories:

  • Personal injuries

  • Collision with another vessel

The following are covered by marine liability insurers:

  • Collision with something other than another vessel

  • Cargo damage

  • Pollution

  • Wreckage removal

  • Fines that might be imposed on a shipowner by the customs or immigration authorities

Effective risk management requires the ability to assess the chain of events that make maritime trade possible at a very granular level, as well as bring advanced technology into the maritime trade with the goal to increase the efficiency.

With the exact purpose of increasing transparency, effectiveness, and control over the events involving trade, in August 2018, In a follow up to their January announcement, A.P. Moller - Maersk and IBM announced the creation of TradeLens, jointly developed by the two companies to apply blockchain to the world’s global supply chain. The solution has onboarded or is in the process of onboarding 100+ organizations, including 4 ocean carriers, 3 inland carriers, 40+ worldwide ports & terminals, large freight forwarders, and 8 customs authorities spanning the globe from Rotterdam to Bahrain.

TradeLens uses IBM blockchain technology as the foundation for digital supply chains, enabling multiple trading partners to collaborate by establishing a single shared view of a transaction without compromising details, privacy or confidentiality. Shippers, shipping lines, freight forwarders, port & terminal operators, inland transportation, and customs authorities can interact through real-time access to shipping data and shipping documents, including IoT and sensor data ranging from temperature control to container weight.

Using smart contracts, TradeLens enables digital collaboration across the multiple parties involved in international trade. The trade document module, ClearWay, enables importers/exporters, customs brokers, trusted third parties such as customs, other government agencies, and NGOs to collaborate in cross-organizational business processes and information exchanges, all backed by a secure, non-repudiable audit trail.

During the 12-month trial, in one of the cases, TradeLens reduced the transit time of a shipment of packaging materials to a production line in the United States by 40%, avoiding thousands of dollars in cost. As of November 2018, TradeLens has logged more than 230 million shipping events and was set to process more than 20 million containers before the end of 2018.

Traditionally, some of this data can be shared through the EDI systems commonly used in the supply chain industry but these systems are inflexible, complex, and can’t share data in real time, IBM explains, emphasizing that too often, companies must still share documents via email attachment, fax, and courier. TradeLens allows tracking critical data about every shipment in a supply chain and offers an immutable record among all parties involved.

Basically, there are two core capabilities that this initiative aimed at digitizing:

  • A shipping information pipeline provides end-to-end supply chain visibility to enable all actors involved in managing a supply chain to securely and seamlessly exchange information about shipment events in real time.

  • Paperless Trade digitizes and automates paperwork filings by enabling end users to securely submit, validate and approve documents across organizational boundaries, ultimately helping to reduce the time and cost for clearance and cargo movement. Blockchain-based smart contracts ensure all required approvals are in place, helping speed up approvals and reducing mistakes.

Interestingly, Maersk has also been involved in another initiative around marine insurance. In May 2018, EY, Guardtime, A.P. Moller - Maersk, Microsoft, insurance industry leaders Willis Towers Watson, XL Catlin, MS Amlin, and ACORD announced that members of the marine industry are using Insurwave, a blockchain platform to support marine hull insurance.

Insurwave, built by a joint venture between EY and Guardtime, leverages blockchain and distributed ledger technologies Microsoft Azure infrastructure and ACORD data standards. It aims to support 500,000+ automated ledger transactions and help manage risk for 1,000+ commercial vessels in the first year. By connecting participants in a secure, private network with an accurate, immutable audit trail, and services to execute processes, the platform establishes a digital insurance value chain. A.P. Moller - Maersk contributed to the development of blockchain technology as a pilot client and is continuing on the platform with its marine hull portfolio.

Today, a container spends 450 hours standing idle during a typical 30-day transit from Shanghai to Rotterdam, which amounts to significant financial loss and risk exposure. As the world’s trading ecosystem continues to grow in complexity and scale, maritime trade will require a technological upgrade to allow for effective economic ties between nations.

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