Insurance sector communities have invaluable expertise and resources to address society’s climate challenges, but that experience is not fully understood or harnessed into the mainstream climate, sustainable development and finance agenda. The United Nations’ 26th conference on climate change, known as COP26, is a strategic opportunity to finally and comprehensively bridge this gap.
With COP26 drawing ever nearer, the insurance industry has a gilt-edged opportunity to recapture its historic role as a key commercial shepherd of social transition and gain a seat at the main table in Glasgow.
Not since the age of industrialization has global society faced a challenge on the scale of climate change, and the insurance sector is uniquely placed to play a leading role in forging a workable solution; in fact, it is a challenge we are duty-bound to accept.
When the Paris accord was adopted by 196 nations in 2015, the annual COP meetings instantly became the focal point of global efforts to tackle climate change. While some of the signatory nations have since made progress in building economic resilience against the physical and financial impacts of climate change, the urgency to do more is escalating; the demand for risk mitigation and adaptation strategies is accelerating in parallel.
Like few others, the actuarial sciences have a track record of providing support for strategic social transition at scale; the role as an architect of the social insurance systems that have underpinned many national reconstructions is well-documented.
More modern insurance tools, such as national catastrophe modeling, also have obvious applications to the climate challenge and reinforce our industry’s unique ability to accurately price risk over the longer term.
It shouldn’t be surprising that an industry built on the mathematical and philosophical foundations of the Scottish and wider 18th century Enlightenment is now well-placed to provide assistance in the quantification of climate-related risks and the evaluation of the related choices and trade-offs.
Since the early 1990s, the insurance industry has revolutionized its mainstream assessment of climate-related risks and integrated this into its core pricing, risk controls, regulatory disclosure and capital management. A decade ago, led by Munich Re and in concert with public and academic partners, the industry created a global facility to assess the seismic risks to properties, infrastructure and wider assets.
In creating the Global Earthquake Model Foundation, the aim was to support better planning, building codes, investment, insurance and disaster response to help save the millions of lives, livelihoods and assets that were at risk. We now have the opportunity to emulate that ambition and provide a program for building a global resilience model to support physical climate risk scenarios, stress testing and analysis for the communities, markets and assets that are exposed.
Because building climate resilience is the product of many factors, insurance is not a silver-bullet solution. But it is a necessary component because, when disaster strikes, the ability to rebuild lost homes, businesses, jobs and lives is central to any economic recovery.
Through insurance, communal risks can be shared across public, private and mutual systems, via premiums, taxation and hybrid systems. With sound scientific principles, economic sustainability and transparency as the foundations, costs, payouts and incentives can be designed to support affordability, risk signaling, resilience and wider solidarity.
By November, we should have set an objective to make access to basic climate-related insurance protection systems an essential component of a climate-resilient lifestyle. In conjunction with wider financial reforms and processes, we also need to ensure that companies and local and national governments have enough support to evaluate and formally manage their contingent climate risks and liabilities.
Society’s history with physical, industrial and social transition has shown that changes need to occur at speed and across all economies. They will require the provision of public, private and mutual insurance (including hybrid approaches) to enable a financially, socially and politically viable process. This is not just about commercial insurance products and public services; it is about the adoption of “insurance thinking” with regard to risk assessment and the creation of economically sustainable risk pricing and risk-sharing mechanisms.
It is a mammoth task, but we don’t have to start from ground zero for insurance to play a role in achieving Net Zero. There are organizational vehicles already in place to help speed us along this journey.
For example, the Insurance Development Forum (IDF), launched at COP21 in Paris, was created in recognition of the critical role that risk management plays in the response to climate change. The Forum is a unique international institution that brings together private and public sectors to help countries to build the resilience they need to limit the physical, social and financial impacts of climate change.
The global challenge of closing the risk protection gap brought by climate change is at the heart of the IDF’s mandate, and the forum has already found success using its Tripartite Agreement project to support major sovereign and sub-sovereign programs.
This model of shared success, augmented by inclusive insurance and mainstream market expansion across many territories, provides the ideas and facilities to support the countries looking to protect their people and assets from the dangers of climate change.
If we seize the opportunity, society may look back on COP 26 in Glasgow as the pivotal moment in climate-financial history in the same way we now refer to COP 21 in Paris for its influence on climate politics. November also may be remembered as the month the insurance sector, a sleeping giant, awakened to fulfill its potential to help quell today’s climate emergency.
As the providers of risk transfer solutions, we have always been “in the room” for discussions on climate change, but we have yet to fully take a seat at the main table where the historic solutions will be forged.
Insurance sector communities have invaluable expertise and resources to address society’s climate challenges, but that experience is not fully understood or harnessed into the mainstream climate, sustainable development and finance agenda. COP26 is a strategic opportunity to finally and comprehensively bridge this gap.
Our cities are built brick by brick, often using construction practices that have evolved little in the last century and giving little regard to proper planning and sustainable development.
Yet innovations and new technologies have produced progressive means of constructing the built environment to ensure that urban infrastructure, once in place, can make a valuable contribution to the workings of a city for centuries to come, withstanding many changes in use and function. Good urban infrastructure needs to anticipate change, be built to adapt and to be resilient.
The Global Agenda Council on the Future of Cities has detailed 10 of the most important urban innovations that will shape the future of our cities. At the heart of these innovations is an understanding that the cities of the future need to be flexible and adaptive on a day-to-day level – doing more with less space and resources – and, in the long term, be able to adapt to the powerful mega-trends placing heavy pressures on the urban environment. The three key trends that will shape the agenda of cities for years to come are: demographic shifts, a changing environment and resource scarcity and technology and business model disruption.
The UN reports that the global population will rise to 9.6 billion by 2050. Nearly all of this population growth will occur in cities – it estimated that 66% of the global population will live in urban areas by 2050. Most of these cities are located in the global South and, at present, lack the capacity and resources to ensure that growth is sustainable.
Unchecked urban population growth can lead to vast unsustainable urban sprawl, or the creation of dense slums. Cities will need to accommodate more people without increasing their urban footprint; increasing density, without decreasing quality of life. This can be achieved with reprogrammable living space such as MIT’s reprogrammable apartments or by building structures with multiple uses in mind, ensuring that they can be used for different purposes at different times of the day or week, such as reusing office space or schools for social or leisure activities during the evenings or at the weekend.
In the developed world, years of declining birth rates and longer life expectancy are leading to a rapidly aging population, with its own set of challenges. The effects of this demographic shift are already being felt in countries including Japan, Italy, Germany and Norway, with pressure being put on cities to rethink the provision of urban infrastructure, embrace universal design and reuse and repurpose buildings and infrastructure that is becoming obsolete.
This trend is also increasing the demand for health and social services and the provision of housing that will meet the needs of people during their 100-year life. Tokyo is at the forefront of this trend; an estimated 200 schools per year are closing, and the city is repurposing them as adult education centers, senior homes and places of leisure and exercise for the elderly. Cities in other advanced economies need to prepare for this eventuality.
Changing environment and resource scarcity
The world’s climate over the next century is likely to shift dramatically. Increased occurrences of extreme weather events, desertification and rising sea levels all threaten the world’s cities. Fifteen of the world’s 20 largest cities are located in coastal zones threatened by sea-level rise and storm surges. To prepare for these challenges, cities need to be resilient, building coping mechanisms into their urban fabric. If well-designed, infrastructure that protects against high-impact climate events can also be flexible, serving a valuable purpose for the entirety of its life. Projects such as New York’s Dry Line, or Roskilde’s flood defense skatepark combine resilient infrastructure with a space for community leisure activities.
The urban planner Patrick Abercrombie, who created London’s post-World War II master plan, reserved its hinterland as a “green belt” aimed to preserve the countryside, while also providing nourishment to the city. Today, the city’s greenbelt is global, and water and resource scarcity in any region can easily disrupt the delicate balance between a city and its worldwide network of production.
The advent of urban farming will help to alleviate this risk. Urban farms are largely hydroponic – feeding water and nutrients directly to the roots – and closed-loop, meaning they use as much as 90% less water. They can be placed anywhere and stacked vertically, making them as much as 100 times more productive per hectare. By 2050, the world’s population will demand 70% more food than is consumed today; urban farms will help cities to feed their growing populations, creating a vertical green belt, adding flexibility into the food system with guaranteed yields and low-risk supply chains.
Cities consume vast amounts of all resources, from the materials of which they are constructed, to the demands of their citizens for products and packaging. Cities cannot continue to follow a take/make/waste pattern, filling landfills and depleting finite resources, and need to move toward a more circular economy. Systems of reuse and recycling need to be in place to smartly deal with waste, and building materials themselves need to be designed for reuse. The European Union program Buildings as Material Banks creates reusable buildings that store and record the value of their composite materials over their lifetime. Others use up-cycled materials such as shipping containers to provide low-cost, flexible housing to students and young professionals.
Technology and business model disruption
Cities are economic engines. According to McKinsey, 600 cities are responsible for 60% of global GDP. The healthy economy of a city sustains its population through salaries and entrepreneurial activity. However, all economic activity is subject to disruption; shifts in business models can create opportunities, but cites from Detroit to Liverpool have seen the possible negative effects of industrial change.
In the fourth industrial revolution, we are likely to see the biggest industrial shifts in a generation, changing the way we work and live in the urban environment. Innovations such as 3D printing, artificial intelligence and next-generation robotics will shift models of work and production in ways that are impossible to predict. Cities and businesses need to be adaptive. Google, a company at the forefront of this change, anticipates that its business model could shift dramatically. The company’s new Mountain View, CA, headquarters is adapted for this, a series of giant domes under which any number of structures, fit for any purpose, can be quickly assembled; making it completely reprogrammable for any eventual use. Cities need to take a similar approach to construction.
The sharing economy can be defined as the distribution and sharing of excess goods and services between individuals, largely enabled by modern technology. This new model is having a deep impact on the urban environment. Many consumers are moving away from ownership and toward access, renting access to mobility, entertainment or space.
Companies of the sharing economy naturally add a layer of flexibility into the city. Airbnb, for example, allows people to rent out their apartments when they are out of town, easily increasing a city’s capacity to accommodate influxes of visitors as demand increases. As the sharing economy develops, similar companies will enable cities to turbocharge their efficiency, ensuring that no excess capacity is wasted.
Humanity faces the mammoth task of adding more than two billion people to the urban population before 2050, the equivalent of creating a city the size of London every month for the next two decades. To house, feed and employ these people, cities will have to do more with less. They have to be smarter, greener and more efficient. They will have to innovate.
As with many modern businesses, Blue Marble Microinsurance began with a question-the same question entrepreneurs and innovators ask themselves every day: What can we do differently that will eliminate inefficiencies and redirect resources to a more value-accretive cause?
The underlying mission of Blue Marble is tied to the recognition that insurance is important to economic development around the world. Without prefinancing losses, societies are vulnerable. Following disasters, people who show potential for emerging into the middle class frequently fall back to the bottom of the economic pyramid.
With the knowledge that fortifying the economic progression of the poor would add untold benefits to the global economy, to our industry and, of course, to the poor themselves, we asked another simple question: What needs to change in the insurance and reinsurance industry to make it relevant to the poor?
To examine this question further, Blue Marble’s founders needed to be open-minded about doing things differently and having a willingness to learn while leading. Only by researching the facts could Blue Marble articulate the problem that the founders set out to solve and establish a mission backed by a business model.
The problem was clearly identified in research literature. For example, Swiss Re reported that in the last 10 years, cumulative total damage to global property as a result of natural disasters was $1.8 trillion-only 30% of which was insured, resulting in a protection gap of $1.3 trillion. This gap is even wider when general property risk such as fire, water damage and burglary are considered. And the gap is likely to continue to grow as a result of trends such as global warming and urbanization. While this research covers a scope broader than microinsurance, we have identified the significance of the protection gap and its ever increasing trend.
Other research has underscored how uninsured losses eventually become the responsibility of governments and society at large, resulting in a drag on the economic growth of nations. In emerging nations, 80% to 100% of disaster losses are uninsured, according to Swiss Re.
Haiti, the poorest country in the Western Hemisphere, is an example that warrants examination. The United Nations World Food Program reports that 75% of Haitians live on less than $2 a day. In January 2010, the dire situation was worsened by a magnitude 7.0 earthquake. According to the Inter-American Development Bank, about 230,000 people died, and nearly 1.5 million Haitians were displaced. Economic losses were estimated at about $8 billion- approximately 120% of GDP—with insurance penetration at around 0.3% of GDP.
In another example-the recent earthquake disaster in Nepal-we estimate the damages at 35% to 50% of GDP, with little to no aid delivered as of yet. The effect of the protection gap on developing nations and the consequence on the poor is crippling.
The poor, with no safety nets other than informal systems of caring for each other, are disproportionately affected by catastrophes. The safety nets break down in a village or community following a disaster, thrusting complete communities to the bottom of the economic pyramid for years to follow. In Nepal, communities rich with heritage and dependent on tourism are now struggling to survive with a safety net under stress. Without mechanisms for prefinancing risk, smallholder farmers, shop owners and artisans who lack savings fall deeper into poverty.
With an understanding of the problem that Blue Marble planned to address, a business case for the consortium was established. The problem was viewed as significant and the solution relevant to the global economy, our industry and the poor.
A Role for the Insurance Industry
The potential solutions include charity and public-private partnerships, but what role might the insurance industry assume? While some companies have attempted to enter the microinsurance market in hopes of providing risk protection to the poor, few actually succeeded. Some have been able to show profitability, but most lacked evidence of the double bottom line: the ability to deliver protection that also creates incentives and enables the poor to make better economic choices in their lives.
This is a crucial point. Risk protection, in and of itself, will not enable economic progression. Incentives embedded in the risk protection are the key drivers. Policies should be designed to encourage growth and expansion. For example, by creating a more certain outcome, a policy can enable the smallholder farmer to cultivate two hectors of land as opposed to one hector. Another example is enhancing a micro-entrepreneur’s willingness to expand his or her sewing business-to buy another sewing machine and hire an employee-all enabled by a reduction in the fear of theft.
Making It Work
A review of prior experiences-many unsuccessful-suggested that Blue Marble needed a different business model. The business model needed to recognize the vast array of talent required to address the protection needs within the context of poverty entrapment. From within the insurance industry, expertise was needed to support product development, regulatory environment and risk pricing. Other areas of expertise likely found outside of the industry included an understanding of the poverty ecosystem and how to partner with entities in the supply chain of the poor.
At the same time, the business model had to address the many barriers to success in microinsurance:
A long-term commitment was needed, yet our traditional business models were anchored on immediacies and benchmarked against such metrics as payback periods.
Financial literacy and trust needed to be established.
High distribution costs result in prohibitive frictional cost, making the protection unaffordable. The cost of innovation to address this frictional cost was high.
Understanding why the poor consistently made suboptimal economic choices even when given access to the means was critical.
Recognition of the barriers to success in microinsurance and the need for a unique talent model led Blue Marble to a collaborative approach: the formation of a legal entity owned by eight significant insurance entities with a dedicated management team supported by employees from the consortium members. Through collaboration, we would share the cost of innovation and be able to “mutualize” talent from within and beyond the industry. By stepping forward and collaborating among the eight, we developed a public-private outreach partnership with a shared goal.
Blue Marble was established as a legal entity owned by the eight but with a long- term focus. A dedicated management team was retained to give focus to the problem at hand and was backed by a governance model involving senior leaders from the consortium members.
The talent model was unique: The eight consortium companies represent 250,000 employees operating in 170 countries. A virtual business unit was established giving Blue Marble access to talent from the consortium members on a secondment basis. The win-win is that Blue Marble has access to both strategic and technical talent on an as-needed basis. For example, if a Spanish-speaking actuary with knowledge of agriculture risk in Peru is needed, we can identify the person and gain access to her expertise for a limited time. Likewise, Blue Marble facilitates reverse benefits in terms of employee engagement and an appreciation for the relevancy of our day-to-day work.
Why the Name Blue Marble?
Employees of all participating companies were informed about the microinsurance consortium initiative, and their ideas for names were solicited. The communication heads for each company coordinated the outreach and then narrowed the submissions. The board ultimately selected “Blue Marble.”
The name was nominated by Denise Addis, an executive assistant from Guy Carpenter. Addis wrote: “Blue Marble is a nickname for our planet…Technology and social media have made the world an even smaller place, and the planet itself has become a community more than ever before. I think this venture will expand that community.”
The Blue Marble name captures our holistic view of our world. Underscoring our mission to extend insurance protection to a broader portion of the population and to advance the role of insurance in society in a socially responsible and sustainable way, it reminds us that we all share the planet. It is up to us to connect with citizens around the world to make life better for us all.
This article first appeared in Carrier Management. Joan Lamm-Tennant spoke to Carrier Management about Blue Marble Microinsurance during a videotaped interview at the IICF Women in Insurance Global Conference in June. Excerpts of the interview are presented below.
What is microinsurance?
Lamm-Tennant: Microinsurance is risk protection for the poor-artisans, small- scale farmers, shop owners. We address their specific risk protection needs and enable them to have stable consumption, which allows them to invest, improve productivity and grow through the economic pyramid.
What are the greatest benefits for carriers that take part in the microinsurance consortium?
Lamm-Tennant: It’s an opportunity to have an impact, to be relevant, to work in public-private partnerships and solve the protection gap. By solving the protection gap and being a part of the financial inclusion initiatives, we in fact enable a massive emerging middle class…
Today, we have seven billion people in the world. The middle class is only 1.8 billion. We could double that in the next 15 years.
The opportunity is also significant in terms of solving our own problems within the insurance industry. It’s an opportunity to be forced to innovate because being successful in these markets is not about lifting and shifting products that are on our shelves. It’s about being more efficient, being more focused on the value proposition within our products, and it’s about new distribution channels.
Because we’re forced to innovate, we’ll have the opportunity to reverse innovate. Last of all, we have a talent challenge within the insurance industry. The Millennials are not necessarily interested in investing their brilliance, their talent, in our causes. So this is a way in which we join them in their cause for relevancy.
Exactly how does the collaboration work? How do carriers share the costs, premiums and claims? Whose paper are policies written on?
Lamm-Tennant: We’re a service entity. Our objective is to prepare a complete turnkey, cost-efficient package for the carriers so that they can enter the market…
What are the component parts of that package? It could be everything from policy design to distribution mechanisms to social impact metrics. In essence, by delivering this package to the carriers, they then will have to add risk capital, using this enabler to enter the market. Their goal is to create the market.
Yes, one of them will lead, and that’s a part of our governance structure. Collectively, among the eight carriers, we have licenses in many markets. A lead, perhaps, would be somebody who is already present with a license…Within and among the eight of us, to fill the demand, our goal is to engage local carriers and other partners. [What] we’re trying to do is make it cost-efficient, by sharing the development cost, so that they can enter with risk capital at a profitable level.
In what areas do you expect microinsurance carrier participants to innovate and reverse innovate?
Lamm-Tennant: Success will not occur by simply reducing a few zeros off the line and saying, “Here, we’ve made this a smaller product. So won’t you buy it?”…There has to be a clear value statement…
The second part is our distribution mechanisms have to be efficient. I’m not suggesting abandonment of the agency distribution system, [but the question is] how do we enable that system to be very efficient with technology?
The third is how we measure success…If we truly want to be relevant, let’s put some broad measures of social impact in our products and not carve it off into a CSR initiative.
Those are three platforms that are going to be critical to our success and create an opportunity for the carriers to then rethink similar issues in their traditional business.
How are microinsurance products distributed?
Lamm-Tennant: We’ve seen some success in some markets with the distribution through utility companies, mobile phone operators, even seed manufacturers. [But] the embedded distribution costs are quite high…Some of these products distributed on those platforms could have a claims ratio of 10 or 20 and a distribution cost of 50 or 60. So we can’t just roll ourselves into those platforms.
We have to think about how to utilize those platforms yet still do it in an efficient way and not impose such distribution costs. Having said that, we are an arm’s throw away. It is within our reach that the poor will move from mobile phones to smartphones…
How will you measure the success of the venture?
Lamm-Tennant: Success to us is having demonstrated evidence that those who are benefiting from our products are benefiting in a sense that they are moving up the economic pyramid-that we’re seeing behavioral change. We’re seeing them put risk aside and invest in their businesses, grow their land, sustain their consumption if it’s a food sustainability motive that we’re looking at.
The seizure on March 26, 2015, of the Marshall Islands-flagged Maersk Tigris cargo ship by Iranian forces off its coast at the Strait of Hormuz on a years-old dispute over containers is something that should get everyone’s attention. What is even more troubling than the seizure of a commercial vessel is that Maersk had agreed to settle the dispute. Iran is appealing for more money in the courts, but, rather than let the courts proceed, took the matter into its own hands.
Understand that one fifth of the world’s oil passes through the Strait of Hormuz in a given year.
We know that piracy, especially off the east coast of Africa and in the vast Asian Pacific, has become a major concern to shippers. So much so that Rolls Royce has announced that one of the benefits of its proposed crewless ship is that it would be much easier to take down pirates, because there will not be the crew hostages to deal with, as there are today. However, if nations begin to seize ships outside the law and with as flimsy an excuse as Iran has in the Maersk case, this is cause for alarm.
While the U.S. will be escorting U.S.-flagged vessels in the area of the seizure, our military fleet is simply inadequate to serve all potential hot spots. Even with escort protection, the risks of confrontation accelerate. Confrontation can include blockades, using vessels to buzz or interfere with navigation or otherwise harass shipping and their escorts, firing shots across the bow, ramming and even firing on vessels and their escorts. Recall that the U.S. entered World War I and World War II and increased our presence in Vietnam as the result of the Germans’ sinking of the Lusitania, the Japanese bombing of Pearl Harbor and the very questionable U.S.-North Vietnamese Gulf of Tonkin incident—all military events involving the sea.
Not all military maneuvers on the seas are necessarily problematic. The U.S. Coast Guard has become adept in hunting down drug traffickers and human smugglers in U.S. waters and cooperates with Central and South American countries to interdict traffickers in the greater Gulf of Mexico. However, these small ships, submarines and speedboats are not like the huge container vessels that large shipping conglomerates operate worldwide.
Even so, there are times when even larger ships pose challenges to countries and militaries, generally for contraband, drugs or illegal shipments of weapons. In 2013, Panamanian officials detained the North Korean-flagged Chong Chon Gang en route from Cuba to North Korea on suspicion of drug trafficking. The investigation uncovered cargo that looked like weapon systems subject to international sanctions against delivery to North Korea. The Panamanian Government consulted with the UN, and the dispute was resolved. In this incident, international law was followed. In the Iranian incident, it is much less clear that its military had the authority to seize the Maersk ship over a payment dispute already in the court system under appeal.
The Shipping Juggernaut
The World Shipping Council reported that world container shipping alone in 2009 produced an annual economic contribution of:
Direct gross output or GDP Contribution — $ 183.3 Billion
Direct capital expenditure — $ 29.4 Billion
Direct jobs — 4.2 million
Compensation to those employees $ 27.2 Billion
The global supply matrix relies heavily on container and bulk shipping to move raw materials, parts and components and complete product between producers, suppliers and customers to virtually every large-vessel navigable port in the world. Some of the biggest container vessels can carry 11,000 containers, and the loss of even one could strain world marine insurance resources. The increase in traffic and size of vessels has led to major efforts to widen the Panama and Suez canals. The Port of Long Beach 20-mile Alameda Corridor went online in 2002 to speed rail traffic under the streets of Los Angeles to remove a major bottleneck to the U.S.’s busiest container port. We can only speculate that one reason why Warren Buffett purchased the Burlington Northern Santa Fe (BNSF) railroad in 2009 was because he saw the spectacular increase in container rail traffic from ports on all U.S. coasts to all parts of the interior.
The modern insurance industry has its roots and owes even much of its policy language to marine insurance beginning with Lloyds during the first tranche of globalization when Britain and other European powers needed to cover commercial trade to and from their vast worldwide colonies. The ocean is big business.
Law of the Seas Doctrine
Who owns the sea? We all do. However, after World War II, many countries led by the U.S. increased the size of their territorial waters for security, fishing and other purposes. In 1967, the UN decided it was time to convene a group to develop an international law of the sea. Unlike trade agreements, the international law of the sea is a framework not for tariffs, taxes and other international economic activities, but for how we may use the sea as our collective heritage. We might compare the international law of the sea to the rules promulgated by the National Parks Service for what people can and cannot do while visiting, working in or otherwise using the natural resources of Yellowstone Park.
The convention can be summarized as follows: The seas are open and free to all states, coastal or landlocked. Passage shall be free and unhindered. The sea is the heritage of all humanity, which includes conservation and protection of these resources from pollution or overfishing or other adverse activities. The seas shall be used for peaceful purposes. Ships and states have a duty to render assistance to vessels and persons in trouble. Cooperation is expected to repress piracy.
These are some of the key provisions relevant to the discussion of the Iranian seizure:
12-nautical-mile limit on territorial waters.
“Ships and aircraft of all countries are allowed ‘transit passage’ through straits used for international navigation; States bordering the straits can regulate navigational and other aspects of passage”
“All other states have freedom of navigation and overflight in the EEZ [Exclusive Economic Zone], as well as freedom to lay submarine cables and pipelines”
“Land-locked and geographically disadvantaged states have the right to participate on an equitable basis in exploitation of an appropriate part of the surplus of the living resources of the EEZ’s of coastal states of the same region or sub-region; highly migratory species of fish and marine mammals are accorded special protection”
“All states enjoy the traditional freedoms of navigation, overflight, scientific research and fishing on the high seas; they are obliged to adopt, or cooperate with other states in adopting measures to manage and conserve living resources”
“Land-locked states have the right of access to and from the sea and enjoy freedom of transit through the territory of transit states”
“State parties are obliged to settle by peaceful means their disputes concerning the interpretation or application of the convention”
“Disputes can be submitted to the International Tribunal for the Law of the Sea established under the convention, to the International Court of Justice, or to arbitration. Conciliation is also available, and, in certain circumstances, submission to it would be compulsory. The tribunal has exclusive jurisdiction over deep seabed mining disputes.” (United-Nations 2012)
Iran is a 1982 signatory of the International Law of the Sea and included this statement:
In accordance with article 310 of the Convention on the Law of the Sea, the Government of the Islamic Republic of Iran seizes the opportunity at this solemn moment of signing the Convention, to place on the records its “understanding” in relation to certain provisions of the Convention…that only states parties to the Law of the Sea Convention shall be entitled to benefit from the contractual rights created therein. [including] The right of Transit passage through straits used for international navigation…The notion of “Exclusive Economic Zone” (Part V). – All matters regarding the International Seabed Area and the Concept of “Common Heritage of mankind” (Part XI)…In the light of customary international law, the provisions of article 21, read in association with article 19 (on the Meaning of Innocent Passage) and article 25 (on the Rights of Protection of the Coastal States), recognize (though implicitly) the rights of the Coastal States to take measures to safeguard their security interests including the adoption of laws and regulations regarding, inter alia the requirements of prior authorization for warships willing to exercise the right of innocent passage through the territorial sea…The right referred to in article 125 regarding access to and from the sea and freedom of transit of Land-locked States is one which is derived from mutual agreement of States concerned based on the principle of reciprocity.
However, Iran included this provision which may have led to its thinking it could lawfully detain the Maersk vessel.
Furthermore, with regard to “Compulsory Procedures Entailing Binding Decisions” the Government of the Islamic Republic of Iran, while fully endorsing the Concept of settlement of all international disputes by peaceful means, and recognizing the necessity and desirability of settling, in an atmosphere of mutual understanding and cooperation, issues relating to the interpretation and application of the Convention on the Law of the Sea, at this time will not pronounce on the choice of procedures pursuant to articles 287 and 298 and reserves its positions to be declared in due time.”
We can expect that there will be incidents that involve questionable cargo subject to international restrictions and conventions, such as drugs, piracy, and prohibited weapons. We can expect that some of these interdictions will involve questions of fact that will be disputed or will later be found to be the result of false or misleading information or observation. However, disputes over cargo payments or other commercial activities whether between commercial ventures or states and commercial ventures deserve to be heard in arbitration procedures, courts of law or other internationally sanctioned dispute resolution venues.
Global trade has become too important for individual states to begin regulating the high seas on their own. There are many places of narrow passage like the Strait of Hormuz that border on many countries. We need to be especially vigilant in these areas and all agree to this specific International Law of the Sea provision: “Ships and aircraft of all countries are allowed ‘transit passage’ through straits used for international navigation; States bordering the straits can regulate navigational and other aspects of passage.”
We need also to prevent harassment or other restrictive activities so that border states in these narrow straits only introduce navigation and rights of passage regulations that are consistent with legitimate safety and security concerns. Slowages, frequent boardings, detentions and other activities that unnecessarily and intentionally restrain trade should be vigorously protested and prosecuted by international bodies and global industry.