Fresh thinking needed on marine cargo insurance

Vol: 45 Issue: 4 | December 2022

For global shippers and importers of product, the biggest and most costly current risk is delay.  

With the majority of goods still shipped on the ocean, today’s global supply network is marked by ever-increasing traffic. Added to this, most ports and terminals struggle with inadequate infrastructure that’s failing to keep up with changing volumes and technology. The inevitable result is ships being held up and the accumulation of cargo.   

Clients want to know they’re covered  

Cover for the financial losses caused by congestion at the ports is a constant theme for customers, says Neil Hiller, founder and director of Hiller Marine, a company he co-founded in Australia that serves as both an underwriter and a broker. 

‘Supply chains have become unreliable,’ he says. Delays caused by a shortage of capacity and port congestion mean clients lose sales or suffer depreciated prices when perishable products finally get delivered undamaged but past their use-by dates. 

If cargo is sitting at the port for prolonged periods, the shipper is liable for expenses charged by freight providers and stevedores, which can come as a shock to many insureds with a standard cargo insurance policy. 

‘They’re telling me, “I’ve just copped a bill for 50 grand. Am I covered?”,’ says Hiller.  

In addition, suppliers are facing inflation, especially higher fuel costs and higher wages. ‘There’s a lot going on in the economy impacting prices for importers and exporters trying to get their goods to buyers overseas,’ says Daniel Morrison, head of Marine Portfolio, National Transport Insurance (NTI).  

Unprecedented demand 

Over the past 20 years, the size of vessels coming into and out of Australian ports has tripled. While there’s a decline in the number of vessels calling, the number of containers being moved has increased. Unprecedented demand caused by rapid changes to consumer buying habits has exacerbated the issues shippers face.  

‘We lose more containers at sea than ever before because we put more containers on vessels and we stack them higher than we did in the past,’ says Morrison.

The pandemic has added further uncertainty to the mix. Fragility and disruption in the supply chain is causing some shippers to rethink their strategy. More are hanging on to stock ‘just in case’ rather than dispatching it to cater for ‘just in time’. ‘Now they’ve got a greater accumulation of goods at their own premises, or they’ve got to manage their own stock, plus their distribution,’ says Morrison. 

Sarah Chang, national marine executive at Aon, says many customers are investing more in insurance, paying higher premiums to afford increased sublimits, spending on additional insurance policies to cover the more unconventional risks and incurring costs as a result of not being able to meet the demands of their buyers. 

Understand the risk profile 

Given that global customers all face similar risks, Stephen Rudman, head of Marine, Transport & Logistics at Gallagher, says the best way brokers can advocate for their clients is by consulting with them to properly understand their risk profiles and to design an insurance program that ‘best protects their customers’ risk exposures when shipping goods’.  

‘Marine cargo insurance is one of the oldest forms of insurance, dating back to Lloyd’s of London in the 1600s,’ says Rudman. ‘Delay has always been a point of discussion; however, it is and always has been an exclusion under marine cargo insurance.

Rudman adds that depending on the circumstances, marine cargo insurance is available to cover customers for cargo risks and marine loss of profits arising from a delay to their project under marine project cargo and delay in start up (DSU).  

‘This insurance, typically more costly, is generally for clients with large, complex and unique risks such as power generation, heavy industry and mining,’ he says. 

Morrison and Chang both point out that extended coverages are also available in the event that perishable items, such as fruit or vegetables, suffer a physical deterioration due to a failure to arrive at their destination on time. 

They believe that marine cargo insurance won’t be changing to cover delay any time soon. ‘It should be remembered how detrimental [covering delay] would be to the marine cargo industry, especially having just been through a hard cycle,’ Chang points out. ‘If everyone was claiming for delay, the industry would be hit hard. Insurers would wear this, and it would become more expensive for our clients to buy the necessary insurance in the long run. 

Challenging the status quo 

Hiller begs to differ, suggesting that Lloyd’s was the home of innovation among brokers, who were the original authors of marine cargo products. ‘Marine insurance products evolved incrementally from covering a few named perils to the wider cover they offer today,’ he says. ‘Why shouldn’t they continue to meet market needs?’ 

Hiller believes clients consider financial loss caused by unexpected delays to be as serious a risk as loss or damage to the cargo. ‘Modern brokers could work with underwriters to design affordable cargo insurance products that cover elements of delay,’ he says. ‘Unfortunately, what we’ve got now is a scenario where the average underwriter continues to have limited scope for taking risks.’ 

He adds that what’s required is a basic, practical cover that meets the needs of most importers and exporters rather than the few very large clients. 

‘If you want to be innovative as a broker, look beyond the current cover for physical loss or damage to cargo,’ he suggests. ‘Look at what clients are calling out for. In my experience, that’s insurance for additional costs and financial losses caused by unforeseen delays after a shipment has departed.’ 

To that end, Hiller collaborated with underwriters to develop a supply chain risk solution that covers physical loss and damage as well as covering clients impacted by supply chain delays outside the policyholder’s control (see breakout, left). The product also provides protection against a variety of supply chain costs and liabilities. 

Relationship exercise

In Australia, NTI’s Morrison says the development of technology is on the agenda, ‘but as an industry, we’re really at the very beginning of that journey’.   

‘For brokers, it’s still that relationship exercise,’ says Morrison. ‘The best approach is to talk to customers and make sure they’re talking to their logistics providers.’ 

Rudman expands, suggesting that while there’s clearly an important place for technological advancement in cargo insurance solutions, the more complex, larger cargo being shipped requires the ‘intellectual intelligence that a specialist insurance broker with experience in the marine insurance industry can deliver’. 

‘Processing for complexity of global supply chains and customers is quite a challenging task,’ agrees Morrison. ‘The development of technologies will become more prevalent if stakeholders agree to share granular data and customers are able to track and monitor their supply chain risks. Then we can provide more detailed information to the underwriter to ensure a clear policy and adequate coverage.’