Professional Insurance Agents/September 2006 1www.piaonline.org

Ocean marine cargo insurance is an age-old product and to many insurance agents, a slightly

mysterious class of coverage. Age-old it certainly is, but mysterious it does not need to be. The diversity of perils that a single policy may be required to cover—war in the Middle East, typhoons off Japan, pirates near coastal Africa, hurricanes in the Caribbean, truck hijackings in Europe—may appear daunting, but the coverage is actually straightforward. And with just a little knowledge, it can represent an attractive opportunity for independent insurance agents. The ocean cargo policy is designed to protect goods in transit from direct physical loss or damage. Coverage is usually written on an “all risks” basis (subject to policy exclusions) including war perils and exposures, such as heavy weather, stranding, sinking, burning, collision, theft and contamination. Coverage for ocean cargo usually is provided in one of two ways. The fi rst is where the overseas supplier provides the coverage as part of the overall cost to the importer under cost, insurance and freight selling terms. The second and more benefi cial way is for the importer to have its own policy in force, arranged through

Marine cargo risksAn ocean of opportunity for agents

By Kevin J. Wolfe

a local agent and insured by a local U.S. carrier. Many small- to mid-sized importers use the fi rst method, believing that they are not large enough to obtain their own coverage. This is simply not the case. Small importers, as well as large can benefi t from tailored marine protection and often save money in the process.

Option 1, CIF, has a number of drawbacks, both for the importer and the importer’s insurance agent: 1. The responsiveness of the insurer is far from guaranteed. Rather than obtaining coverage from a local U.S. carrier that is well known to the U.S. importer’s agent, the importer is often times dependent upon a foreign carrier to settle the claim. Given time zone issues, coverage questions and the need to await survey results, a claim may drag on for some time before reaching fi nal settlement.

2. Coverage under the supplier’s CIF terms is on a standardized basis. There is no opportunity for the importer’s local agent to negotiate specifi c terms and conditions and pricing. Coverage may therefore end up costing more. 3. In the event of a claim, particularly a disputed claim, the importer’s insurance agent will play no role. The party most

inclined to make sure the claim moves quickly and ensure the importer’s interests are protected will be absent from the process. 4. For the importer’s agent, an opportunity to broaden client relationships and round accounts, making them less vulnerable to competition, also is lost. Larger importers tend to approach these risks differently. Mindful of the control and price issues described above,

they commonly turn to their insurance agents to arrange standalone coverage for ocean marine cargo risks. Why the difference? I believe it is because bigger importers tend to be more sensitive to the risks and costs involved. It is not that they necessarily have more at stake: The cash fl ow of a small importer is just as vulnerable to the delayed payment of a marine cargo insurance claim as the cash fl ow of a large importer—maybe even more so. But large importers are more inclined to have dedicated staff including full-time

Professional Insurance Agents/September 2006 1www.piaonline.org

—Reprinted with permission from PIA.—

2 Professional Insurance Agents/September 2006 www.piaonline.org

risk managers, whose job is to minimize their employers’ total cost of risk while structuring a comprehensive marine cargo program. Carriers with specialist expertise in this line of business can help brokers develop marine cargo opportunities. We have compiled a checklist of simple questions agents should ask their clients to understand their coverage needs. The answers to these questions will allow underwriters to assess the specifi c risks involved and develop a comprehensive marine program for each insured.

What are you importing? The more detailed a description of goods to be insured that can be obtained by the agent, the better. Different goods have different risk characteristics. Metals may corrode; refrigerated foodstuffs may thaw and spoil; fragile items may break through rough handling; liquid bulk cargos may become contaminated; and high-end clothing, computers, etc., may be stolen.

What is your expected annual volume of shipments? The policy premium is developed using this fi gure against an agreed upon policy rate. A deposit premium is set at binding, and at expiration, actual values shipped under the policy are provided by the insured. These actual values are applied to the policy rate to develop the fi nal premium for the 12-month period. If the actual earned premium exceeds the deposit premium, additional premium falls due. What geographical trading areas are involved? The risks affecting different trade routes vary. Gulf of Mexico sailings during hurricane season and North Atlantic sailings during winter months generally will attract higher rates than less perilous routes. Port facilities vary, impacting the loss potential as goods are loaded and unloaded. Cargo handling procedures and equipment in North American and Western European ports are different from those in developing nations and need to be considered when underwriters set terms and pricing.

What forms of transport are being used? Ocean marine cargo insurance is something of a misnomer. Ocean cargo coverage includes not just vessel movements, but also air freight. It will also cover the initial land moves that get the goods to the airport or seaport and

the further land moves that occur after discharge, such as the road or rail freight to the goods’ fi nal destination (often the importers’ warehouse).

How will the goods be packed? Most ocean freight is shipped in containers. The main distinction here is between full containers, which are sealed at the shipper’s premises and not opened until arrival at fi nal destination (door to door) and partial containers (less than container load) where container space is shared with other importers to achieve a full container load. The latter type of import presents greater risks from pilferage and theft as they must be deconsolidated at the air/sea port and separated prior to continuing on their journey. The more hands involved, the greater the chance for loss.

What coverage limits does the importer need? Policy limits are set based upon the maximum value insured on any one conveyance. The easiest way for the insured and agent to estimate the limit required is to review the largest exposure the importer has had on any single conveyance over the past 12 months. This can then be used as the basis for setting a forward-looking policy limit (with a suitable limit cushion built in). Other questions should be asked to determine if, in fact, the insured only needs pure transit coverage or if the policy needs to be extended to meet the client’s broader needs. For example, if imported goods are to be warehoused for any length of time, separate coverage will be needed. Similarly, the client may wish to purchase coverage to protect the goods after they leave the client’s premises and are en route to the client’s customers (domestic/inland transit). Like their larger counterparts, small- and mid-sized businesses are eager to exploit the opportunities that globalized supply chains afford, while managing the associated transit risks. Marine cargo insurance is a useful tool to help them and a broker knowledgeable in marine cargo exposures will be an asset to their client.

Kevin Wolfe is cargo team leader, marine group, at Beazley, U.S. He can be contacted at kevin.wolfe@beazley.com.

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2 Professional Insurance Agents/September 2006 www.piaonline.org

—Reprinted with permission from PIA.—