While each form of insurance can be beneficial to businesses, cargo insurance is the most effective way to insure your company’s supply chain.
In my last post, I discussed the three most common types of supply chain insurance: self-insurance, business owner property and casualty, and cargo insurance.
While each form of insurance can be beneficial to businesses, cargo insurance, which covers goods in transit, is the most effective way to insure your company’s supply chain. Here’s why:
Cargo insurance can apply to ocean, land and air transportation modes. The policy can cover loss and damages, ocean General Average claims and even consequential coverage.
It can also cover contingencies that may occur if the responsible party, according to the INCO terms, does not come through with the coverage they were required to have or if their carrier had an unknown exclusion.
Additionally, it might cover a contingency situation where you sell goods FOB and don’t have the legal liability, but your highly important customer has the clout to demand payment for damage anyway.
The insurance can be for actual cash value, replacement cost or selling price.
Cargo insurance policies can be customized based on the type of goods, modes of transportation, desired coverage and risk tolerance.
They can be written to cover high-value loads, including commodities within high tech, pharma and jewelry industries with some having been known to exceed $25 million in value.
The policy will likely have some limit to the total coverage. These types of policies provide an affordable, predictable option to mitigate potentially large financial losses associated with loss or damage.
“ The insurance can be for replacement value, purchase cost or invoice value.”
An “all risks” policy will protect against most problems door-to-door, and even within the warehouse, but there can be exceptions like wars and strikes.
Cargo insurance can cover risk for special events like trade shows, or unlikely situations including earthquakes, fire and water, if specified.
It can also cover mundane situations like activity at the dock door during the loading and unloading process, where significant damage can occur.
Cargo insurance can cover your cost or replace your revenue stream
The insurance can be for replacement value, purchase cost or invoice value.
Generally shippers want to recover their cost, but if that cost is rising rapidly, replacement cost may be considered.
Perhaps it’s important to protect the full revenue stream and profit, and therefore invoice value would be insured. It may be different if the load is being received (import) or shipped (export). Perhaps the firm would want to insure imports at cost, and exports at invoice.
We recently had a discussion with a supply chain professional about how much of her firm’s revenue might be at risk due to supply chain failures. After a lot of discussion and consideration, she estimated that it would be “only 1%” of their $200 million revenue stream.
But then doing the math, we quickly realized that 1% of this firms’ revenue ($2 million) was a major detrimental loss for a firm of this size.
The cargo insurance carrier should understand your supply chain
It’s important to find a partner well versed in supply chains to help you develop a comprehensive supply chain risk management strategy, and customize a cargo insurance policy to your unique needs.
UPS Capital Insurance Agency, Inc. is a good example of an insurance broker that does this naturally, given their close tie to a supply chain company, UPS®.
The best companies actively collaborate with their customers, and have deep expertise in the global supply chain, thus reducing the likelihood of a loss and lowering the cost of the policy.
The cost of cargo insurance doesn’t have to be a mystery
“ There is a lot of competition in the cargo insurance industry and new players are entering all the time.”
Some insurance carriers low-ball the price just to get the business, but in the long run you get what you pay for one way or the other. Your premium for cargo insurance depends on a number of variables.
The list below can be daunting at first glance. That’s why it’s important to partner with an insurance professional that takes the time to understand your supply chain. Factors affecting the cost of cargo insurance include:
- Transactional coverage or umbrella coverage: Transactional coverage for individual shipments can be expensive and can cost up to three times more per load than an umbrella policy covering all shipments all year; but this may be appropriate for your needs.
- Value insured: How much of the total gross value of your shipments do you want to insure? You will need to specify both a maximum value to be covered, as well as an average value.
- Packaging: Packaging clearly affects damage rates and therefore influences insurance rates. Some policies may even have certain packaging requirements or clauses that enable prompt claims payment. Many carriers, including UPS®, offer package testing services. A packaging evaluation performed by an expert will improve your loss history and minimize the risk of unpaid claims.
- Routing: The routing of shipments is key, especially global shipments moving through high-risk areas. Mexico, for example, may have a 25% premium, or much higher deductibles, versus shipments in the U.S.
- INCO terms: Insurance rates will depend on which party has the liability at each stage in the supply chain.
- Modes: The various modes of transportation used affect insurance rates since each has a different risk profile.
- Loss history: Loss history for the company and the product, or similar products in other companies, will affect insurance rates. Companies should know and track their loss history and take active steps to mitigate the causes.
- Policy limits: The aggregate limits and deductible can be customized for your company’s particular risk tolerance.
- Product type: The type of product being shipped is clearly a consideration. High-risk goods, of course, are more expensive to insure (e.g. electronics, jewelry, beverages, precious metals, automotive parts, pharmaceutical, etc.). For example, tablets have a much higher risk and insurance cost than truck axles.
- Underwriter judgment: Pricing models continue to improve as underwriters become more experienced with certain commodities and loss ratios. Therefore, it is incumbent for a shipper to understand their risks and be able to articulate their assessment and mitigation programs to give the underwriters a comfort level to price coverage appropriately.
Shippers should manage their insurance cost by optimizing and trading off the 10 factors above, with the help of a supply chain-savvy insurance professional.
How to evaluate insurance
Someone with a supply chain background should be involved in evaluating cargo insurance.
Shippers who track loss history are likely to have a rich data set that will provide insurance underwriters with a clear picture of the shipper’s loss history of high-probability/low-impact losses.
This provides a benchmark for establishing appropriate deductible/risk retention levels. Higher deductibles supported by this data can reduce premiums significantly without exposing the shipper to any additional loss. Low probability/high impact loss events, by definition, are unpredictable.
A simple calculation can be conducted to evaluate the benefit of having insurance protection for rare events
A quoted annual premium for this coverage of $50,000 would clearly be justified. Since rare-but-devastating events can occur tomorrow or many years in the future, this calculation is used to spread the impact over time and help assess the cost of annual insurance premiums to protect against, in this case, a $5,000,000 loss.
Reasons companies don’t buy cargo insurance
“ Someone with a supply chain background should be involved in evaluating cargo insurance.”
- Current coverage is misunderstood: Supply chain professionals may mistakenly believe they are already protected. Unfortunately, this is almost always carrier liability coverage, which has all the pitfalls and drawbacks enumerated above. They may also think the business property and casualty (P&C) policy covers them. The bottom line is that unless you have a cargo insurance policy, you are putting your business at risk.
- Inappropriate KPIs: Many supply chain professionals are measured on cost, but not on transit losses. These can be charged to “another account.” In such cases, these departments are not incentivized to manage transit losses closely.
- Lack of supply chain risk understanding: Often there is confusion within a company about who has the responsibility for purchasing supply chain insurance, or there is an assumption that these risks are already covered.
- No major loss recently: The current management team may have never suffered major transit losses. Although any one event may have a low probability of occurrence, when all possible loss events are taken together, the chance of something happening is surprisingly high.
- Loss invisibility: Losses are not tracked over time or across different management regimes. Therefore, cargo loss becomes essentially invisible to the organization
- Claims may not be paid: There is the fear that submission of a claim will cause the premium to go way up, the policy to be canceled or the claim to be rejected outright as is often the case with carrier liability coverage. It is important to understand that insurance is different than carrier liability and can be customized to meet the risk tolerance profile of the company. These benefits should help.
While understanding cargo insurance will help keep your supply chain protected, understanding other trends in the marketplace will undoubtedly help your supply chain grow.
For this reason, my next post will highlight the 10 megatrends in transportation insurance that shippers should follow. Watch for that post soon, here on Longitudes.
Dittman’s white paper, Will you be ready when a loss happens to you? can be downloaded here.
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Reprinted with permission of Longitudes, the UPS blog devoted to the trends shaping the global economy.