Significant delays in the movement of goods due to the closure of ports, redirection of shipping routes, coupled with a surge in consumer spending are impacting whole industries across the globe – from construction to retail. These forces are causing major business interruptions with potentially devastating consequences for profitability and sustainability.
This article examines the global shipping crisis from an insurance and risk management perspective, setting out how insureds can take action to reduce their risk exposures and the impact on their bottom line.
HOW DID WE GET HERE?
While many of the above factors can be linked to interruptions caused by COVID-19, supply chain vulnerabilities existed before the pandemic. Over time, global economic factors have caused shipping companies to restrict their operating costs, leading to reduced investment in new vessels, reliance on older containers, and the rerouting of inefficient shipping routes. Meanwhile, demand for larger capacity container vessels grew, leaving older, smaller capacity fleets idle. Fast forward to 2020 when an almost overnight surge of online consumer demand triggered the reopening of abandoned shipping routes.
The scarcity of available vessels and containers, combined with the increased consumer demand for goods has seen a dramatic increase in freight rates. For example, the World Container Index has seen prices climb for 40ft containers by 360% since August 2020, and over 600% for the Shanghai to Rotterdam route. It is expected that sustained freight cost increases will eventually be added to the cost of goods.
Further delays are occurring in some of the world’s largest container ports in China and the United States caused by closures following COVID-19 infections amongst dock workers as well as additional biosecurity measures being applied. These disruptions cause spillover into other ports and congesting spikes. Freight companies implemented workarounds such as leasing passenger and cargo aircraft to transport goods. This provided some relief while international travel was restricted, but as borders reopen, this is no longer such a viable solution.
WHAT DO IMPACTED INDUSTRIES NEED TO CONSIDER?
Industries that import or export products or raw materials have felt the impact of these supply chain disruptions, particularly the Food & Beverage, Retail, and Construction industries. From an insurance perspective, there are key policy considerations that can help reduce your business’ changing risk profile and ensure the appropriate cover is in place to minimise losses. These are outlined below.
Deterioration of stock (fresh food and perishables) caused by delays
Delays are normally excluded in most Institute Cargo Clauses, however, deterioration of stock is usually covered (depending on the cover written into the policy). This adds an element of complexity when settling a claim and often leads to partial or commercial settlements. Insurers are willing to offer forms of extended cover to write back some protection for loss or damage caused by the delay with terms and conditions (pricing, limits, and deductibles) linked to the exposure and likelihood of loss.
Insurers are also starting to see claims arising from failure of older, refurbished shipping containers (e.g., refrigerated motor failure) so a policy review to ensure stock deterioration is covered is encouraged.
With the shortage of containers, limited access to ship tonnage, and increased freight rates, some insureds may look to consolidate loads, which can cause increases in conveyance limits. What was deemed appropriate in the past may need to be reviewed and the insurance policy should reflect this.
Additional risk management and inspection conditions
Inspection of containers prior to transit and upon delivery is sound risk management practice and where possible, it should be built into your overall risk protection/mitigation strategy. Larger conveyances can include inspection warranties/conditions at the port. If this is not completed and a claim is made, it can impact an insurer’s view on indemnity. Therefore, clear instructions and effective communication with logistics providers can help prevent claims from being denied.
Indemnity period(s) and limits of liability
Delays in the delivery of raw materials or critical plant and machinery items can, in turn, delay the rebuild, reinstatement, or replacement of insured property in the event a loss occurs. Increased turnaround times may exceed the policy indemnity periods. This can lead to a portion of the loss not being paid out, underinsurance, or inadequate insurance in the form of the policy limit.
When assessing an adequate policy limit, freight is often considered an uninsured working expense and is factored in the Rate of Gross Profit. A formal Business Interruption review should be regularly undertaken to ensure cover and limits are appropriate.
Costs that are reasonably incurred to expedite the transportation of insured raw materials, plant, and equipment following a loss are covered under most Property policies. An example here is the additional costs of leasing an aircraft instead of a ship. Some insurers may have different stances on clients paying additional fees to ‘buy their way up the line’, and whether this is covered under expediting extensions. Therefore, open, and early communication with your broker is vital.
Contract Works insurers have also seen significant increases in the cost of construction projects, fuelled by the growing costs and limited availability of raw materials (timber, bricks, glass, etc.) and labour. Clients are encouraged to undertake regular reviews of their limits, values, and contracts with their customers to ensure they have adequate insurance in place.
Fines and penalties
Supply chain disruptions are also impacting completion periods within the construction industry as well as industries downstream where project completion has been postponed. Most Contract Works insurance policies do not provide cover for fines and penalties incurred as a result of shipping/transport delays pushing out completion periods. Some insurers can write this cover back in, however strict underwriting protocols will be applied when assessing the risk to determine pricing, terms, and conditions.
WHERE TO FROM HERE?
While many factors continue to disrupt the global supply chain and the impacts can be devastating to businesses, our message to clients is that having the right insurance policies in place and reviewing these closely with your broker is an effective risk management strategy. Feel free to reach out at any time to discuss your business needs.
Head of Placement