Getting goods from one place to another is a risky business, even without the challenges of a global pandemic. So, what do importers and exporters really need to know about marine insurance? And how important are brokers in these disruptive times? Helping me navigate the complexities to identify the opportunities is Estelle Bond, Senior Business Development Manager in the Marine Team at Hollard Insure.
The pandemic had a significant impact on supply chains and shipping. Trade, as we know it, was turned upside down and inside out – by lockdowns across the world’s economies. Without access to labor and production, trading patterns were heavily skewed towards essential goods.
COVID-19, if anything, demonstrated how resilient the maritime industry really is. The flow of goods never stopped – it just shifted from non-essential to essential goods.
Of course, there were challenges within the shipping industry as well. It has been a tough time for seafarers. They have been stranded and away from their families for extended periods of time, anxious about their own safety and that of their families back home. Even so, seafarers have continued to play a pivotal role as essential workers, responsible for keeping global supply chains working.
While there have been delays in receiving goods due to lengthy delays at the ports or inland borders, essentially even at the height of the pandemic, products kept flowing, and the industry was able to get medicines and other essential goods to the areas that needed them.
Did the pandemic affect premiums? There are many reasons why a policyholder’s premium may increase. The reasons are linked to matters within his control and specific to his portfolio, and others relate to things beyond his control, which still have an impact on the cost of insurance overall. Thus, the premiums he must pay may change depending on his loss ratio or the nature of the goods he imports and exports, or even the value of these goods and their inherent risks. Goods that are high target goods will be priced higher than goods that are not. Given the recent increase in hijackings observed in South Africa lately it is likely that either his premiums or his excesses will increase.
Events that are out of his control, but which nevertheless cost millions sometimes billions of dollars when they happen – also place a strain on reinsurers who provide capacity to local insurers, and this drives the cost of insurance up as well. So, events like natural disasters, or storm activity, or man-made disasters like port explosions in Beirut, or the blocking of the Suez Canal, or the local riots and civil commotions these events have increased both the risks and costs associated with marine insurance. Other trends related to the pandemic include the bizarre hike in container rates due to the shortage of containers. Prices more than quadrupled. So, there are many things that have been unfolding alongside the pandemic and all these impacts both the cost of insurance overall and the cost of reinsurance that we rely on as insurance companies. And ultimately these costs are passed down to the consumer via the cargo owner via the industry at the end of the day.
So let’s hone in on the specifics of marine insurance…what is it and who does it cover?
The first covers CARGO or goods that are traded internationally. Any buyer and seller that has bought and/or sold goods has got to get their goods to the receiver of the goods. Transporting these goods is risky business as so much can go wrong during a typical shipment.
Goods can be lost or damaged during the handling of the goods at the various stages in the transport chain, the loading of goods onto the ships and then of course the journey itself. It’s not unusual for fires to occur, or for ships to strand, sink or run aground or for land side risk such as collisions, overturning, derailments or theft. It makes sense for anyone who is importing or exporting to protect the value of that sale by buying the right insurance cover to protect those goods against physical loss or damage. We are seeing an increasing amount of General Average losses where cargo owners have to put up guarantees towards general average contributions without which their goods are not released by the shipping lines. These container loads are worth millions. The financial burden of having to replace or repair the goods could potentially bankrupt a company if something does happen. Therefore, it makes sense for all importers and exporters to protect their moving assets as well as their businesses.
The second product line is called HULL insurance and this covers private individuals who own pleasure-craft such as yachts, ski-boats or jetskis – that are for their personal use. Additionally, we cover commercial hull which is usually owned by a business and used to generate revenue. So here we think of the fishing vessels or dive-charters. All of these watercraft are insured against physical loss or damage and some have liability extensions as well.
Lastly, we look at marine liability. These include the responsibility of Stevedores, Charterers, or ship repairers under their contractual obligations. This is when a company, might incur a liability to other parties during the course of their business activity.
How important is the broker relationship in all this?
Critical. In our business we talk about brokers being trusted advisors and I think this rings true here. To be a trusted advisor you need solid experience and expertise in understanding the densities of the marine product. Maritime insurance is complex and litigation heavy, so you need specialist advice to make sure you have the cover that you need and to have someone demystify the terminology and jargon that is unique to the marine product.
What other conversations should businesses be having with their brokers?
Before asking what is covered, they need to ask what’s NOT covered. If they know what’s not covered, they can adopt risk mitigating strategies to ensure they are protected elsewhere. The worst thing is when you submit a claim as a client and you’re expecting to be paid only to be told there is no payment because of something in the fine print. So, my advice is to really take the time to sit down with your broker, ask questions and make sure you understand what you won’t be covered for and why. Managing expectation is as important as managing risk.
Have a conversation with your broker about the warranties on the policy. Sometimes there are specific warranties within a given contract. The client needs to understand what these warranties are, how to abide by them so that they don’t jeopardize claims due to non-compliance. In which instances can they expect to be paid out, in which instances not? And what are the warranties?
Lastly, conversations around heightened risk during the pandemic are highly recommended.
Some advice to help people assess whether a broker is the right fit?
The best thing to do is look at their track record and their marine portfolio.
The track record is very useful. Is this a line of business that the broker has a proven track record in? As already stated, – marine insurance is complex, so you don’t want someone who specializes in a different class of insurance and only dabbles in marine. A good indication as to fit is the quality of the communication between you and your broker. How proactive has your broker been during the pandemic – have they alerted you to heightened risk that you face – unique to the context of the pandemic? For example, have they recommended you review your limits of exposure as goods accumulate in port or elsewhere and the value exceeds the policy limits? In general, losses caused by “delay” are not covered under a traditional insurance contract – have they brought this to your attention enabling you to consider alternate strategies to reduce costs linked to delay, demurrage or deviation.
Advice you would like to offer business owners?
If importers and exporters were hesitant in purchasing marine insurance previously – please review your thinking once you have had an opportunity to reflect on the new risk landscape that we find ourselves in now during and post this pandemic – and the many new nuances to risk that it brings.