The growing importance of marine risk management to insurers

The shipping industry has great potential for future growth, writes ERGO board member for property/casualty insurance Christian Diedrich.

The rise in the world population, improvements in standard of living – especially in newly industrialised countries – and increasing globalisation mean that growth in transport volume is likely.

Transport insurance is taken out by companies on exports all over the world. Marine risk management is therefore becoming ever more important in avoiding losses during transit and storage.

Millions of containers are shipped between continents each year. Around 42% of all imports into the EU come from Asia, accounting for almost €720bn last year. Most of these containers come from China. Exports from this extremely dynamic economy are consistently on the up, increasing by a fifth from 2010 to 2011 alone. Last year, 34.1 million 20-foot equivalent units went through the Chinese port of Shanghai, making it the world’s largest container port, ahead of Singapore and Hong Kong.

As soon as the keel of a ship has been laid, the owner needs comprehensive insurance for their investment.

Transport insurance covers companies involved in import/export and their foreign branch offices around the world. This is only possible with a strong international network, such as the International Network of Insurance, which has created a marine cargo policy for 29 countries and is able to offer services in a further 80 countries.

This is especially important for small to medium-sized companies that do not otherwise have the necessary international experience or networks.

Even large corporations need international insurance policies and the right services to stay ahead of the foreign competition. The Asian market is especially significant for transport insurers, since capital goods made in Europe are in high demand there – not to mention the warehouses and ships headed west being full of Asian products.

As well as traditional transport insurance, advising insured customers on the risks of transport and storage of cargo abroad is becoming increasingly important. This consultancy service is sometimes even a condition of transport insurance policies. Various internationally active insurers have reacted to these new demands by investing in marine risk management, including ERGO.

It is the marine risk managers’ job to take a broader view than that of traditional insurance business of loss prevention.

Marine risk managers are on site to take action at often remote ports with a lack of infrastructure, trained staff and/or technical equipment (for example cranes, slings, chains or forklift trucks). They have the expertise to be able to advise personnel on site and develop alternative strategies. In some cases, they even have to stop loading or unloading until the correct equipment can be organised, because it is their goal to make sure the cargo arrives with the customer on time and undamaged.

Safe transit and correct storage are key in international trade. This is especially the case for expensive goods and high-value, made-to-order products, such as generators. In the case of large loads, it is impossible to simply send a replacement as you would for a mass-produced product. And just-in-time deliveries have to be on time or they lose their competitive value. Companies that produce made-to-order products not only have to deal with material costs, which can quickly add up to millions, they also cannot afford to lose their reputation.

Aside from large loads of several hundred tonnes, frequent claims are also a concern in marine risk management. Frequent claims drive up costs, yet are avoidable losses. They continue to occur due to poor packaging, insufficient labelling or instructions to contractors, poor management of handovers (forms filled in inadequately, releases not signed) and missing or miscalculated corrosion protection (amount of desiccant often only calculated for the duration of transit and not for unplanned stops, for example customs checks). Poor communication between the production, transport and sales departments often also leads to problems. In sales, transport is frequently only an afterthought and delivery services and hauliers are hired according to cost, not quality. In transport, speed and price are the deciding factors when choosing a company.

Important factors, such as methods of lifting, lasting points on the goods and the quality of the goods and packaging are often not prioritised. Employees in the production department are usually very familiar with the goods, yet unfamiliar with the routes they have to travel and their particular challenges. Transport begins during production and is decisive in the success of the business. About 70% of all transport costs are avoidable – if transport is planned well, and safety and security are part of the equation.

The value of goods stored at any one facility can come to huge amounts (for example solar energy systems worth millions). No company wishes to hand over such high-value assets to a storage facility without transport insurance. Marine risk managers are in action here, too – they assure the quality and security of storage facilities according to the following criteria:

• What are the natural risks?
• What fire-prevention measures are in place?
• Is the facility well secured against theft?
• Do the staff treat the goods carefully?
• Is the facility well managed and the inventory transparent?

If certain criteria are not adequately fulfilled, the marine risk manager develops appropriate measures, or in exceptional cases, will refuse to work with the facility.

Ideally, marine risk managers are able to observe transport risks holistically – from preparations, along the route and all the way to the recipient. This means possible losses can be taken into account in the advice that they give, making transport losses avoidable up to a certain point. However, marine risk managers are often turned into a form of emergency service and have to improvise on site because of insufficient planning or the insurer only being informed at late notice.