Tag Archives: piracy

Marine Cargo Insurance

The fundamental factors of underwriting marine cargo insurance lie within a world fraught with international intrigue, storms and crime. Marine underwriters stand ready to reimburse your marine insurer for ocean shipments, delayed, lost in transit or stolen. The underwriting process spreads a loss out through several re-insurers or groups of re-insurers called managed syndicates, so that no one entity risks an unacceptable loss.

Nature of Cargo

They type of cargo, whether it is finished goods, refrigerated goods, pharmaceuticals or machinery, makes a difference in the underwriting. An underwriter would not insure refrigerated cargo shipped in an unrefrigerated container. A single piece of machinery may be worth more than a whole shipping container full of clothing bound for a discount store, so it represents a greater potential loss to the underwriter.

Customs regulations may bar or delay the entry of some goods. Because late arrivals or government seizure are things underwriters insure against, these regulations become another fundamental factor in the underwriting process.

The packaging of the commodities influences the decision to underwrite, as well. If, for example, a shipment of automobile parts were packed so that the humid atmosphere inside a shipping container would cause water to settle on the parts, causing rust, the underwriter might exclude rust from their protection.

Hazards

Weather is always a potential hazard at sea, so marine cargo underwriters always consider the seasonal weather along the route of the shipment. Because underwriters insure against late delivery, as well as loss or damage, the port of origin and the destination port are considered. Some ports, where inefficiency and theft are prevalent, give underwriters pause.

Risks

The risks in marine cargo insurance underwriting are not the same as its hazards. A risk is not inevitable, whereas the hazards of the marine Panama Canal, to accommodate ships greater than 950 feet in length, ship sizes are increasing. The loss of a ship means a greater risk for a larger loss. Loss of cargo to theft also is an increasing concern.

As of October 2012, piracy is on the rise, according to the International Marine Bureau’s Piracy Reporting Centre. Theft from shore facilities, such as warehouses and storage yards at ports, also is a risk insurers consider.

One risk peculiar to marine insurance is a condition called “general average”. When cargo is deliberately jettisoned from a ship for the safety of the ship and crew, the loss to one shipper is shared by all shippers. Marine cargo underwriters insure against general average by assessing the condition of the ship and the experience of the captain and crew.

Worst – case Incident

Marine cargo underwriters, like all insurance people, look at the worst-case scenario. For many, the worst-case scenario is serving as the underwriter on both ships in a collision between two large ships. One class of tanker, called an ultra-large crude carrier, can carry more than $4 billion worth of crude oil. If two such ULCCs collided, the loss could include not only the ship, but the cargo, the cost of litigation – which the underwriters also may insure – environmental cleanup costs and government fines.

More than 190 maritime incidents were reported in the six months from January to June 2014, ranging from the grounding of cargo ships, collisions at sea and in port, water ingress, engine failure through to suspected piracy – with the crew, ships and cargo reported missing for months on end. These perils represented significant financial losses to cargo owners without the requisite marine insurance to protect their financial interests in their cargo, and in particular, for general average losses.

Many importers and exporters run the gauntlet of not insuring their cargo in a bid to save on costs, the reality is that goods in transit are highly susceptible to damage by fire or storm, theft, jettison or mishandling. Cargo insurance is an essential means to guard against serious financial loss, and in particular as the application of general average losses grow and become more commonplace.

A general average occurs when a voluntary sacrifice is made to safeguard the vessel, cargo and/or crew from a common peril for example, jettison of cargo to lighten a vessel in order to get to the closest port to prevent a ship from sinking and even piracy. If the sacrifice is successful, all parties contribute to the loss based on a percentage share that their cargo value bears to the full value of loss suffered, with the maximum contribution not exceeding the full value of their cargo.

There have been instances of General Average where the proportionate share each cargo owner had to pay was equal to 60% of the value of their cargo on board the affected vessel, however, it has become more common that open ended average guarantees are required to be signed and returned to average adjusters.

For example, if a particular cargo owner had cargo to the value of $10 million on board the affected vessel, his contribution will be $6 million up to $10 million. For any business without adequate marine insurance cover in place, this kind of exposure can be particularly devastating.