by Jim White , Managing Director - JW Marine Risk & Insurance Services

What do the events of September 11th, 2001, a gloomy global economy, and multiple years of double-digit commercial insurance price increases mean to those purchasing coverage for the global transportation of goods and merchandise? Surprisingly, the future is quite bright!

Pricing Trends

From a consumer perspective, the marine market is currently a shining star in the insurance industry. While commercial insurance buyers experienced overall price increases in the 25% - 250% range for most of 2002, the increases experienced by the marine cargo market were nominal.

Global underwriting results for 2001 recently announced through IUMI (International Union of Marine Insurers) support these optimistic market conditions. Of the three basic lines of marine coverage (Hull & Machinery, Marine Liability, Cargo), the underwriting results on Cargo continue to make it the darling of the three, with a combined ratio (ratio of claims and expenses to premium) of 87%. This ratio is the target for the rest of the property and casualty industry where the combined ratio is approximately 116%.

The marine market has not escaped completely unscathed, however. Rather than a trend toward general price increases, we have seen the marine market become more conservative in analysis of new risks and moderately stingy in granting broad coverage terms on new and existing policies.

Coverage Changes

Storage Exposures
Most commercial insurance buyers incorporate some ‘static’ risk exposures into their marine cargo insurance programs. Static is defined here to mean ‘stationary’, such as storage coverage on raw materials, work in process, and/or finished stock, rather than property in the ‘course of transit’. Marine underwriters and property underwriters share similar reinsurance markets on static risks and, therefore, are experiencing the same capacity crunch when trying to satisfy the high limit needs of their larger customers.

Terrorism Exclusions
New exclusions promulgated in the market during 2001/2002 exclude terrorism perils from virtually all property insurance policies. However, under marine policies this exclusion does not apply to goods while in the normal course of transit, where coverage continues to be provided under standard strikes, riot and civil commotions clauses.

Marine underwriters will be under the same requirements as property insurers to comply with U.S. Terrorism Insurance Act (TRIA) of 2002, and most are currently scrambling to meet the upcoming February 2003 deadline.

With backing of the US Government, under TRIA, terrorism cover will be available as an Option (and subject to additional premium) under all commercial property & casualty policies including marine policies.

Private Equity Transactions

Pre-acquisition

The Statement of Values is generally the focus of any property insurance program by most insurance brokers and risk managers. The problem with these benchmarking tools is that they only provide a snapshot of static property owned by a company and do not provide information on the property in motion that an organization may have at risk. With many of today’s manufacturing companies operating on just-in time principles, an increasing percentage of exposed property will be in transit - such as importation of raw materials and components and finished goods in transit to the marketplace.

If the targeted organization is a subsidiary of a larger entity, it may be difficult to obtain even the most basic marine underwriting information because it may never have been previously requested. Basic marine underwriting information includes the following:

• Projection of annual values shipped to/from various points
• Terms of sale for incoming and out going shipments
• Values at risk per shipment by plane or vessel
• Methods of packing goods for shipment
• Detailed logistics patterns and transit carrier service contracts

Loss of income and time element exposures

One of the most glaring insurance issues for manufacturing companies is a lack of coverage for loss resulting from delay or interruption of property in the course of transit. To trigger a Business Income (BI) loss under a standard property policy, the property in question must actually be insured by that policy. Goods in transit (especially in transit internationally) are specifically excluded from most property policies and, therefore, any resultant BI loss from this property is excluded.

Marine cargo policies traditionally do NOT provide BI coverage and, in fact, loss due to delay, loss of use, and/or loss of market are standard exclusions under marine cargo insurance policies. However, specific coverage can be negotiated to cover these exposures in the marine market.

This exposure should be of particular concern to manufacturing companies who are in the midst of ramping up new manufacturing facilities or retooling existing facilities. In these situations, the consequential loss exposure from a delay in startup could be more costly than the actual replacement cost of lost or damaged production equipment.

Post-Acquisition

Is the consolidation of all portfolio companies’ global transit exposures under a single or blanket marine cargo policy a good idea?

• Advantages
  It is certainly easier to administer a program consisting of one insurance policy. A single policy also eases the task of dovetailing coverage with property insurance program. A ‘global’ Marine Cargo program may serve to minimize the need for locally admitted insurance policies.
  
  Volume discounting is prevalent on marine lines of insurance, so substantial cost savings are possible by consolidating coverages.
  
  The most compelling reason for the single policy concept, however, is the risk control element of ensuring that proper insurance coverage is afforded to all organizations in the portfolio.
• Disadvantages
  Risks associated with transit exposures can vary wildly depending on geographies, the inherent nature of the goods being shipped, and modes of carriage. For example, a containerized vessel shipment of clothing from Malaysia to the United States represents a substantially different level of risk than an airfreight shipment of notebook computers from the US to Moscow. High risk exposures are usually better suited to coverage arranged provided by insurers with specialized claims and underwriting expertise.

Look at your options

Work with your broker or risk management advisors to review these items when arranging coverage for any new entity.

• Dovetail marine program with property insurance program (close gaps which may exist in each policy). Areas of concern include the following:
  • Inland or domestic transits
  • Storage coverage at unnamed property locations
  • Trade shows/exhibitions
  • Property in the custody of field and sales reps
• Marine underwriters continue to be a source of good quality, low cost earthquake coverage. A competent broker can maximize the efficiency of earthquake capacity in the market place by evaluating capacities in both marine and traditional DIC /Property markets. For example, a manufacturing/ distribution operation may want to consider insuring inventories under a marine cargo policy which includes earthquake coverage at no additional premium, thereby reducing the amount of DIC coverage needed.

Summary

The brutal hardening of the insurance market beginning in 2001 has left most commercial insurance buyers feeling demoralized and with little negotiating power over coverage terms and conditions. The marine market is unique in that it has remained fairly stable and, therefore, continues to aggressively attract new business opportunities.

The marine market is often overlooked as an excellent vehicle to solve problems or close coverage gaps that may exist in traditional property insurance programs. All insurance buyers with exposures to goods or property in transit should be encouraged to evaluate insurance coverage alternatives in the marine marketplace whenever possible.

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Jim White
Managing Director
JW Marine Risk & Insurance Services
415-989-4300
jim@jwmarine.com