Almost a year ago, we wrote about the marine insurance market from an Asian perspective.

We said that to focus on “underwriting, underwriting, underwriting” in response to the global economic slowdown, suggested that insurers should seek rate rises, higher deductibles and self-insured retentions, tighter conditions and the imposition of further risk management requirements for their Assureds.

And we argued that (in Asia at least) this was not likely to happen because of the region’s economic recovery, inward investment and capacity, and the ever-maturing environments in which assureds are operating.

A year on and economic recovery has been slow in many parts of the world and forecasts for growth are conservative in most regions. However, Asia’s growth has been relatively strong, investment and capacity continues to grow, and markets continue to mature.

Despite the usual forecasts of the prophets of doom, marine insurers are, for the most part, still profitable and marine insurance markets have not moved sharply in any direction. Over the next 9-12 months, we expect that the markets will remain soft, even in light of the recent natural catastrophes in Australia and Japan.

What has happened over the course of the year is for the Japanese tsunami to clearly highlight some of the failings – and opportunities – that exist for marine insurance markets worldwide.

MARINE CARGO

Overall, we have seen cargo markets remaining soft with only a handful of insurers trying to maintain their rates with no reductions. Profitable accounts, as ever, are still able to access the best rates.

We have seen new players enter the market in both London and Asia, contributing to the continuing growth in capacity. This capacity is also broadly based, which has a dampening effect on the leverage available to any one company or underwriter. This is, of course, good news for Assureds as rates continue to be kept low.

We are seeing London competing hard with Asia, often coming in cheaper and putting paid to the notion that Asia is always able to undercut London.

Despite all of this, premium volumes have been increasing as economic activity picks up and commodity prices have risen.

MARINE HULL

The hull markets were trending slightly downwards for the most part, until the Japanese tsunami when the market started to flatten. This was perhaps a knee-jerk reaction which particularly affected clients with renewals falling in the immediate aftermath of the event, who might otherwise have been expecting a reduction. The reality is that whilst this was a devastating and tragic time for Japan, very few markets suffered any significant hull losses.

Nevertheless, hull insurers remain under pressure to seek a minimum of expiring terms on clean renewals. In London however, the market is still relatively soft, no doubt helped by the introduction of hull capacity from six new syndicates. There is also new capacity available from continental Europe and, as with cargo, we are seeing new markets opening up in Asia.

The hull underwriters who enter Asia often aim to not compete on price, but in reality are forced to do so if they are to win business. This is particularly the case when the necessary service infrastructure – experienced claims teams and risk managers – is lacking.

There have been some high profile accounts achieving significant reductions on their renewals, and savvy shipowners are continuing to press for, and achieve, competitive renewals by utilising new capacity as well as their existing markets.

MARINE LIABILITY

We have previously talked about the lack of marine liability expertise in Asia, but we have since started to see the development of a credible liability market in Asia, with the potential for good capacity on Asian and worldwide risks.

There are no widely acknowledged leaders yet, and there remains a lack of experience amongst many intermediaries in this class of business. It will take time to break the old habits in this class and London is not yet under any threat.

However, we are confident that there is the opportunity in Asia for a market to grow, and that there is sufficient credibility of expertise and claims staff to gain traction.

NUCLEAR RADIATION

In light of the Japanese earthquake and subsequent radiation leak, the insurance industry was very quick to point out that radioactive exclusion clauses are paramount and apply to ship and cargo owners. However, we believe that there is a commercial and humanitarian case for providing an insurance solution for some nuclear incidents.

The relevant radioactive exclusion clauses clearly state that Assureds are not covered for loss or damage as a result of nuclear radiation produced by nuclear fuel, waste, matter, nuclear combustion or any nuclear weapons.

Clauses such as these serve a very important function. If radiation contamination were not excluded, the insurance industry could face collapse if a widespread nuclear incident or conflict occurred. These clauses therefore exist to prevent that, and rightly so.

However, their introduction originally arose from fears of a catastrophic nuclear conflict and we believe that the time has come to reconsider the market’s approach to relatively finite incidents such as the Fukushima radiation leak.

The industry has an opportunity here to meet the needs of shipowners, charterers and cargo interests by offering insurance cover that can respond to this type of incident. That cover would necessarily be strictly limited in quantum and perhaps also by some measure of the scale of the nuclear incident. Ideally the initiative should encompass physical damage buybacks for ships and cargo which may be leaving, entering or transiting an affected area. Extensions to P&I and Charterer’s covers addressing the concerns of owners and charterers affected by a nuclear incident and at risk of disputes might also be made available.

In a situation such as that following the Japanese earthquake and tsunami, where the chartering of ships to bring relief supplies and reconstruction equipment is problematic because of the risk of irradiation, an appropriate insurance solution should not only be commercially feasible, but represent an attractive product for the industry’s customers. It is also in the public interest.

Lloyd’s syndicate Hiscox recently announced the launch of a new product, Crew Radiation Insurance. We hope to see more insurers seize the opportunities that the Japanese tsunami has revealed in order to protect their clients further.

FORECAST

Compared to the rest of the world, Asia remains resilient, with strong growth rates and good trade forecasts. The IMG are forecasting 8%+ growth per year over the next five years for the countries they term “Developing Asia” and 5-6% growth for the ASEAN 5 countries.

Over the course of the next year, we anticipate that the cargo marine insurance market will remain soft but with overall premium volumes rising, especially in Asia. This will be fuelled by continuing economic growth, high commodity prices, and public and private sector-funded construction projects. Underwriters will remain profitable in the whole, and as new players continue to enter the market, we do not believe that cargo rates will harden.

The hull insurance market will probably remain relatively flat. More capacity is still entering the market, principally in London and continental Europe. This will continue to keep rate rises at bay, however we expect Asia to harden in comparison to London as capacity growth stabilises.

Moreover, Asia is still not writing a large enough book of hull business to have much influence on overall rates. The new capacity in London, combined with the need to write substantial amounts of business, will influence the market by keeping prices low through excess capacity.

The relevant radioactive exclusion clauses clearly state that Assureds are not covered for loss or damage as a result of nuclear radiation produced by nuclear fuel, waste, matter, nuclear combustion or any nuclear weapons.

Clauses such as these serve a very important function. If radiation contamination were not excluded, the insurance industry could face collapse if a widespread nuclear incident or conflict occurred. These clauses therefore exists to prevent that, and rightly so.

However, their introduction originally arose from fears of a catastrophic nuclear conflict and we believe that the time has come to reconsider the market’s approach to relatively finite incidents such as the Fukushima radiation leak.

The industry has an opportunity here to meet the needs of shipowners, charterers and cargo interests by offering insurance cover that can respond to this type of incident. That cover would necessarily be strictly limited in quantum and perhaps also by some measure of the scale of the nuclear incident. Ideally the initiative should encompass physical damage buybacks for ships and cargo which may be leaving, entering or transiting an affected area. Extensions to P&I and Charterer’s covers addressing the concerns of owners and charterers affected by a nuclear incident and at risk of disputes might also be made available.

In a situation such as that following the Japanese earthquake and tsunami, where the chartering of ships to bring relief supplies and reconstruction equipment is problematic because of the risk of irradiation, an appropriate insurance solution should not only be commercially feasible, but represent an attractive product for the industry’s customers. It is also in the public interest.

Container manufacturers struggled to keep their factories open during the global economic slowdown and many were forced to close and lay off workers. The sudden turnaround in demand by shippers has caught many manufacturers unawares, resulting in a significant shortage.

The problem will become more acute as a number of factors come together:

• Growing consumer demand as the world’s economies begin to recover
• An increased emphasis on slow steaming, leaving more containers at sea for longer
• New box ships coming on stream – 28 containerships were ordered in September alone, 16 of which were 8,000 TEU or more
• The expansion of trade and the use of larger vessels, particularly in the intra-Asian, European and South American trades
• Congestion at terminals, especially in Indonesia, Philippines, Vietnam and Thailand

These factors are being further accentuated by the late arrival of documents due to flight delays strikes, volcanoes, weather, engine problems – as well as importers not paying sellers on time – leading to boxes remaining on wharves for longer.

Increased pressure is being applied to forwarders by shipping companies keen to ensure containers are collected and returned promptly.

In many instances, forwarders are being subjected to financial penalties for delays even when these are beyond their control.

Furthermore, the forwarder has to contend with claims for damaged or spoiled cargo, theft and pilferage of goods awaiting delivery, and the legal costs of defending spurious claims.

Protection may be available against most of these penalties, fines, errors, omissions and other claims exposures via our “Freight Services Liability” insurance cover. We also recommend that forwarders obtain competitive marine insurance cover for the cargo owner to protect their client relationships in the event of an unforeseen situation.

Please contact your usual broker at FP Marine Risks or email info@fp-marine.com if you would like to discuss how we may be able to help.

Much emphasis has also been placed on making Incoterms easier to understand, and for that reason a few key changes have been made.

For a full summary of the changes, please contact your usual broker at FP Marine Risks or email info@fp-marine.com

Here is a brief overview of some of the key changes:

Two categories of rules
The rules now come in two categories:

1. Rules for any mode of transport
2. Rules for sea and inland waterway transport

Number of ‘D’ terms reduced
DAF, DES, DEQ and DDU have all been abolished and replaced with:

DAT – Delivered at Terminal (replaces Delivered Ex Quay)
DAP – Delivered at Place (replaces Delivered At Frontier, Delivered Duty Unpaid and Delivered Ex Ship).

A fifth ‘D’ term, Delivered Duty Paid, remains unchanged.

Insurance
The rules and terminology relating to insurance for the transport of goods have been harmonised with the 2009 Institute Cargo Clauses.

Security
The rules now provide specific obligations for the buyer and seller to supply the other party with information or to provide assistance in obtaining security related import, export and transport documentation.

Terminal Handling Charges
The rules have been amended so that the risk of the buyer being charged twice for terminal handling costs is minimised.

E-communications
The new rules allow for paper communication or an “equivalent electronic record or procedure” where agreed or customary, “customary” meaning that in some cases parties will be unable to refuse electronic communications (for example, email).

String Sales
Previously the Incoterms meant that the seller had to theoretically ‘ship’ the goods, notwithstanding that the goods were being bought and sold on the high seas. The new rules allow for a seller to ‘procure goods shipped’ and not just to ‘ship’ the goods, in line with existing commercial practice.

Last year, FP Marine Risks was granted an Australian Financial Services Licence, enabling it to conduct direct business in Australia.

The acquisition of EDI Cargo Cover is a strategic move aimed at building the company’s presence in the region’s direct market place.

Philip Bilney, Group Executive Director, says: “EDI Cargo Cover has built up a first-class client base of freight forwarders, importers and exporters in Australia. This has been achieved by a combination of the intelligent use of web-based systems and good old-fashioned client service – a business ethos which very much mirrors our own.”

FP Marine Risks provides clients with its web-based programme, Alto, which enables users to manage their marine insurances online.

Ian Macnaughtan, founder of EDI Cargo Cover and now Manager, Logistics – Australia and New Zealand at FP Marine Risks says: “FP Marine Risks and EDI Cargo Cover fit perfectly together, both in terms of our marine specialism and the scope of service we offer online and by more traditional means. We are very excited to be joining a Lloyd’s broker that can provide our clients with the full range of international marine insurance services.”

Peter Sandall, General Manager of Australia and New Zealand, agrees: “We are in the enviable position of being able to offer freight forwarders and traders in Australia direct access to the Lloyd’s insurance market, whilst still offering the unique services of a specialist marine insurance broker on home ground.”

It is believed that the majority of goods had not been insured.

The Delhi Exporters Association’s president, Mr S P Agarwal is reported to have said: “It is the responsibility of manufacturers to bear the insurance from factory to Concor premises. The goods remain for a few hours there before they are sent for shipment to destination. Generally traders avoid insurance during this transit period. Once the goods are transported, buyers take care of insurance.”

We wrote a previous blog about the hazards of cargo accumulation after a similar fire in India earlier this year and the necessary steps cargo interests must take to protect themselves against substantial losses. The risks in depots are often underestimated, particularly in situations such as these where it is believed that the depot exceeded its maximum container capacity. And whilst many containers might only be stored in depots for a short period of time, a very real exposure to loss exists, especially given that the spread of the fire is often so rapid that it can wipe out entire warehouses within a few hours.

We recommend that all cargo interests, including freight forwarders and those insurers who may cover such cargo consignments, speak to a specialist marine insurance broker who can help design the necessary cover to protect them from the full range of risks they face.

Freight stations and warehouses can each contain hundreds of millions of dollars worth of goods that are at risk of becoming total losses from perils such as fire, flood and wind.

Earlier this year, a serious fire swept through the Punjab Conware Freight Station in India. The facility is 15,000sq ft and was storing a mixture of cargo from chemicals and tyres to garments. Due to the nature of the cargo, the fire was able to rage on for over 24 hours even though a significant number of fire engines attended the scene.

Most cargo policies provide limited extensions for cargo stored in these types of facilities or on the wharves, in stockpiles or train depots but the policy extensions need to be looked at carefully by both the policy holders and Insurers.

Freight forwarders and cargo owners need to ensure they have adequate scope of cover and sums insured clearly stated in their policies.

They should anticipate that with the growing use of transport hubs at any point in the transit / storage chain, there is always a possibility of such large high-value accumulations occurring.

Likewise, cargo insurers should anticipate all possible exposures, including unforeseen accumulations. They should clearly state intended location value limits and ensure they have sufficient facultative reinsurance in place.

All cargo interests should speak to a specialist marine insurance broker who will be able to design and secure the best cover for cargo owners, and place competitive reinsurance for underwriters.

And catastrophic incidents do occur. In August 2009 there was an accident in Talaja, India, when a bridge collapsed and a 128-wheel truck carrying a turbine to a power plant in Pipavav plummeted into the river below killing at least 5 of the crew and causing substantial damage to the cargo.

Marine consequential loss insurance exists to indemnify the insured in respect of expenses, standing charges, anticipated profit or actual loss of profit, including interest on loans etc., arising out of late or non-delivery, or damage to the cargo during transit. It is believed that the financiers in the Indian accident did not have the necessary insurance and are likely to be facing multi-millions of dollars in losses.

This type of cover is particularly relevant to those companies and governments embarking on major infrastructure projects such as new power generating plants, water desalination operations, port developments and construction of mining operations etc. In relation to these major projects, the cover is referred to as Delay in Start Up (DSU) or Advanced Loss of Profit (ALOP). Failure of a project to start on time can cost developers or financiers many hundreds of millions of dollars in lost earnings and interest.

As a specialist Lloyd’s marine insurance broker, FP Marine Risks is seeing a growing demand from clients seeking protection for these types of exposures. Although these risks are often very complex and can involve hundreds of millions of dollars, FP Marine Risks has access to world markets keen to provide competitive and individually tailored cover to insulate clients and financiers who could otherwise be facing disaster.

The Rules have been designed to regulate marine cargo liabilities internationally and may ultimately replace the Hague Rules, the Hague-Visby Rules and the Hamburg rules in those countries that are signatories to those conventions.

The sixteen states who signed were Congo, Denmark, France, Gabon, Ghana, Greece, Guinea, the Netherlands, Nigeria, Norway, Poland, Senegal, Spain, Switzerland, Togo and the United States. China is a public supporter of the Rules but is not yet a signatory, whilst New Zealand, the United Kingdom, Singapore, Bulgaria, Slovenia, Japan, Finland and Crotia have not yet signed the Convention.

20 signatories are required for the new rules to come into force, and whilst the USA has been very vocal in its support of the rules, the European Shippers Council (amongst others) believes that the new rules could put shippers in a worse position than they were prior to the introduction of the original Hague Rules.

The Rotterdam Rules have been six years in the making, and are argued by some to be necessary to reflect the recent modernisation in trade practices as well as provide for industry needs in respect of cargo moving door-to-door.

Exclusions

1. Insufficiency of Packing or Preparation has been widened and made more favourable to the Assured.  Prior to the revisions, loss caused by insufficient packing was not covered.  Now the exclusion only applies when the goods are packed by the assured or their employees.

2. Insolvency and Financial Default has been amended to the advantage of the Assured.  If the Assured was neither aware of the insolvency or financial default of the owners, managers, charterers or operators of the vessel nor should have been so aware in the ordinary course of business, this exclusion does not apply.  Moreover, the clause now provides that the exclusion will not apply where the contract of insurance has been assigned to a purchaser of the insured cargo acting in good faith.

3. Nuclear Fission and/or Fusion exclusions have been widened in light of the increased use of nuclear material bringing them in line with the opening words of causation in the extended radioactive contamination clause.

4. Unseaworthiness and Unfitness exclusion clause has been amended and is more favourable to the Assured as it will no longer apply when the benefit of the insurance has been assigned to a purchaser of the insured cargo acting in good faith.

5. Terrorism has been defined with the intention of clarifying causation.  For the exclusion to apply, Clause 7.3 now requires the act of  terrorism to be undertaken by a person acting on behalf of, or in connection with, an organization and does not apply to the actions of a ‘lone terrorist’.  However, Clause 7.4 does include lone operators and increases the scope of terrorist related activities.  These are no longer confined to “political motives” but now also include “ideological” and “religious” motives.

Duration

1. 1. The Transit Clause has seen a large revision, again more favourable to the Assured.  The insurance now attaches within the warehouse or place of storage when the goods are “first moved… for the purpose of the immediate loading into or onto the carrying vehicle or other conveyance for the commencement of transit” whereas previously the insurance would not attach until the goods left the warehouse.  Furthermore, the insurance now terminates on completion of unloading from the vessel at (rather than delivery to) the final warehouse or at a warehouse prior to the destination named in the contract of insurance which the Assured or their employees elect to use either for storage or distribution.
2. 2. The Change of Voyage clause has been amended by the removal of the words “held covered” because it was considered that these could be misunderstood by the Assured as providing cover even where it would not be available.  Clearer words are now used explaining the circumstances in which cover may be available from underwriters

Generally

1. 1. New definition of “Assured” appears and now expressly includes either the person by or on whose behalf the contract of insurance was effected or an assignee.
2. 2. The word “goods” does not accurately describe the range and type of cargoes now insured under the ICC so it has been replaced with the term “subject-matter insured”.

At the same time, the Institute Strike Clauses have been renamed the Institute Strike and Terrorism Clauses.  This change in name was intended to identify where terrorism cover is found.

It has been over 25 years since the clauses were updated, and in that time the nature of trade has evolved with new realities brought about by modern logistics, the ever-changing threats of terrorism, and maritime fraud.   We therefore see these as necessary, common sense changes, many of which we had previously included as a matter of course in our own wordings.  We are pleased to see these improvements to the basic Institute Cargo Clauses and hope they will be widely accepted worldwide.

It has been over 25 years since the clauses were updated, and in that time the nature of trade has evolved with new realities brought about by modern logistics, the ever-changing threats of terrorism, and maritime fraud. We therefore see these as necessary, common sense changes, many of which we had previously included as a matter of course in our own wordings. We are pleased to see these improvements to the basic Institute Cargo Clauses and hope they will be widely accepted worldwide.

Lowering worldwide consumer demand has already heavily impacted commodity prices. Profit margins have narrowed, and markets have diminished, which we expect to lead to increasing numbers of claims from buyers who reject goods on spurious grounds where previously they might have accepted them. Manufacturers and shippers also cut costs by using cheaper methods of packaging and shipping, and cutting the size of their workforce (often including the number of qualified staff and surveyors).

We also anticipate an increasing number of smaller claims as it becomes more profitable to pursue them; an increase in claims for theft because of organised crime and petty thefts; and an increase in abandoned cargo as buyers struggle to manage cash flow, access credit, or declare bankruptcy.

Known as the Importer Security Filing and Additional Carrier Requirements Regulation, it requires marine cargo carriers and importers to submit new information to the DHS’s Bureau of Customs and Border Protection (CBP).

The regulation is also known as the 10 + 2 rule. 10 new pieces of data are required from importers, including the details about the seller, the buyer, the manufacturer, etc., plus two new pieces of information from carriers, namely a plan with standard information about the vessel and where cargo is stowed onboard, and reports on any cargo loading, unloading or other container movements.

Importers will now have to gather and submit their data to CBP 24 hours before the goods are loaded at the originating port, and can no longer wait until the arrival of their goods at a US seaport.

Some traders are concerned that these new regulations could impact on costs, increase delays and increase their legal exposure for non-compliance.

The global economic gloom is casting its shadow over insurance like everything else, with sharp rises in premiums likely across the board in the near future. We asked logistics-industry insurance expert Philip Bilney* why reducing cover is not a good idea.

Can project forwarders avoid paying more for insurance?
The temptation is always there to skimp on insurance cover. Reducing the level of cover or seeking less comprehensive policies may save money short-term but the risk is that it would be a “false economy”. It does look as though the insurance market in general will harden over the next several months – in other words premiums will rise – for a number of reasons. This applies to most sectors including Marine Cargo insurance, E&O, projects and project-related cover such as Delayed Start-Up (DSU) or Advanced Loss of Profits (ALOP) insurance. But the answer at a time like this is to look to an organisation such as the WCA Family that has the buying power to reduce the impact of any market price hikes.

So insurers are seeking to restore their profits?
Essentially, yes, because insurance companies have to make a profit like anyone else. Here are some of the reasons why – reasons you may care to pass on to project owners tempted to cut back at this difficult time.

First, supply and demand: insurance capital is derived primarily from equity markets and when that capital dries up, the amount of risk any one insurer can accept is reduced. Less equity market capital means a reduced supply of insurance capital, which in turn leads to a higher price to buy that small part of it which you need to cover your risk. In this regard it behaves in much the same way as any other commodity, but in the opposite direction.

Similarly, there is not an abundance of capital sloshing around looking to take advantage of a perceived increase in rates. After Hurricanes Rita and Katrina, which hit the Energy and Offshore market so hard, there was a rush of new capital into the industry to take advantage of the anticipated hardening, with the result that it never actually happened. That sort of capital ingress often tends to manifest itself in the form of new start-up reinsurance companies which are effectively the wholesalers of insurance capital.

But surely premiums are already expensive?
Actually, premiums will be rising from a relatively low level. The market has been at historically soft levels for the last year or so and thus is due an upturn anyway (in my experience upturns only really happen when the market is already genuinely soft). We had the same situation immediately before 9/11, which prompted the last serious hardening of the market.

Also, major losses were unusually high in 2008. For example, claims from
Hurricane Ike alone are expected to reach USD16 billion.

Insurance companies are famously known as “investors with a bad habit” (underwriting), so many have been hit hard by a collapse in their asset values. The thing is, very few are admitting to it yet.

What other factors contribute?
Generally speaking, recessions on a scale now being encountered worldwide produce more crime, including fraudulent claims and associated losses, and that of course drives up premiums.

Insurance buyers will often ask why the cost of their particular insurance has gone up in a hard market although the risk remains the same. The answer is that all classes of insurance are connected because the source of capital is much the same, and reinsurance costs (the mechanism by which insurance companies offset their risks) tend to rise across the whole industry. So the tide of the whole market rises and falls as one, although of course individual anomalies do occur here and there.

When will the premium increases start to hit home?
Curiously enough given the depressing economic news, there is some debate over whether this hardening is actually happening as yet. The ‘rescue’ of AIG has actually had the effect of reducing some prices because AIG has to compete harder to retain market share, and in other areas some insurers are maintaining prices in order to avoid losing good business.

But in general, insurance companies are refusing to reduce premiums now and there are some areas (Marine Hull for example) where increases of 5-10 percent are already being applied. The jury is still out, but the general view in the industry is that prices will move sharply upward from early 2009.

Trade Credit premiums, on the other hand, have already doubled. If you can buy cover at all. Default & bankruptcy claims are escalating dramatically and most insurers in that sector (there are only a handful) are hunkering down and declining to accept much new business while they wait for the storm to pass. But business is still being done.

So what can project forwarders do to economise?
Despite some rising prices, now would be the worst possible time to run uninsured. Claim frequencies will rise, not only for the reasons I mentioned above, but also because more goods will be rejected by customers than would normally be the case, and if they are genuinely damaged, then cargo insurance will cover this.

FSL (freight services liability cover) also becomes more vital as people get more litigious and the nmber of disputes rises. Forwarding businesses are highly exposed at the best of times, but the risks can only worsen as the world’s economies slide into recession and trading becomes more difficult.

It’s also worth bearing in mind that insurance companies tend to give a much better deal to long-standing clients than they do to companies who are perceived to dip in and out of the market. So while there is every reason to ‘shop around’, there is also value in building and maintaining a good relationship with an insurer over time – try to work only with reputable, secure insurers and where possible leverage off the influence of those organisations who have genuine buying power.

*Philip Bilney is group executive director of FP Marine Risks, a specialist provider of insurance products and services across the entire spectrum of Marine and related sectors. Based in Hong Kong, in 2006 the company was the first Asian-based insurance broker to become a fully accredited Lloyd’s of London broker following three years of mandatory provisional accreditation. FP Marine Risks, the sole broker for WCA Family of Logistic Networks, developed Project Cargo Insurance, one of a suite of products available exclusively to members of WCA Family that includes Marine (cargo) insurance and Freight Services (E&O and legal liability) cover.

International security efforts have increased, but their presence is having minimal impact on what is unquestionably a lucrative crime.

Somali pirates are making ransom demands of up to USD10million, threatening the crew and warning the shipowners that they will ground the ship if their demands are not met.

Understandably, the safety of the crew and the release of the vessel take priority. However, whilst the affected shipowner does what is necessary to secure the release of the crew and vessel, cargo owners can be significantly affected.

The cargo is often more valuable than the vessel itself, yet in the event of a hijacking, cargo owners may not be alerted to the situation and are unlikely to be involved in the subsequent negotiations and ransom payment.

Recent hijackings have lasted between seven and 100 days; 58 days is the average duration of a hijack in Somali waters. Cargo owners can see disastrous delays particularly affecting any seasonal or other time-critical cargo, and in the worst case, deterioration or material damage to the cargo itself.

We are also witnessing an increasing number of shipowners attempting (some successfully) to recoup a share of the paid ransom from cargo interests in General Average.

Given the cargo is more often of significantly greater value than the vessel it is being carried on, ship owners will seek to recover the significant majority of the ransom payment and any other general average charges from them.

Irrespective of the ultimate position, shipowners are likely to have a prima facie right to demand general average security and we would expect owners to exercise their lien over the cargo in order to obtain that security where they consider it necessary to do so. Unsurprisingly, we are also aware that cargo interests are attempting to resist the claim in General Average.

What action can Cargo Interests take to protect themselves?

It would appear critical to establish a protocol for communications with shipowners in the event of an incident.

In addition, we suggest cargo interest obtain confirmation from shipowners regarding adequate Hull and Machinery, P&I, and War Risks insurance for the voyage in question.

There is specialist Marine Kidnap and Ransom Insurance available which provides not only cover for the ransom payment but, arguably more importantly, access to specialist security consultants who will assist in negotiations for any ransom payment. We recommend that cargo interests check with the shipowners to see if they have purchased this cover.

We are also witnessing collaboration between the parties involved in the voyage (charterers, owners and cargo interests) to purchase this cover for all interests.

Please see our separate news article on Marine Kidnap and Ransom Insurance for details or contact us to discuss your requirements further.

To keep up to date with reported piracy incidents and to learn more about prone areas, please visit http://www.icc-ccs.org/prc/piracyreport.php

The challenge for credit and political risk insurers is considering the numerous factors that affect the markets in which they operate. Global trends affect the demand for business and local issues determine how they structure cover for their clients. Oliver O’Connell looks at a snapshot of the Asian credit and political risk insurance market and the wider external factors and detailed internal issues that affect it.

“The first trend to take into account in the region is the increase in intra-Asian trade. This has been increasing over the last few years, and while business between Asia and Europe and North America has always been there, intra-Asia business is certainly a much greater percentage of the total than it was two or three years ago,” observes Jeremy Hampshire of Hong Kong-based Trade Line, the specialist trade credit and political risk insurance broker.

“The second trend, which follows on from that, which is obviously a global trend – is the movement from LC to open account. In Asia this has manifested itself as European and US buyers saying that this is the only way we are going to trade from now on. If you combine these two trends you end up with higher credit and political risk, especially credit, for companies within Asia, and their trading. It doesn’t matter where they’re trading, but this has led to an increased requirement for trade credit insurance,” he adds.

In terms of the most affected trade sectors, the trend began a few years ago with the transition to open account in the electronics industry. Following on from this was also a shift in the textiles industry amounting to approximately 65% of transactions by early 2005. Other trade sectors showing a similar trend include plastics, chemicals, steel, and some soft commodities.

This is also leading to a trend in which payment terms are being pushed out. Starting with a move extending payment terms from 15 days to 30, this has eventually been pushed as far as 60 days. These companies now have higher accounts receivables on their balance sheet for the same amount of business than they did one or two years ago. This means higher risk and supposedly more trade credit insurance opportunities.

In the last 18 months underwriters report to have seen a 25% increase in business, if not 30% in some areas, and in line with global trends, brokers have seen a 25-35% increase in enquiries over the same period.

Increased competition
Greater demand for insurance has seen an increase in interest in Asia from insurers, with a number of new office openings, cooperation agreements and new initiatives. Says Hampshire: “The main brokers have never made a big commitment to this class of insurance. They may have done so in Singapore for example, but they don’t have a significant presence. So things have been left largely to individual operators.”

In March, Trade Line entered into a strategic alliance with Cosmos Services Company giving the company access to a network of offices across Asia, as well as in London. For Cosmos, part of Japan’s Itochu Corporation, the aim of alliance is to expand its trade credit and political risk insurance field to better serve its client base. Trade Line still operates as a separate independent unit but now is a greater presence within the industry.

On the more specialist side of the industry, FP Marine Risks, the Hong Kong-headquartered specialist marine insurance broker, has launched a new trade finance initiative aimed at providing specifically designed marine insurance products for the industry.

Philip Bilney, executive director of FP Marine Risks, says: “There’s no doubt that in Hong Kong and Asia there is a growing need for trade financing banks to protect their marine exposures. By launching this initiative, we are leveraging our existing portfolio of specialist marine insurance services to address this need.”

Spearheading the new initiative is Audrey Poon, a broker with 16 years of experience in the insurance industry who joins FP Marine Risks as manager, trade finance. Having spent the past decade specialising in marine cargo insurance for trade financiers and international commodity traders in Singapore, Poon is aiming to help similar companies in Hong Kong minimize their risk in what FP Marine Risks see as an increasingly volatile market.

In the underwriting section of the insurance business, the major players are increasing their presence in the region. Atradius is establishing an office in Hong Kong at the moment and is investigating obtaining a license for China as well. Bermuda-based Exporters Insurance Company is establishing a representative office in Hong Kong in what is described as a prelude to the expansion of Exporters’ activities in the region through growing contact with local brokers. It is expected that Ace will also look to develop in Asia, perhaps using Japan as a platform for expansion into the rest of the region.

Hampshire adds: “A lot of the other majors are here already so perhaps some of the niche players will want to increase their presence here. We certainly get more visits of representatives from the majors coming through than three or four years ago. The general feeling is that there is more business going on in Asia and Latin America than elsewhere, and given the situation in Latin America at the moment, Asia seems preferable.”

In conjunction with this increased interest in the region is an increase in people moves within the industry. There is a level of opportunity, but with factors such as the cultural difference between Europe and Asia it is difficult for companies to simply parachute someone in and expect them to be able to create new business in a short time. Underwriters claim that with a lack of ‘home-grown’ specialist brokers, they have to spend more time on direct marketing and direct sales and cannot just rely on broker channels to drive business.

Active markets
In terms of the markets within the region that are driving business, China, unsurprisingly, leads the way in generating enquiries. Business coming from China is more for credit insurance rather than political, but most other active markets in the region are weighted more in the favour of requests for political risk coverage. For example, the Philippines, Indonesia and Vietnam all generate more political than credit insurance requests.

The challenge of low pricing that has featured across the world has been especially prominent in Asia with rates falling dramatically in most countries. Of the above mentioned countries, Indonesia and Vietnam have dropped quite significantly, though the Philippines and China have maintained similar pricing levels to the recent past.

Indonesia is of particular concern in that some brokers feel that margins have dropped to the extent that perhaps things have gone down by too much against the potential risk in the country. Mining has proved an especially strong sector for political risk insurance, Martin Phelan, head of political risk for the Pacific region at Marsh in Melbourne, comments: “We’ve done a number of transactions in lease and asset finance for mining equipment. For example in the coal sector in Kalimantan, Indonesia, where the client is supporting international contract mining companies by using asset finance as an alternate structure to pure project finance or traditional on balance sheet debt.”

In this instance the mining company required limited recourse project finance to develop $300 million copper-gold project on which it had completed a bankable feasibility study. The project is located in a sparsely populated country with limited infrastructure – physical, commercial and legal – very low income levels and virtually no history of foreign investment or financing other than that provided by development agencies. The mining laws and regulation that did exist was untested at the time.

Understandably the banks were concerned with the risks involved – the stability of key property rights including government commitment on issues such as royalties and the right to export minerals, the reliability and transparency of the legal system and the remoteness, and therefore possible vulnerability, of the project.

Marsh brought together a syndicate of political risk insurers to ensure that commercial lenders had the appropriate coverage against a range of actions and events that could affect the project.

High commodity prices across the globe over the last two to three years have been driven this mining and oil and gas boom causing a reasonably pronounced upturn in new projects and investment. This is channelling into copper, gold and other base metal mine development and the consolidation of project financing schemes in addition to new exploration and extraction of oil and gas deposits.

Phelan highlights the opportunities available for insurers: “A lot of the transactions we’ve been involved in are still creating further opportunities, medium to large project finance-based copper and gold projects, including in some new countries such as Laos. The commercial market facilitated the entry of foreign investment into the country over the last three years, and by the close of this year, total foreign investment over the last five years – largely from Australian companies in the mining sector – amounts to over $1 billion.”

As demonstrated by the Kalimantan mining project, it is localised issues, not global trends that determine the details of political risk coverage. The Philippines and Papua New Guinea tend to be both the hottest and most contentious markets for enquiries and are dominated by local risk factors.

On a national level the Philippines is a highly attractive country geologically for mine development, but is also a challenging country politically with a range of cultural-cum-political issues. The influence of the Catholic Church is just one of the political and cultural challenges faced by foreign investors in new mining projects, as it is a strong vocal force and strident agitator against new projects because of their environmental, social and cultural impacts.

Phelan comments: “At Marsh we get involved in very distinct regional, national, provincial and even local issues. Political risk is not just about sovereign government issues. For example Papua New Guinea has very high levels of tribal diversity especially in the southern highlands – nationally there are as many as 700 tribes and 700 different dialects. The devil is in the detail when providing cover to projects in regions such as this. It doesn’t necessarily stop deals getting done, but it can be highly intimidating as a challenge in the market. So you need to have the knowledge and ability to come to grips with what the issues are and how they can be managed.”

While it may be wider global factors that moderate the wider market trends and flows of business, it is the location-specific issues and the ability of both the underwriters and brokers to come to grips with them that determines success and failure in a regional market. There is no shortcut to developing workable market knowledge.

In a recent case regarding strict liability, PPG Industries Inc, a manufacturer and shipper of cal-hypo, was found liable for the loss of a 1,799-teu vessel, the DG Harmony and her cargo, after a fire broke out as a result of the water-purifying commodity being stored inadequately.

The judge remarked: “Although I have concluded that PPG was not actually aware of the full risks of shipping cal-hypo in 300-pound drums in the manner in which it was shipped here, I conclude also that the hazard was reasonable, as there were sufficient red flags to have caused PPG, in the interests of reasonable care, to have investigated further the dangers presented.”

Ruling
The court ruled PPG was strictly liable to the vessel and other cargo interests under the US Carriage of Goods Act, even though the claimants were not party to the bill of lading contract. PPG was negligent for not conducting appropriate safety tests on the method of storage they chose, and failed to warn the carrier of the known risks of cal-hypo, an unstable commodity with a history of costly accidents.

Implications
Information set out in the IMDG code for the shipment of dangerous goods is a guideline only. Full information and warnings relating to the risks of cargo, both actual and possible, should be supplied to the carrier by the shipper, and further investigations conducted if in any doubt.

The carrier must be in a position to make the decision to carry dangerous cargo on the basis of “informed consent” and shippers should be aware that this ruling will have an impact on them if they do not pass on full and thorough information to the carrier.