When it comes to insurance, we only tend to find out the inadequacies of our cover when we make a claim.

For example, when we purchase car insurance we may perhaps choose the cheapest option, but when we have to make a claim, we might face a staggeringly high excess, no courtesy car to keep us on the move, and no legal fees cover for when the other driver tries to take us to court.  The costs mount up, and that’s with insurance.

So too with liability insurance for freight forwarders.  Prudent freight forwarders already appreciate the importance of purchasing liability insurance for their business. They are already aware of the financial strain they could face if they are liable for another party’s loss.  What that freight forwarder might not be aware of is how inadequate their liability insurance is, until it is too late.

So here are some tips to ensure your liability insurance will protect you when you need it:

• Make sure you purchase marine liability insurance – general non-marine liability insurance does not provide cover for international forwarders, but is often purchased in the mistaken belief that it does. 

• Ensure you have full liability protection to cover all of your forwarding operations. Some forwarders only request cover for their house bills of lading, but if you work in customs broking, warehousing or distribution, then the liability exposures for these need to be covered as well.

• Check that your insurance covers you for Errors & Omissions and Legal Liability – all freight forwarders have a contractual liability for a loss, regardless of who is responsible.

• If you trade internationally, check that you have adequate limits of liability, particularly for Errors & Omissions claims. Being sued and found liable in a Californian court can be expensive.

• Defending an action brought against you, even if you were not at fault, can be time consuming and costly so ensure that your cover includes Defence, either “ground-up” or “first dollar” if possible (so that you do not have to pay a deductible or excess).

• Make sure that General Average and Salvage Charges are included as these types of claims can fall back onto the forwarder.

• Utilise your own “Conditions of Trade” to limit your company’s liability in your day-to-day business where no standard limitations of liability are employed (such as FIATA or COGSA), and make sure that you refer to them on your company website, letterhead paper and invoices. Get your insurer to view and approve these before the inception of your liability insurance contract, and if you make any changes to the conditions or your limits of liability, you must get prior approval from your insurer.

• Never accept liability without first speaking to your insurer.

There are also ways to avoid losses, which we encourage all freight forwarders to consider:

• Never agree to release containers or cargo without the production of the original Bill of Lading, no matter how well you know your customer or how long you have done business with them.

• Always keep original Bills of Lading in a secure place and ideally separate some of them so that if there is a fire, for example, you will not lose all of the originals.

• To lower the chances of a customer seeking compensation from you for loss or damage to their cargo, always encourage them to purchase cargo insurance.

The best advice we can give to freight forwarders is to use the services of a specialist marine insurance broker.  They will be able to find you the most competitive deal available, whilst ensuring that the cover is tailored according to your company’s needs.  An experienced marine insurance broker can make sure that the insuring conditions under your freight services liability insurance are wide enough to protect your company against the liabilities you face and that the insuring premium is competitive for that level of cover.

On the face of it, the global economic slump created conditions that should have left marine insurance clients bearing the brunt of a hardening market and spiralling premiums.  But according to Mr Philip Bilney, Group Executive Director, FP Marine Risks, not only did that not transpire, but it is not likely to happen in the foreseeable future either.

At the recent IUMI conference in Hong Kong, Ms Deidre Littlefield cautioned that whilst the global economy may be through the worst of it, there were still signs that insurers in Asia would need to focus on “underwriting, underwriting, underwriting”.

This would suggest that underwriters should be seeking universal rate rises, higher deductibles and self-insured retentions, tighter conditions and the imposition of further risk management requirements for their Assureds.

However, from an Asian marine insurance perspective, it is apparent that this has not happened and nor will it.

There are three key reasons for this – Asia’s quick economic recovery as demonstrated by the rebounding trade figures, investment in Asia and the subsequent capacity it has brought with it, and finally the ever-maturing environments in which the assureds are operating and thereby lowering their associated risks.

Recovery

There is no doubt that Asia is recovering quicker than Europe or North America.  The IMF has forecast GDP growth of 4% worldwide, but 10% in China and 5.3% in Asia overall for 2010.

The world seems to be recovering from the recession but whether it is a sustainable recovery is yet to be seen.  Recent figures from the World Trade Organisation show that the downward trend in trade experienced worldwide during 2009 has come to an end, with world merchandise trade up 25% in the first quarter of 2010 when compared with the same quarter in 2009.

Importantly, intra-Asian trade has played a key role in sustaining growth within the region.  The WTO has recently reported that the trade flows within Asia have rebounded more strongly than those of developed economies and believes this is due to trade within the region.

China – An engine of growth

Furthermore, China’s imports grew at 16%, twice as fast as its exports (8%), suggesting that the country’s fiscal stimulus package has benefited trade within Asia as a whole.

China is now the world’s largest exporting country and probably stronger than ever relative to the West as we emerge from the financial crisis.  Unless something catastrophic happens, we expect to see the continuing, phenomenal growth of that economy.

The benefits of Asia’s growth in GDP and trade will of course filter down to the shipping, trading and maritime industries as a whole.  There is no doubt that because of this, Asia is certainly the most exciting place in which to be writing insurance business at the moment.

Investment and capacity

Accelerating a trend going back at least two decades, the last two to three years have seen an uninterrupted, headlong influx of new insurance capacity into the Asian market.

I am therefore not surprised that we are seeing continued investment into Asia.  There are now 15 Lloyd’s syndicates operating in Singapore and another five in Hong Kong plus 11 independent coverholders, most of which write Marine.

International insurers have either entered the market or dramatically increased their underwriting capacity.  With the new Asian-domiciled start-ups and increases in existing capacity, according to our own estimates, total Hull and Cargo capacity in Asia is today around three times that of just five years ago with no signs of abating. We expect to see more international insurers active in Asia before the year is out.

Whilst the capacity available is considerable, Asian marine underwriters now have unprecedented levels of authority at their disposal. US$100 million Project Cargo lines and US$25 million Hull lines are no longer unusual (without reference to treaty underwriters or to an overseas head office).

This trend has given Asia a self-contained marine market capable of supporting the great majority of insurance exposures arising in the region.  No longer is there an automatic need to seek capacity or expertise in London or Europe because it can all be found here. Insurers are realising this and repositioning themselves accordingly.  If they want to be part of the Asia Pacific Century, what choice do they have?

The developing world is highly developed

Many of the major cities in Asia enjoy world-leading infrastructure – ports, airports, roads and railways – which operate with modern technologies and are expanding daily.

Asian-focused logistics companies are highly efficient and move cargo through the system seamlessly and – in their own highly competitive environment – with ever greater regard to the safety of their customer’s goods.

Losses are being minimised throughout the supply chain as newer technologies and a continual push for international competitiveness have helped improve safety records.

Meanwhile, the shipping industry is ever-more regulated for the benefit of seafarers and the public alike.

Benign and sophisticated claims environment

The combined benefit of this is a relatively benign claims environment.  There have been some increased cargo losses in particular areas and circumstances, but on the whole we believe this downward trend will continue.

According to IUMI, total losses have, on the whole, followed a downward trend over the last 30 years.  Whilst the costs of some claims have increased, repair costs for damaged vessels have largely fallen, and with fewer ships in service losses have been muted.

Claims are an inevitable part of insurance, but when losses do occur, the Asian claims infrastructure is ever-improving.  Every major adjuster, or international law firm, is heavily represented in the region and local expertise is growing.

Market with credibility and strength

Not only are the risks getting better, they are more plentiful too. The new capacity in Asia is addressing a growing pie, as the economic data demonstrates, but what it does not reveal, and what we are witnessing, is that more marine insurance business is being attracted to the region’s markets.

Asian buyers now have better insurance options here than overseas, and foreign companies trading in Asia are more easily convinced by the international insurance brand names which are now on offer locally.

A number of international insurers have brought their existing Asian books with them and further still many Asian underwriters are increasingly writing non-Asian business.  This has created a market with credibility and strength.

Good news for Assureds

The world recovery, which is proving to be strongest in Asia, combined with plentiful capacity and better risks means it is unlikely the Asian marine insurance market will harden.  Whilst no one believes we are truly out of the woods just yet, there is no reason to assume that insurers in the region will do anything other than carry on being competitive.

As more underwriters continue to build up their regional presence in Asia, the need to increase rates and narrow conditions is suppressed.

An abundance of options for Asia’s Assureds combined with a determination on the part of underwriters to increase their market share has naturally created a competitive environment.  But, with continued investments in infrastructure and an increase in trade volumes combined with a reduction in claims, insurers in Asia understand that underwriting, underwriting and more underwriting does not need to translate into rate increases and a tightening of conditions.

Instead, underwriters in the region can utilise their local knowledge to write more business and a greater premium volume through a broader spread rather than increasing premium through increases in rating.

The maritime news continues to be filled with articles about pirate attacks in the Gulf of Aden, while piracy also continues less reported in several other key areas such as Nigeria, the Philippines and Brazil. There has been some discussion, and perhaps confusion, about what support is available to shipowners in the event of a pirate attack.

To mitigate the risk, some shipowners are avoiding the area but at substantial additional expense, and others are using organised convoys or employing security staff for the vessel.

Marine Kidnap and Ransom insurance can play a key part in any shipowner’s risk management strategy because it covers the specific costs associated with piracy attacks, however there has been some misunderstanding regarding the detail of the cover.

Andrew Brooker, director at marine insurance brokers FP Marine Risks, says: “We are often asked what insurance protection is available to shipowners in light of the increased risk of piracy. Marine Kidnap and Ransom needs to be seen as a service that shipowners can draw upon that isn’t catered for by traditional hull insurance.”

Traditional hull insurance only protects the shipowner from loss or damage to the vessel as a result of piracy and is only designed to work in a reactive manner once the claim is made after the event.

In the absence of physical loss or damage, the ransom and associated costs would be considered a General Average expense and settled by all parties against their respective values. However, the legitimacy of these costs being claimed in GA has never been tested and could be disputed by the cargo parties’ insurers.

Given the amount of shipping traffic that transits areas such as the Gulf of Aden, statistically the risk of a pirate attack is quite low. However, when it does happen, shipowners are faced with a challenging range of issues they are unlikely to have encountered before.

Brooker explains: “Shipowners suddenly find themselves with a host of questions about how to move forward – how do they find the necessary help from specialist negotiators; how do they enter into effective communications with hijackers; how do they deal with threats to their crew, vessel and cargo; how do they raise and deliver the ransom?”

Marine Kidnap and Ransom insurance is designed to specifically meet the needs of shipowners in dealing with these issues. It also provides the security of having an insurance in place that ensures the shipowner receives priority treatment from kidnap negotiators and other personnel involved. It covers all the necessary related costs that are needed to secure the safe and quick release of the vessel, crew and cargo, including the ransom and its delivery.

Furthermore, if a shipowner were to declare General Average in an attempt to raise the ransom, it could jeopardise their commercial relationships.

Brooker says: “There is generally no deductible with Kidnap and Ransom insurance, so owners are not exposed to additional costs after the premium and our cover ensures the Kidnap and Ransom insurers do not seek to recover any aspect of the costs from cargo or charterer interests, thereby preserving those commercial relationships. It also has the effect of protecting the owner’s existing Hull & Machinery or War cover from a loss which exposes them to an increase in rating for the following year – in effect, Kidnap and Ransom insurance has no memory and will not seek to recover claims through increases in premium.”

Deidre Littlefield, IUMI president, said “There is no doubt that the all-time historic profits made by owners during the halcyon period marked by the last five years were helped in no small measure by driving ships and crews as hard as possible.

“Inevitably, such a strategy impacts heavily on claims, and we expect that many ship repairs and onboard unit replacements, which have been deferred or ignored during the sky-high profit years, will start to surface, along with the results of skimped maintenance, leading to a further escalation of claims. And adding to the financial pressure on insurers, we will see spiralling requests for return of premiums applying to ships going into ‘cold’ or long-term lay-up.”

The pressures on insurers may be offset by certain benefits that lower trade brings, namely fewer older vessels on the water and fewer problems finding suitable seafarers, although as Ms Littlefield adds, “recruitment going forward remains a huge problem when seen against the threats of piracy and the criminalisation of mariners.”

At FP Marine Risks we have not yet seen a sustained or widespread hardening of the marine market, despite many insurers’ predictions at the end of last year.

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.

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.

Andrew Brooker, Associate Director of FP Marine Risks, a leading marine insurance broker based in Hong Kong, explains: “The S&P market can have a huge impact on the ability of shipowners to receive full reimbursement from their insurers in the event of certain types of loss, specifically a salvage, general average incident or total loss.  Unfortunately, many assureds don’t realise this until they come to make a claim”.

The science is simple – for example, a vessel valued at USD2.1million and insured accordingly could see its market value rising to USD3million as a result of a buoyant S&P market. If the valuation on the insurance cover is not adjusted accordingly, the assured could find themselves having to meet the additional costs.

Andrew says: “For example, if a vessel has to be towed to port as a result of an accident or breakdown, salvage charges are payable from both the ship and cargo.  However, if a vessel is underinsured, the amount of reimbursement the shipowner will receive from the insurer for these charges will be reduced by the same proportion that the ship is underinsuerd.”

It is up to the assured to advise insurers of any changes in the value of their vessel.   “We recommend that shipowners keep an eye on the S&P market and speak to their insurance broker if they believe there have been significant changes in the value of their vessel,” Andrew continues.

And for those who are thinking the easy solution is to overinsure, unfortunately the insurer may refuse to accept the increase in value and demand proof by way of an independent valuation.

But is this a lot of noise being made by those who would talk-up the market, or does it reflect a genuine trend?

There is a common misconception that insurance rates are predicated solely on the likelihood of loss. In fact, insurance rates directly reflect the volume of investment capital coming into the industry and the competition that generates for the premium dollar.

Claims rarely have a direct impact on rates unless they are of such a magnitude they drive insurers out of the market or any given sector of the market.

Executive Director Philip Bilney adds, “In reality, rates only rise when people like us - brokers looking for the best deals for our clients - run out of options. When the competition for risk dries up, then the market hardens. Insurance capacity is a commodity and like any other commodity if demand outstrips supply, the price goes up. It’s as simple as that.”

So were Katrina and Rita big enough to move the market? Frankly, we don’t know yet.

At first, we doubted they were, but the losses now stacking up in the Energy Market are starting to suggest otherwise.

The Hull market is definitely hardening, with increased rates being charged in London.

The trend is a little more difficult to discern on the Cargo side. There is a great deal of talk about the Professional Re’s imposing tough terms on the 1 January treaty renewals, although Reinsurers are yet to put pen to paper.

It looks increasingly likely the soft pricing of the last 12 months may indeed have come to an end.