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.

However, in terms of marine liability programmes for large, multi-jurisdictional or complex risks, Asia has not yet responded to local demand, allowing London to continue leading the way.

Whilst small or purely local programmes in Asia can often be placed in their respective domestic insurance markets, this is generally not possible if higher limits are involved or risks are spread across multiple jurisdictions. For example, the Korean, Japanese and Chinese markets have the experience and appetite for domestic programmes, but we are unlikely to see them entering the international arena in the short to medium term.

Generally speaking, international insurers operating in Asia have not placed specific underwriting expertise for larger liability programmes in to the region, contrary to hull, cargo or P&I.

As such, these programmes tend to be underwritten via the US or London head office by an underwriter who may have less in-depth experience or knowledge of the Asian market, the particular legislative environments, or the insurance and servicing requirements of clients in Asia.

It is fair to say that Asia, apart from the developed jurisdictions such as Hong Kong, Singapore, Korea and Japan, often has relatively immature liability legislation or infrastucture. This has historically affected demand for liability insurance in the region; however, the understanding of insurance buyers in Asia is developing, creating an increasing need for liability underwriters. Furthermore, those buyers expect to utilize capacity in Asia in the same way they do for other classes due in part to the perceived servicing benefits.

Some insurers are responding. In the last two years, some Lloyd’s syndicates have sent liability underwriters to Singapore, and other insurers and syndicates are likely to provide the expertise and capacity in the near future. There is also at least one Agency market in Asia currently expanding their liability portfolio and employing underwriters who were previously based in London.

However, London continues to provide most capacity due to its historical experience in this area. It remains the leading market for a large swathe of marine liability programmes across the world.

We believe the Asian market is under-served by liability underwriters, certainly when compared to marine hull, cargo or P&I, and an opportunity exists for a leading liability market to grow an Asian book.

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.

Charterers who have been lucky enough to have had no claims in recent years may consider discarding the cover as an easy to decision to make.

However, as the volume of trade reduces, so do the margins for everyone involved – the receiver, the shipper, the shipowner and, of course, the charterer. As projects are mothballed or cancelled completely, more cargo is being rejected that would have been otherwise acceptable. Previously, minor damage to the cargo would have made little difference in a climbing economy where the value at discharge was significantly higher, but this no longer holds true as values and demand fall.

So, what happens to these losses? To protect their margins, receivers will claim from their cargo insurance, where they previously did not. Cargo insurers will be more interested in pursuing a recovery against the carrier using recovery consultants or lawyers working on a ‘no-win, no-fee’ basis. Carriers will then look to pass on those losses to charterers.

Similar issues arise with damage to hull claims by owners. Previously, owners were too busy trading and enjoying high charter rates to consider off-hiring vessels or conducting minor repairs. However, these same owners are now suffering from a lack of income, which in some cases is making slow repairs a more attractive option than trading at a daily loss. Owners will now be seeking to make those repairs and recover their losses from the charterers.

In addition to the above physical loss exposures of a charterer, there are also the legal costs implications for charterers in any position in a long charter-chain. Most owners and charterers are currently saying “I am fine as long as my counterparties continue to trade and pay”. However, if one charterer fails, then the whole chain is very quickly exposed to losses as each party tries to protect themselves and/or frustrate the contract. If one party in a multi-charter chain goes bankrupt and is left owing others, then extricating yourself from the intricacies of the chain will be time-consuming and expensive – the legal process is almost certain to be protracted and potentially multi-jurisdictional.

Whilst FD&D (Freight, Demurrage and Defence – legal costs insurance) doesn’t cover the underlying exposure to pay or recover charter hire, it does provide cover for the legal costs of both defending the incoming claim/frustration of the charter and the costs of pursuing the bankrupt charterer for unpaid losses.

Charterers are more exposed to risk now than they have been for some time, from cargo losses, hull losses and legal bills.  Whilst the need to cut costs is weighing heavily on charterers minds, it is as important as ever to be protected.

Whilst attacks in the Malacca Strait and Indonesia have dropped by over 50% in the same time, the Somali coast and Gulf of Aden have seen a drastic rise from only 2 incidents in 2004 to 44 in 2007.

The data available for 2008 shows that between January and September there were 50 attacks off the coast of Somalia, 32 hijack incidents and over 260 crew members held hostage.

The pirates have hijacked vessels from over 20 countries, including Germany, Japan, Malaysia and France, and members of the crew are predominantly from the Philippines and Malaysia.

The pirates targeting vessels near the Gulf of Aden and Somali waters are predominantly local fishermen and disaffected youth from Puntland, a semi-autonomous region in the north east of Somalia.

They threaten to kill the crew and run the ship aground from the outset, and make ransom demands of between USD2m to USD10m for which they leave little room for negotiation.

Ten countries have sent in military forces to the waters surrounding Somalia and the Gulf of Aden to try and prevent further attacks, but with little success.

It is argued that as long as the issues internal to Somalia remain unresolved, piracy in the area will continue.

Avoiding the area entirely will limit a shipowners exposure to the risk of piracy, but it is also a costly and time consuming alternative.

Marine Kidnap and Ransom Insurance, on the other hand, ensures that if a vessel is captured and a ransom demanded, the shipowner is able to respond quickly and with the support of experienced crisis-handling professionals to ensure the safety of the crew and expedient release of the vessel.

The Cover

In summary, the Marine Kidnap and Ransom Insurance covers the following:

1. The ransom that has been paid

2. The loss in transit of the ransom

3. The fees and expenses of security experts who specialize in advising clients on how to handle crises such as kidnap-for-ransom

4. Additional expenses including those for an independent negotiator; a public relations consultant or interpreter; reasonable costs of travel and accommodation of the assured; plus all other reasonable expenses incurred subject to the insurer’s approval.

5. Legal Liability to cover settlements or awards, fees and judgments imposed upon and paid by the assured as a result of an action for damages brought by or on behalf of any insured person, or his / their legal representative or shareholders, as a result of the kidnap. Defence costs incurred by the underwriters are payable in addition to the limit for legal liability.

What would you do without insurance cover?

Without the necessary Kidnap and Ransom insurance, shipowners understandably find themselves unsure about how to proceed in the event of a hi-jacking.

They need to consider how to enter into effective communications, how to handle the demands and threats made by heavily-armed pirates, how to advise family members of the situation and how to raise and deliver the necessary ransom to guarantee a swift and successful release.

Most, if not all, owners would consider it an unprecedented strain on finances, resources and expertise to manage the crisis effectively.

However, with adequate Marine Kidnap and Ransom Insurance you have the necessary support from experienced professionals as soon as you need it.

They have the ability and know-how to advise you through every stage of the negotiations and release, their costs being covered by the insurance.

In addition, the insurance also covers the ransom itself along with a wide range of ancillary, but necessary, expenses that may be incurred either during and/or after the successful release of the crew and vessel.

The above information is intended solely as a summary of the cover – for full details regarding the conditions of cover, exclusions and definitions, please email or telephone your usual FP Marine Risks contact or call the Hong Kong office on +852 2544 3410, the London office on +44 (0) 207 397 4920 or email info@fp-marine.com

With growing trade volumes, vessel sizes and government legislation, supply chain managers face increasing risks and liabilities in their industry. Insurance is an important risk management tool, but one that has yet to be fully utilised in Asia. For an effective insurance purchasing strategy, supply chain managers should be aware of the changing risk exposures, the breadth of cover available and the long-term benefits that insurance provides by protecting profitability.

Supply chain management, by the diverse nature of the business, is exposed to constantly changing and, in most cases, increasing risks and liabilities. Depending upon the geographical spread of the business, those risks are likely to range from political risks to business interruption and the more specific threats of piracy or theft.

The insurance market has always been keen to respond to these varying and changing risks, not only with more sophisticated products, but also greater expertise and knowledge. In the increasingly competitive environment that the trade insurance market has become, differentiation is a key driver for insurance solutions that can dovetail with existing covers and/or risk management devices already in place.

What remains constant and critical is for supply chain managers to be able to identify the risks and react to them positively. That requires a high degree of both understanding of the exposures as well as the resources required to implement the required risk management procedures. As part of that process, the involvement of the insurance market and its knowledge base can be invaluable not only to determine the possible solutions available, but as a cost-efficient external resource.

Changing Exposures

Supply chain managers have become more risk averse in recent times due in part to the falling cost of insurance, but also due to an increase in the understanding of risk and the constantly evolving legislative environment.

A gradual, but steady, improvement in the understanding of the liabilities of service providers and the courts’ willingness to find new areas of liability or affirm previously held views has focused more attention on the involvement of insurance as a risk management tool. But, is there sufficient focus or understanding on this area?

There can be no doubt that it is difficult to maintain adequate knowledge of new risks and the evolution of existing risks. As the size and demands of the industry continue to develop, both in Asia and globally, so too does the list of potential losses that might arise.

One such example is the risk of accumulation brought about by the increased volume of trade. Accumulation arises where a series of shipments are in the same place at the same time, whether that be a warehouse, vessel or other conveyance.

For supply chain managers, this is a difficult exposure to monitor on an ongoing basis, yet can give rise to a significant underlying exposure in the event of just one single incident. Whereas this used to be predominantly the preserve of static risk insurers, due to the progress of, specifically, the shipping sector of the industry, it now has a broader effect across the supply chain.

As the size of vessels increase to meet the cost efficiency demands of global trade, so does the possibility of an accumulation of risk on those very vessels. The capacity of the ‘Emma Maersk’ and her 11,000 twenty-foot equivalent units (TEUs) is a forebearer of things to come. It is perhaps noteworthy to compare her with the recent losses incurred by cargo interests alone on the ‘Hyundai Fortune’ of potentially USD75m and the ‘MSC Napoli’ in the region of USD66m, both of which were unavoidable losses from the point of view of the supply chain managers unlucky enough to be involved.

But the issues of accumulation do not stop once the cargo is discharged from the overseas vessel. As trade volumes continue to rise, specifically to and from China, so consolidation and deconsolidation points become more congested and/or capacity increases.

If we add to the equation the risks of port congestion either through natural or man-made causes such as the recent strike in the US Pacific Northwest, those exposures can result from a number of causes making them difficult to predict.

Being able to calculate these exposures, with a degree of accuracy, requires a high level of risk management capability, which may not be viable within certain areas of the supply chain. It is, of course, difficult enough to manage risk successfully where all the information is available; where that information is not available, it becomes a considerable challenge.

The result of this is that there is only a limited level of protection for even the most sophisticated risk manager. Offsetting risk in the form of insurance should, therefore, play a pivotal role in the overall risk management strategy.

Insurance in Asia

To this end, the insurance market in Asia continues to grow as more and more insurers enter the arena, either as additional offices to bases in London or the US, or Asian headquartered and capitalised. The London and Lloyd’s market is and will remain the epicentre for the complex risks that the supply chain management industry requires, but there is significant shift in knowledge as insurers place expertise on the doorstep of the risks they write.

Indeed, Lloyd’s itself now has hubs in Singapore and Shanghai, allowing Lloyd’s markets to utilise their capital based in London to set up at minimal additional cost in Asia. While the spread of insurance placements is often global, insurers are seeing a real benefit to a presence geographically alongside the risks they are writing.

This provides insurance buyers in the supply chain sector with the services and knowledge base that, all too often, remains under-utilised. While the insurance market is keen to provide this support, generally speaking it has not been considered a traditional option for the supply chain industry. This, though, needs to change if the supply chain sector is to benefit from all the available tools, including insurance, and meet the risk management challenges that Asia will continue to present.

Regulatory and Legislative Environments

The concern, however, has to be that Asia’s trade volume is increasing at a pace considerably in excess of other markets, while regulation and legislation in many of the region’s countries remain in their  infancy. However, this has not dampened the expectation of clients of the supply chain industry in the region, who demand the highest levels of service.

Given the current pace of growth in countries such as China and India and the relative lack of focus on ensuring that the regulatory environment keeps pace with that growth, the protection of that exposure becomes ever more difficult. The changes in regulatory practice will take some time to gain traction and is, perhaps in part, contrary to the desire of those who wish to reap the benefits of the regional growth in trade.

This is likely to continue to have a negative effect on the ability of the supply chain industry to manage their exposures in the developing economies for some time to come.

However, the news is not all bad as insurers have an equal desire to be involved in trade to those regions and, to do that, they want and need to understand the risks involved. This is, in part, the reason for the increase in focused expertise being brought in or propagated in the region by insurers.

To properly understand the environment, they want to be accessible to their assureds and to the risks they face. Whether this proximity will give rise to a consequent increase of insurers’ involvement in the risk management strategies of the supply chain industry remains to be seen.

At present, there remains a relatively low penetration of insurance purchasing in Asia but a change is unlikely to be driven by the regulatory bodies, even with the full support of the supply chain management sector.

Ultimately, an effective risk management strategy needs to be seen as an asset to any company before the costs involved will be accepted. That will require a fundamental change in thinking in some sectors regardless of the regulatory environment.

Premium versus Risk Management

An effective risk management strategy that is able to react to new risks and control existing ones can expect to have a long-term beneficial effect on the insurance costs.

When this is compared to the falling cost of insurance even as trade levels continue to climb to some of the highest levels ever achieved, the actual costs of risk management can be eroded, in some cases, to a large degree.

This also gives rise to more specific options within the insurance programmes to create greater premium efficiencies as the risk management strategy provides more predictable results. Increases in self-retention of risk, for example, can mean a beneficial reduction in premium.

Other, significantly more sophisticated, products start to be made available as the risk management strategy becomes a key aspect of the profile of the insurance buyer. The equation between a reduction in claims experience and a reduction in premium becomes weighted in favour of the insurance buyer with a history of successful risk management.

The Impact of Unused Risk Management Tools on the Balance Sheet

Experience shows that, even where a strong risk management structure is in place the understanding and knowledge may not be filtering across to operational levels. This will reduce the ability of companies to extract the most from their risk management strategy and, ultimately, will have a negative effect on profitability. Put in insurance terms, opportunities to recover losses from insurers are simply not identified on an all too often basis. This can be either due to a lack of knowledge of the breadth of cover available or, perhaps, a perception that making insurance claims will increase premiums in the future.

With an otherwise effective risk management strategy in place, it becomes even more important. The reimbursements not only provide financial recompense, but provide the insurer with valuable knowledge of the operational or commercial risks that are occurring. More importantly, it tests the insurance to ensure that it responds as it should do when it is required. The cost benefit to the assured is clear, but the long-term risk management benefits of stressing the insurance purchasing strategy are perhaps not as obvious, until a significant loss arises.