Marketing discussion

Alex smith

mktg_4220_4e_ch_10_53.pptx

Home >Business & Finance homework help >Marketing homework help >Marketing discussion

Chapter 10

Marketing 4220

International Sourcing, Logistics

& Transportation

International Insurance

5/25/2015

International Insurance

Perils of International Shipments

Risk Management

Insurance Policies

Lloyd’s of London

Commercial Credit Insurance

International Insurance (1 of 2)

There are many pitfalls in international insurance:

Many of the risks are misunderstood. While historically most shippers were located near sea ports, today most are located inland and have no idea what dangers international shipments face.

The complexity of the field is substantial: not only is there a minimum of six different standard insurance policies, but there are also countless variations in the specific clauses that can be included or excluded.

The vocabulary used is unique, with several terms have completely different meaning than in everyday language. It is important to learn some insurance vocabulary.

International Insurance (2 of 2)

The problems are compounded by the fact that:

The Incoterms® rules are somewhat misleading. Although both CIF (Cost, Insurance, and Freight) and CIP (Carriage and Insurance Paid) mention insurance, they refer to the most basic coverage available, which is inadequate for many goods.

The carriers offer very limited coverage.

Under the various international liability conventions, carriers offer very basic coverage, with very low limits, and are exempt of liability in many cases.

International Insurance - Glossary - (1 of 4)

A risk is the chance (or the probability) of a loss. Several types of risks exist:

Speculative Risk

The chance (or probability) of a loss or a gain. Not insurable.

Pure Risk

The chance (or probability) of a loss. Insurable.

Objective Risk

The actual probability of a loss, determined from actuarial data.

Subjective Risk

The perceived probability of a loss by an individual or company.

International Insurance - Glossary - (2 of 4)

Insurance policies cover specific perils and the premiums are based on the hazards of a particular shipment:

Peril

The event that brings about a loss. E.g., theft, loss or piracy.

Hazard

A situation that increases the probability of a peril and therefore of a loss.

Certain regions of the world are more hazardous than others.

International Insurance - Glossary - (3 of 4)

Marine Cargo Insurance policies use unusual vocabulary, specific to the types of perils that a cargo faces in an international voyage:

General Average

A loss incurred on an ocean voyage that is general in the sense that it involves all of the cargo owners on board.

If the captain of the ship saves a portion of the cargo by unloading some of the cargo at sea, it is also a general average.

Particular Average

A partial loss incurred by a cargo owner on an ocean voyage.

International Insurance - Glossary - (4 of 4)

Other types of perils of an international voyage:

Jettison

The act of throwing overboard part of the cargo of a ship (or the fuel of an airplane) in an attempt to lighten the ship.

Barratry

An act of disobedience or willful misconduct by the captain or the crew of a ship that causes damage to the ship or the cargo.

Perils of the Sea

Cargo at sea can be damaged by a number of perils:

Cargo movement

Water damage

Fire

Sinking and Stranding

Piracy

Theft

Collision

... and several more

Cargo Movement

Cargo can be damaged by careless handling while being loaded and unloaded.

Ship Movement

A shipment by ocean is

subjected to numerous

ship movements

Wave Damage

In stormy seas, waves

pound the ships and can

damage the containers

On board

Water Damage

As ships encounter stormy seas, waves wash overboard and can slowly

infiltrate the containers or cargo on board.

Overboard Losses

Containers are tied down, but

the lash bars can fail, causing

container stow collapses.

Dangerous cargo can only travel internationally by ocean, and ships’ ability to fight fires is limited.

Fire

Stranding

Ships can get stranded

when their machinery

or engines break down.

Sinking

Ships can be damaged

by rough seas and sink.

Ships can be attacked by pirates. Here, the ransom is dropped onto the Sirius Star.

Piracy

Collision

Ships are far from maneuverable. Sometimes, collisions happen and

cargo is delayed or damaged

Theft

Theft is a much greater risk on shore, specifically in transit to the port of departure and from the port of arrival, but it is a significant concern.

Pilferage

Unplanned theft, based upon the opportunity to steal cargo.

Organized Theft

Deliberate and carefully-planned theft of cargo or containers.

System’s Theft

The use of technology to access the files of a particular shipment and steal it. That way the theft may not be detected for a few days.

Other Perils of the Sea

Ocean cargoes are exposed to a number of other perils:

Other cargo contaminating or affecting the cargo

Stowaways damaging the cargo

A government seizing or arresting the ship

The owners of the ship declaring bankruptcy

The port shutting down because of a strike

Weather delaying loading or unloading of the cargo

... and more.

General Average

The concept of general average is unique to marine insurance.

If there is a major loss during a voyage, the costs are shared by the owner of the ship and all of the cargo owners, including the owners of the goods that were not damaged.

In other words, if 25 percent of the containers of a ship (and the ship) are damaged in a fire, then the owners of the undamaged containers (75 percent of the cargo) are held financially responsible for the losses to the 25 percent and to the ship owner.

The concept is that all parties have a vested interest in a successful voyage and therefore, they all share the risk.

Air Shipment Perils (1 of 2)

Although there are generally fewer perils in air transportation than in ocean transportation, goods are still exposed to many of the same risks:

Cargo handing (before loading and after being unloaded)

Cargo movements (significant accelerations and decelerations as well as turbulence “bumps” during flight)

Theft and pilferage (especially since high-value goods are often shipped by air)

Water damage (cargo can be left on the tarmac, exposed to the elements)

However, there are risks specific to air shipments.

Air Shipment Perils (2 of 2)

There are two risks specific to air shipments:

Changes in temperature

Cargo enroute from a tropical area (Singapore) to another warm-weather area (Los Angeles) may transit at an airport such as Anchorage, exposing the goods to potentially very cold temperatures, even though the shipper did not expect them to be.

Changes in atmospheric pressure

Cargo may be placed in aircraft that are only partially pressurized, or may be not pressurized at all (less likely).

Risk Management

A company involved in international trade can manage its exposure to international transportation risks in one of three ways:

Retain the risks

Transfer the risks to an insurance company

Adopt a mixed approach

The difficulty in determining the proper strategy is the correct assessment of the risks of a particular shipment.

Risk Retention

Some companies decide it is more economical not to purchase insurance for international transportation risks. They are:

Very large international traders with many shipments. Their insurance premiums would be higher than the expected values of their losses.

Exporters or importers with little exposure. They are shipping or buying goods of such little value, in such small shipments, that a loss would have few financial consequences.

Exporters or importers that have little relative exposure because international transactions represent such a small percentage of their business.

Firms that do not evaluate their international transportation risks clearly.

Risk Transfer

Some firms decide it is best to transfer their international transportation risks to an insurance company. In exchange for a premium, these firms are covered against their losses:

Firms with high exposure. The value of the goods they ship is high, and the loss of some of these shipments would be a substantial financial blow to their operations.

Firms with high relative exposure. Even though the amounts at stake may be small, they are relatively high for these firms, as a percentage of their sales.

Firms that lack experience in international trade. They insure because they are uncomfortable with the risks involved or are unable to properly assess their exposure.

Mixed Approach

A firm can use a mixed approach, retaining some of the risk and transferring the rest. This strategy can be achieved in two different ways:

The decision is made based upon the maximum amount of exposure that a firm is willing to risk: this objective is traditionally achieved with the use of a deductible or a franchise.

The decision is made based on the types of risks the firm is willing to take and those that it would rather transfer to an insurance company.

Marine Cargo Policies (1 of 3)

There are two possible ways to purchase marine cargo policies:

Open Cargo Policy

An insurance contract with which a firm insures every international shipment it makes for a fixed period of time. Such a policy is formally known as an Open Ocean Cargo Policy and it automatically covers all the shipments of the insured.

Special Cargo Policy

An insurance contract valid for one specific shipment.

Marine Cargo Policies (2 of 3)

Marine Cargo Insurance can be purchased from two sources:

An insurance agent, who can assist the firm in obtaining the most appropriate coverage, given its product mix and its risk management strategy; as such, agents sell most open ocean cargo policies.

A freight forwarder, who can provide “generic” coverage for a given shipment almost immediately; as such, freight forwarders sell a lot of special cargo policies.

Marine Cargo Policies (3 of 3)

There are two major groups of policies that can be purchased in order to protect cargo during an ocean or air shipment:

The first group is governed by British Law and was completely rewritten in 1982, and modified further in 2009. This group of insurance policies seems to have become the standard for many countries. They are known as the Institute Marine Cargo Clauses policies, Coverage A, B or C.

The second group is older, with some antiquated clauses and more modern ones, and is mostly written by U.S.-based insurance companies. These traditional policies are known as “All Risks,” “General Average” and “Free of Particular Average” policies.

Coverage Exclusions

Regardless of the coverage purchased, insurance policies will not cover the following risks:

Improper packaging—Damage caused by packaging insufficient for an international ocean or air voyage.

Inherent vice—Damage caused by an ordinary natural change in the goods; wood warping, steel rusting, ... and like items.

Ordinary leakage—Decrease in weight due to evaporation, ordinary wear and tear (miles on a vehicle transported).

Unseaworthy vessel

Nuclear war

Institute Cargo Clauses - Coverage A -

Coverage A is an all-risks policy in that it covers “all risks of loss or damage to the subject-matter insured,” except for some risks that are specifically excluded, such as war, seizure of the cargo or ship by a government or strikes and civil disturbances.

A policy written with Coverage A of the Institute Marine Cargo Clauses is identical in all countries.

Coverage A is the maximum coverage that an exporter or an importer would need to purchase in the case of a shipment traveling on most trade lanes in the world.

Institute Cargo Clauses - Coverage B -

Coverage B is a “named perils” policy, as it lists specifically the risks that it will cover.

The list of covered perils includes fire, stranding, sinking, collision, jettison, washing overboard, water damages, and total losses during loading and unloading; however, not covered include losses due to bad weather, partial losses happening during loading and unloading of the ship, theft, condensation and improper stowing by the carrier.

Coverage B is best for goods that have a good tolerance for bad weather, such as bulk raw materials including coal, iron ore, polymer pellets and lumber.

Institute Cargo Clauses - Coverage C -

Coverage C is also a “named perils” policy. The list of covered perils is limited to fire, stranding, sinking, collision and jettison; it does not include washing overboard, rough weather or water damages and losses during loading and unloading.

Coverage C is the minimum coverage required by the Inco- terms CIF and CIP.

It is insufficient for most containerized goods, with the possible exception of goods that are unlikely to be affected by an international voyage in any way, and if lost overboard, would not be a major loss. There are very few cargoes that fit this description.

All-Risks Policies

An “All Risks” policy is an older—but still very common policy, used particularly in the United States. All-risk policies are not standardized, unlike Coverage A.

Under all-risks policies, all risks are covered, except those specifically excluded. For example, an all-risks policy often excludes the risk of war.

All-risks policies can be written with U.S. or British clauses and coverage is different based upon that determination. For a United States all-risks policy to be enforceable, the goods have to be shipped “under deck.”

Finally, all-risks policies are written in non-contemporary English terms, which makes them difficult to comprehend.

With Average Policies

A “With Average” policy is a “named perils” policy: only those perils that are listed in the policy are covered, not any others.

This type of policy covers fewer perils than an all-risks policy, but a few more than a Coverage B policy. Traditionally, a with-average policy excludes condensation damage to the goods, theft, improper stowage by the carrier, leakage and breakage, but does cover heavy seas and damage occurring while loading and unloading.

With-average policies vary substantially, and great care should be taken in making sure a specific peril is covered. They are written in non-contemporary English and include clauses that are either U.S. or British clauses.

Free of Particular Average Policies

“Free of Particular Average” policies are named-perils policies, that cover total losses, but only cover partial losses in some circumstances.

A free-of-particular-average policy would cover partial losses if they result directly from a fire, a stranding, a sinking, or a collision (American version), or if they occur on the same voyage that a fire, a stranding, a sinking or a collision occurs, without these perils having directly caused the loss (English version).

Free-of-particular-average policies cover fewer perils than with-average policies, such as damage to the goods while loading and unloading. They are not appropriate for most goods.

Marine Cargo Clauses (1 of 4)

Some clauses will always be included in a marine insurance cargo policy. Here are some of them:

General Average

The insurer will cover the General Average responsibilities of a shipper toward the ship owner and other cargo owners.

Constructive Total Loss Coverage

The insurer will reimburse the shipper for goods that have been abandoned after a stranding or a sinking, as long as the costs of recovering the goods and making them marketable is greater than their value. If it is possible to recover the goods at a cost lower than their value, then the insurance company pays for these costs.

Marine Cargo Clauses (2 of 4)

Sue and Labor

The shipper will act in the best interest of the insurance company when a loss occurs. The principle is that, after a loss, the insured should protect the cargo from further damage, as it would if it had not been insured, in order to keep the loss to a minimum. The insurer will pay for the costs of protecting the cargo.

Inchmaree Clause

A clause which ensures goods are covered in the event of a burst boiler, broken propeller shaft, as well as errors in navigation and seamanship.

Marine Cargo Clauses (3 of 4)

Strikes Coverage

All standard policies include a clause, called the “Strikes, Riots, and Civil Commotions” (S.R. & C.C.) clause in the American policies and the “Strikes Exclusion" clause in the Institute Marine Cargo policies, which excludes coverage of damage to cargo due to strikes and other civil disturbances.

War and Seizure

A clause that excludes coverage of damage to cargo due to war and warlike situations, such as the seizure of a ship by a foreign government or the accidental collision of a ship with a mine. American policies call this clause the “Free of Capture and Seizure” clause.

Marine Cargo Clauses (4 of 4)

Some policies will add clauses to standard coverage:

Warehouse to warehouse Coverage

An addition to a policy which covers the goods from the time they leave the exporter's warehouse until the time they arrive at the importer's warehouse, or fifteen days after they arrive in the port of destination, whichever occurs first.

Difference in Conditions

An addition to a standard policy, “Difference in Conditions” coverage is designed to fill the gap between what an importer would like to have covered under its open cargo policy and what is covered under its supplier's CIF or CIP coverage.

Other Marine Insurance Policies (1 of 2)

Hull Insurance

Hull insurance is contracted by the ship owner to cover the risk of damage to the ship when it is involved in a peril, such as grounding or fire. It also covers the owner in case of a complete loss, such as a sinking.

This policy also covers the ship owner‘s liability toward the cargo owners in the case of a general average.

Other Marine Insurance Policies (2 of 2)

Protection and Indemnity

Protection and Indemnity (P&I) is another form of insurance for a ship owner; it is a protection against liability to other parties when a ship sinks or is damaged.

In the last few decades, it has meant liability for oil spills —specifically cargo spills, but also ship fuel spills—in the oceans, on beaches, including their extensive clean-up costs.

However, it also includes the ship owner’s liability toward the crew (injury, death) or in repatriating stowaways.

P&I insurance is provided by P&I Clubs, groups formed by ship owners to share their mutual liabilities.

Airfreight Cargo Policies

Airfreight cargo policies mirror the coverage provided under Coverage A of the Institute Marine Cargo Clauses, or provided by an all-risks policy. However, they exclude:

Improper packing

Inherent vice

Ordinary leakage

Un-airworthy aircraft

Nuclear war

Filing an Insurance Claim

There are several steps in filling a proper insurance claim:

Notifying the insurance carrier

Protecting of the damaged cargo

Filing the claim

Understanding carrier liability limits

The liability limits of carriers, both ocean and air, are significant and are covered in Chapters 11 and 12.

Lloyd’s of London (1 of 3)

Although it is often considered an insurance company, Lloyd's of London is actually the oldest insurance market in the history of shipping.

An insurance company makes a profit from the difference between a large number of small premiums (its revenues) and a small number of large losses (its expenses).

Through Lloyd’s, insurance policies are written for risks that are uncommon or risks that do not generate a lot of premiums; therefore, traditional insurance companies cannot use their traditional business model.

Lloyd’s of London (2 of 3)

Through Lloyd’s, companies that need a risk covered are placed in touch with syndicates, or groups of people who are willing to take that risk.

Syndicates are made up of members who:

Share the premium proceeds if there is no loss

Share the costs of the loss if there is a loss

A syndicate is therefore made up of members who wager that a loss will not occur. They “win” when there is no loss and “lose” when a loss does occur.

Lloyd’s of London (3 of 3)

Members of a syndicate can either be:

Bespoke Names — individuals with great wealth who join a syndicate to add to their investment portfolio.

Corporate Members — corporations that join a syndicate to increase their diversification strategy.

Bespoke Names have the distinct characteristic of having unlimited liability (on all their personal assets) for the risks that the syndicate undertakes. Corporate Members have limited liability.

Because of this characteristic, syndicates are increasingly composed of corporate members.

Credit Insurance (1 of 4)

International commercial transactions include their own risks:

Commercial Risk

The risk presented by the customer defaulting on its obligation to pay, for whatever reason. For example, a customer encounters financial difficulties or has a complaint about the product and withholds payment.

Political (or Country) Risk

The risk presented by the country in which the transaction takes place. For example, the government raises tariffs, freezes accounts of foreign currencies, or the country does something to cause other countries to institute an embargo against them.

Credit Insurance (2 of 4)

Commercial and political credit risks can be managed in the same manner as transportation risks:

Retain the risk

Transfer the risk to an insurance company

Follow a mixed strategy of retaining some of the risks and transferring others.

Credit Insurance U. S. Programs (3 of 4)

Export-Import Bank (Ex-Im Bank)

Its mission is to help create jobs in the United States by supporting export sales. It offers political credit insurance and loan guarantees.

Overseas Private Investment Corporation (OPIC)

Its purpose is to encourage private investments in developing countries. OPIC offers several programs of loans, political insurance, and private equity investment funds.

Small Business Administration (SBA)

SBA has programs designed to help exporters finance sales abroad: working capital loans and long-term loans for capital investments.

Credit Insurance Private Companies Products (3 of 4)

Foreign Credit Insurance Association (FCIA)

FCIA offers products that combine the Ex-Im Bank's political insurance coverage and commercial credit insurance products.

Lloyd’s of London

Certain Lloyd's syndicates have added coverage of political risks to their underwriting portfolio and present the advantage of offering insurance to countries for which the United States' government will not provide coverage, such as Afghanistan, Albania or Belarus.

Private Insurance Companies

Companies such as Euler-ACI and COFACE offer commercial credit insurance policies.