When I started working on my new book on agricultural commodity supply chain professionals, I quickly realised that I had significant gaps in my knowledge. One of the biggest was my complete ignorance of the world of insurance. I had worked for many years as a physical trader and broker, but we always traded FOBS or C&F. I don’t think I ever traded a CIF cargo. As I started to delve into the matter, the first thing that struck me was the connection between marine insurance and the law.
Lord Mance, formerly Deputy President of the UK Supreme Court, said,
“Insurance and the law are inextricably linked at all points. Insurance is not like making cars or widgets. It depends on agreements and wordings for its force and effect, and agreements and wordings depend on the law for their force and effect”.
The second thing I learned was that insurance is so incredibly complex that someone could write a whole book about it. Therefore, I was delighted to find someone who had written an entire book on the subject and could answer my stupid questions. I have always loved meeting fellow authors. Only an author can share Winston Churchill’s pain when he said,
“Writing a book is an adventure. To begin with, it is a toy and an amusement. Then it becomes a mistress, then it becomes a master, then it becomes a tyrant. The last phase is that just as you are about to be reconciled to your servitude, you kill the monster and fling him to the public.”
K.S. Vishwanath (Vish) has nearly 40 years of experience in marine insurance in India and the Far East. Since 2008, he has been a freelance consultant based in Bangalore. He has written a highly acclaimed book, Insuring Cargoes—A Practical Guide to the Law and Practice, published in the UK. The second edition was released in March 2023.
Vish told me that although there are many scholarly works on the subject, he felt there was still space on the bookshelf for a book written by a practitioner that focused on practice rather than theory. He wanted to write a book that provided solutions to the issues a practitioner confronts daily.
“The shipping industry is in turmoil with the events in the Red and Black Seas,” he told me. “Still, on a different level, the insurance sector’s most significant issues are excess capacity and severe competition. In many parts of Asia and Africa, this leads to the commodification of complex risks. The European markets are less affected.
“Many risks are complex to price. Insurers, hungry for premiums and profits, may not price them correctly.
“Insurers develop volatility in their books and must make a profit to build a reserve for any significant loss. An insurer will take a pyramid approach, where most of their business comes from a low frequency of claims, but one or two of those claims will be of high severity.
“The bottom line should always be at the back of your mind as an underwriter. Still, market and broker pressure may force you to introduce excess volatility into your book. Competition is severe. If I say no to a business, the brokers will say, ‘You’re cherry-picking—if you want profitable business from this client, you must also do some high-risk areas.’
“As an insurer, you must ask yourself, “Is my business sustainable over a long period? Am I being fair to the clients as well as my shareholders?” These are things which I would lose sleep over.”
“You mentioned that the insurance market is in turmoil because of the Red and Black Sea situations,” I said. “What are the issues there?”
“The Red Sea is one of the world’s most important shipping zones,” Vish told me. “An underwriter with less appetite for risk may say they will not write business for voyages via the Red Sea, but most companies will do the business but increase their rates. It increases traders’ costs.
“The other issue is that avoiding the Red Sea will increase transit time and adversely affect a moisture-sensitive cargo like grain. Going from the Red Sea through another climatic zone may lead to condensation issues in bulk cargoes.
“Sweating and condensation can be a particular problem for containers but may be excluded under the insurance. Desiccants only work for a limited time; they stop working if containers take longer routes or are otherwise delayed.
“Piracy is still a risk if you go through the Red Sea. Traders must ensure they get piracy extensions in their policies. Some bulk cargo owners only have the ICC clauses B and C. It is untested whether they cover piracy ransoms. It is preferable to get piracy extensions.
“The Dark Fleet is the biggest issue in the Black Sea. Some underwriters insure Dark Fleet ships, but if there’s a significant incident, there may be no recourse against the ship owner via the P&I Club (1). The IPOC typically covers an oil spillage but doesn’t cover the Dark Fleet. (2)
Another issue is that some vessels switch off their transponders as they approach the area. Russian exporters may take Ukrainian grains and mix them with Russian grains, but insurers or traders cannot know that.
“Imagine you are a trader,” I said, “what traps should I look out for when I insure a cargo?”
Most companies, even the big corporate trading houses, pay too little attention to insurance. Senior management must embed good insurance practices across the whole organisation. The CFO or the insurance manager may try to get the cheapest premium, but how about the coverage?
“What’s the deductible? Have you covered heat, sweat, and spontaneous combustion? Is rejection risk covered? The corporate office should drive risk management and insurance.
“First, appoint a good broker and don’t encourage brokers or underwriters who don’t ask for copious information. Brokers should be fussy with details and fully understand the business.
“Second, do a benchmarking exercise. How does my insurance programme compare with my competitors? A good broker should do a benchmarking exercise.
“An all-risk policy will not cover rejection, seizure, or condemnation by food, health, port, tax, or quarantine authorities,” he continued. “You require a rejection risk, which few people take. Insurers have little appetite for rejection insurance. There are specialist markets that write this class of business. The rates may be high, but at least attempt a small limit, start somewhere and cover rejection risk.
“What are the specific challenges for agricultural commodities?” I asked.“
Shortage is a big risk for any bulk cargo,” he told me. “The shortage could be due to various reasons.
“If there are multiple receivers and ports, it’s entirely possible that some excess delivery has been made to a receiver in another port or your port.
“The draft survey may not reflect this as the tendency is to match the draft survey with the bill of lading. A draft survey method is not an exact science but depends on the condition of the sea, the swell, the wind, and the surveyor’s experience.
Another issue concerns moisture, self-heating, and dust accumulation. Another risk is quarantine due to loss or fear of loss. Insurers sometimes specifically exclude the rejection of grains by some importing countries when grains arrive with traces of genetically modified crops.
“And of course, you have this piracy and general average, theft, water damage through bad weather. These are the usual claims.”
“There has been an increase in fraud by sellers and buyers over the past few years.
“An example of seller fraud would be when a surveyor fails to notice that a container has not been correctly sealed. When the surveyor leaves, the seller unplugs the seal, removes the cargo and puts some rubbish inside.
“There are three types of buyer frauds,” he continued.
“The first type is where a buyer and seller have been trading for a while and build trust between them. The seller agrees to discharge shipments against a letter of indemnity, but suddenly, there is a dispute, and the buyer refuses to pay.
“The second type of fraud is the one-time fellow who places an order with you, forges the bill of lading or signs the bill of exchange, takes delivery of the original bill of lading, and disappears.
“The third type is imposter fraud, where someone pretends to work for a big company, shows industry knowledge, creates an email ID that resembles a corporate email ID, and gives the name of a first-class bank but with a fake account number and address. The buyer then intercepts or forges the documents, discharges the cargo, and disappears.
“Watch out for red flags. Go to a trade body like the Chamber of Commerce or the company to ask whether they know this email or this person or if it is fake. You should never enter today’s market with an unknown buyer or seller.”
“Are there things that you should particularly watch out for containers?” I asked.
“For general cargo like machinery, toys, and electronic items, containerisation is a better risk for insurance companies than shipment in break bulk. Still, containers will have problems with coffee, cashew nuts, and grains because of heat-sweat issues. Containerisation has reduced losses but has not eliminated them.
“Damages, theft, pilferage, water damage, and piracy are common claims in containers and breakbulk.
“How is technology affecting the insurance world?” I asked.
“There is an issue with automated crew-less vessels,” Vish told me. “How will they reduce losses? Will General Vverage come down? Will they encourage piracy? We need to see.
“Artificial intelligence will streamline claims processes. It can give you an online platform where claims and documentation are more straightforward. It can help underwriters generate proper premiums through data analytics.
“The sky is the limit for technology. Embrace it or be left behind.”
“Do claims often end up in court?” I asked.
“Insurers in the US and Europe don’t deny legitimate claims,” he replied. “They will negotiate, but they won’t deny. Most European and American companies have a strict Chinese wall between underwriting and claims to avoid the temptation for the underwriter to increase profitability by reducing the claims. Arbitration is compulsory in Western markets, but arbitration is only for quantum disputes, not for determining liability in India.
“If somebody files a case in a court in India, it will take 15-20 years before a judgment comes. By then, I will have retired from the insurance company and collected my bonus. So why should I bother? Compulsory arbitration would resolve this.”
“Could you give me a pre-trade checklist for insurance?” I asked.
“Absolutely,” he replied.
“The most important thing is to spend time on insurance. Don’t go for the lowest possible rate. Identify brokers or experts. Benchmark your program and spend some time on risk engineering. Identify insurance companies with an excellent claims-settling philosophy.
“You should then consider your chartering philosophy and how you select a vessel. Do I go for the cheapest ship, or do I go for a good-quality one? You may save on freight today, but what if a 5-million-dollar claim is not payable?
“Look for any gaps in my coverage. Consider taking rejection risk insurance. It is costly, but ask whether it is better to have it. Identify any unique exposures in your business and tell your insurance company about them.”
“And for companies in general?” I asked.
“Companies should use insurance to protect their balance sheets. Large corporates often forget this and go for the cheapest premium instead of ensuring best-in-class coverage backed by risk management. As a consultant, I have always told my clients that insurance should be driven from the top to embed the right message within the organisation.
I’ll give you an example of a textile mill in India whose products were brand names here. A new CFO joined them, saying, “This is not a low-lying area. We have a water shortage in this area. Why are you paying $50,000 for flood insurance? Cancel it.” The board applauded the decision, but there was a freak flood the following year, and the company went bankrupt.
Protect yourself against anything which can ruin your balance sheet, even though the chances of that happening are rare.
Notes
(1) A P&I club is a mutual insurance association that provides members with risk pooling, information, and representation. Unlike a marine insurance company, which reports to its shareholders, a P&I club reports only to its members. Originally, P&I Club members were typically shipowners, ship operators or demise charterers, but more recently, freight forwarders and warehouse operators have been able to join. Source Wikipedia
(2) Click here to read more about the risk implications of the Dark Fleet.
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Jonathan, I enjoyed talking to you. Thanks for posting this.
I wish to clarify my response to the piracy question. ICC (A), which is an all-risks form, covers piracy, including ransom which is recovered under General Average. ICC (B) or (C) do not. However, there is a legal opinion that ransom could be recovered under the “riots” section of the Institute Strike Riot and Civil Commotion Clauses (SRCC). I suggested that cargo owners should choose ICC (A) cover as courts have not yet tested the recoverability of ransom under “riots.”
Wish to add a few more comments.
1. IPOC : ( I meant IG Clubs). What I said was no member of the International Group of P& I Clubs (IG Club) would cover the dark fleet. So, recovery for cargo losses would be impossible. Also without a P& Insurance, wreck removal, liability for pollution etc. would go uninsured. (2) I am not sure that I said in western countries arbitration was compulsory. What I mean is in India where there is a long pendency in courts, the insurance regulators could have explored possibility of making arbitration mandatory or at least nudge the insurance industry to embed ADRs into their contracts.