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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\u2019t 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.<\/p>\n
Lord Mance<\/a>, formerly Deputy President of the UK Supreme Court, said,<\/p>\n \u201cInsurance 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\u201d.<\/em><\/p>\n 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\u2019s pain when he said,<\/p>\n \u201cWriting 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.\u201d <\/em><\/p>\n 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\u2014A Practical Guide to the Law and Practice<\/a>,\u00a0published in the UK. The second edition was released in March 2023.<\/p>\n 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.<\/p>\n \u201cThe shipping industry is in turmoil with the events in the Red and Black Seas,\u201d he told me. \u201cStill, on a different level, the insurance sector\u2019s 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.<\/p>\n \u201cMany risks are complex to price. Insurers, hungry for premiums and profits, may not price them correctly.<\/p>\n \u201cInsurers 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.<\/p>\n \u201cThe 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, \u2018You\u2019re cherry-picking\u2014if you want profitable business from this client, you must also do some high-risk areas.\u2019<\/p>\n \u201cAs an insurer, you must ask yourself, \u201cIs my business sustainable over a long period? Am I being fair to the clients as well as my shareholders?\u201d These are things which I would lose sleep over.\u201d<\/p>\n \u201cYou mentioned that the insurance market is in turmoil because of the Red and Black Sea situations,\u201d I said. \u201cWhat are the issues there?\u201d<\/p>\n \u201cThe Red Sea is one of the world\u2019s most important shipping zones,\u201d Vish told me. \u201cAn 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\u2019 costs.<\/p>\n \u201cThe 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.<\/p>\n \u201cSweating 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.<\/p>\n \u201cPiracy 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.<\/p>\n \u201cThe Dark Fleet<\/a> is the biggest issue in the Black Sea. Some underwriters insure Dark Fleet ships, but if there\u2019s a significant incident, there may be no recourse against the ship owner via the P&I Club (1). The IPOC<\/a> typically covers an oil spillage but doesn\u2019t cover the Dark Fleet. (2)<\/p>\n 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.<\/p>\n \u201cImagine you are a trader,\u201d I said, \u201cwhat traps should I look out for when I insure a cargo?\u201d<\/p>\n 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?<\/p>\n \u201cWhat\u2019s the deductible? Have you covered heat, sweat, and spontaneous combustion? Is rejection risk covered? The corporate office should drive risk management and insurance.<\/p>\n \u201cFirst, appoint a good broker and don\u2019t encourage brokers or underwriters who don\u2019t ask for copious information. Brokers should be fussy with details and fully understand the business.<\/p>\n \u201cSecond, do a benchmarking exercise. How does my insurance programme compare with my competitors? A good broker should do a benchmarking exercise.<\/p>\n \u201cAn all-risk policy will not cover rejection, seizure, or condemnation by food, health, port, tax, or quarantine authorities,\u201d he continued. \u201cYou 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.<\/p>\n \u201cWhat are the specific challenges for agricultural commodities?\u201d I asked.<\/span>\u201c<\/span><\/p>\n Shortage is a big risk for any bulk cargo,\u201d he told me. \u201cThe shortage could be due to various reasons.<\/span><\/p>\n \u201cIf there are multiple receivers and ports, it\u2019s entirely possible that some excess delivery has been made to a receiver in another port or your port.<\/p>\n \u201cThe 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.<\/p>\n 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.<\/span><\/p>\n \u201cAnd of course, you have this piracy and general average, theft, water damage through bad weather. These are the usual claims.\u201d<\/p>\n \u201cThere has been an increase in fraud by sellers and buyers over the past few years.<\/p>\n \u201cAn 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.<\/p>\n \u201cThere are three types of buyer frauds,\u201d he continued.<\/p>\n \u201cThe 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.<\/p>\n \u201cThe 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.<\/p>\n \u201cThe 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.<\/p>\n \u201cWatch 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\u2019s market with an unknown buyer or seller.\u201d<\/p>\n \u201cAre there things that you should particularly watch out for containers?\u201d I asked.<\/p>\n \u201cFor 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.<\/p>\n \u201cDamages, theft, pilferage, water damage, and piracy are common claims in containers and breakbulk.<\/p>\n \u201cHow is technology affecting the insurance world?\u201d I asked.<\/p>\n \u201cThere is an issue with automated crew-less vessels,\u201d Vish told me. \u201cHow will they reduce losses? Will General Vverage come down? Will they encourage piracy? We need to see.<\/p>\n \u201cArtificial 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.<\/p>\n \u201cThe sky is the limit for technology. Embrace it or be left behind.\u201d<\/p>\n \u201cDo claims often end up in court?\u201d I asked.<\/p>\n \u201cInsurers in the US and Europe don\u2019t deny legitimate claims,\u201d he replied. \u201cThey will negotiate, but they won\u2019t 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.<\/p>\n \u201cIf 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.\u201d<\/p>\n \u201cCould you give me a pre-trade checklist for insurance?\u201d I asked.<\/p>\n \u201cAbsolutely,\u201d he replied.<\/p>\n \u201cThe most important thing is to spend time on insurance. Don\u2019t 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.<\/p>\n \u201cYou 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?<\/p>\n \u201cLook 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.\u201d<\/p>\n \u201cAnd for companies in general?\u201d I asked.<\/p>\n \u201cCompanies 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.<\/p>\n I\u2019ll give you an example of a textile mill in India whose products were brand names here. A new CFO joined them, saying, \u201cThis 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.\u201d The board applauded the decision, but there was a freak flood the following year, and the company went bankrupt.<\/p>\n Protect yourself against anything which can ruin your balance sheet, even though the chances of that happening are rare.<\/p>\n Notes<\/p>\n (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<\/a><\/p>\n (2) Click here<\/a> to read more about the risk implications of the Dark Fleet.<\/p>\n \u00a9 Commodity Conversations\u00ae 2024<\/p>\n This is an\u00a0excerpt from my new book,\u00a0Commodity Professionals\u2014The People Behind the Trade, <\/strong><\/span>now available on Amazon<\/a>.<\/p>\n 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 … <\/p>\n![\"\"](\"https:\/\/i0.wp.com\/commodityconversations.com\/wordpress2\/wp-content\/uploads\/2024\/04\/Image-18.04.24-at-10.57.jpeg?resize=215%2C300&ssl=1\")
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