Rebounding Economy Spurs Growth in Cargo, Supply Chain Risks

By | October 22, 2012

A slow trend toward economic recovery in the U.S. may mean good news/bad news for insurance agents and brokers who handle commercial accounts with cargo and supply chain vulnerabilities.

The good news is growth in sales and manufacturing will generate increased need for insurance coverage and risk management services for such exposures. The bad news is that agents and brokers who are unfamiliar with these types of risks may find themselves in over their heads if they haven’t learned the ins and outs of both their clients’ businesses and the appropriate insurance products and services to mitigate those risks. (For more on economic growth, see sidebar “A Growing Economy,” below.)

One important thing that agents and brokers need to know is that just about any commercial account has some vulnerability to supply chain issues, according to Don Harrell, senior vice president, Marine, at Liberty International Underwriters.

During a recent webinar hosted A.M. Best and sponsored by LIU, Harrell cited the top 12 industries that are expected to experience growth over the next 10 years, areas where LIU believes “agents and brokers and underwriters should focus their attention.”

These industries include: health care; health sciences; energy (traditional); alternative energy; petrochemical; agriculture; natural resources; technology (including bio technology); light manufacturing; insourced manufacturing; export-oriented industries; and shipping (rail, marine, trucking), Harrell explained during a recent webinar sponsored by LIU and A.M. Best.

“As you can see … everything has an element that has cargo and logistics and risks associated that happen along supply chain,” Harrell said.

The Biggest Threat

Natural catastrophes get lots of attention but the number one issue for supply chain risks is cargo theft, Harrell said.

“The biggest issue that we see historically and today is theft. The increase in cargo theft is a major problem,” he said. “If you look at organized crime, [there are] some staggering statistics around the estimated total crime and retail losses on an annualized basis. It’s close to $30 billion a year; it’s a huge problem. … Over 90 percent of retailers today — small, medium and large — are affected.”

From a geographic perspective, states where cargo enters the country and where it is stored are the most vulnerable, Harrell said.

The top 10 states for cargo theft, according to CargoNet’s Second Quarter 2012 U.S. Cargo Theft Report, are: California, Texas, Florida, Illinois, New Jersey, Georgia, Pennsylvania, Alabama, South Carolina and Tennessee.

By product type, food and drink are most often stolen, followed by home and garden products, clothing, and electronics. “Anything that can be sold on the street; anything that people can use or consume, it is a target for theft,” Harrell said.

CargoNet, an organization focused on preventing cargo theft and increasing recovery rates, noted that in the second quarter of 2012 warehouse/distribution centers, surpassed truck stops as the primary locations where cargo thefts occur. Parking lots, terminals and terminal yards also ranked high on the list of common sites of cargo theft.

Generally, the thefts are not random, Harrell said. There’s “a lot of inside information being given to the wrong people. … They know what they want and they know what they are going after and they do everything they can to get it.”

The issue of accumulation, too, is a huge challenge for the insurance industry. “Most cargo unless it’s sitting in a warehouse is in transit, it’s moving somewhere along the supply chain,” Harrell said.

An insurer could potentially have the cargo of multiple clients on any one container ship or sitting in any one port, he said. “If it happens to be the time when Hurricane Isaac hits, or some other hurricane, you can have multiple clients exposed.”

It’s challenging for both the shipper and the insurer to understand the accumulation issue, Harrell said. It’s much easier for the insurance industry to measure static exposures — such as warehousing and property values — especially with improvements in data gathering.

“It’s just a matter if you can have access to that data,” he said.

Know the Coverage

“Risk can’t be 100 percent avoided,” said Patrick Ryan, vice president, Marine, for LIU, who also participated in the A.M. Best webinar. So it’s important for businesses that rely on cargo transit to partner with the right shipper, partner with the right producers and make sure those producers have the right contacts with the right underwriting companies, he added.

Ryan suggested several questions a potential client should consider when it comes to selecting producers, underwriters and insurance carriers, such as: “What sort of long-time experience have the underwriters and producers had in the international insurance industry? Do the [insuring] companies have the right claims expertise? Do they have the right risk engineering expertise to take a look at each risk and make specific recommendations?”

Good risk management on the part of the insurance provider includes being involved in selecting a shipper, as well as “in where the goods are going, in the packing, making recommendations to avoid the risk even before the risk starts. The more information you can get, the more information that you can disseminate to [your client], the more expertise you can lend, the better risk you’re going to have,” Ryan said.

Coverage for domestic and worldwide transits — whether by vessel, air, truck or rail — currently is very broad, Ryan said, noting that carriers are being pushed to add additional coverages, such as stock storage, foreign inland transit, processing and installations.

For their own protection and that of their clients, “agents and brokers need to really know the terms of coverage and they need to explain it to their clients,” said Joe Grasso, a partner in Wiggin and Dana’s Litigation Department and co-chair of its Insurance Practice Group. “There may be a sophisticated risk manager involved, most likely there’s not. So the agents and brokers should communicate, communicate, communicate with their clients and let them know all of the terms of coverage.”

Grasso, who serves as counsel to the American Institute of Marine Underwriters and the Inland Marine Underwriters Association, noted that for agents and brokers, there are liabilities that have been around forever. “One of them of course is that as a broker or agent, you have to be very careful that you are communicating all material information to the underwriter. And there’s got to be an open line of communication in both directions,” said “You have to make sure that you are obtaining the coverage your client wants, and that your client understands what the coverage is.”

A Growing Economy

Media reports notwithstanding, the U.S. economy, while sluggish, is not in danger of going over the fiscal cliff.

That’s according to a couple of insurance industry executives, who say that private sector job hiring is up, the housing industry is slowly improving and manufacturing is making a comeback in the United States.

“I think some of the numbers show that particularly for the U.S. things are actually looking much better … the trends are looking better,” said Don Harrell, senior vice president, Marine, at Liberty International Underwriters, while participating in a recent webinar hosted A.M. Best and sponsored by LIU.

“Economic growth will continue but it will continue modestly throughout the next year, 12 to 18 months,” Harrell said. “GDP growth is expected by the end of this year to be about 2 percent this year, as it grows, it’s going to grow next year up to about 3 percent.”

Harrell’s comments echoed those made a little over a month earlier by Insurance Information Institute President and Chief Economist, Dr. Robert Hartwig.

“Despite the 24/7, 365, bad news you hear from you hear on CNBC, the world is not coming to an economic end,” Hartwig said during a presentation at the Insurance Council of Texas insurance symposium in July.

“Consumer spending is actually up. Business lending is actually up. … People are spending more on their credit cards. … New home sales are actually up and prices are up. There are a lot of little things to be positive about,” Hartwig said. “Business bankruptcies are falling. The housing market, yes its weak, but again, some improvements. Inflation is very, very tame. The private sector hiring, although anemic, is still positive, which is something we couldn’t say four or five years ago.”

Manufacturing is recovering compared with the past couple of years, Harrell said. “The value of manufacturing shipments in June 2012 was up 32 percent since June 2009,” he said. That growth in value is a “very good indicator on how manufacturing is doing in the U.S.”

Harrell said there has been a “huge growth in durable goods; primary metals are up 20 percent over the last year; manufacturing and machinery, up 11 percent, fabricated metals up are up 6.5 percent. Even the non-durable goods are up. What this means is that the U.S. is manufacturing more … and exporting that more than they did last year. That means the demand on U.S. products is there. That means the growth of our importers and exporters and our manufacturers is positive.”

Hartwig said that while construction has a long way to go before it gets back to what is considered a normal level activity, the good news that the growth that is happening in the construction is occurring in manufacturing and energy sectors. And, it’s occurring entirely in the private sector.

That’s good news, he said, “Because construction in manufacturing and the power business are long term investments. …You don’t build a power plant with the expectation that you’re going to run it for six months. You have the expectation that you’re going to run it for half a century at least, the same thing with manufacturing facilities. That implies hiring down the road.”

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