Industry Profile: Risk Transfer Fallacies in Shipping
Basham, Blair, Risk Management
Acme Manufacturing makes widgets at its factories in Asia and sells them all over the world. To get the widgets from the factories to the stores, Acme contracts XYZ Movers. This makes Acme a shipper. XYZ Movers transports the widgets with its own ships or makes arrangements to have them moved. This makes XYZ a carrier. The risk manager's concern in this relationship is the legal contract that determines which party takes responsibility for the widgets while in transit.
If only it were so cut and dry.
Out in the real world, the transportation industry is in deep trouble. The global economy is sagging, freight rates are dropping sharply, sailing schedules are being trimmed and terrorist attacks are pushing up insurance premiums. Tighter security at seaports and airports is sure to cut the industry's profits, while inspections of vessels, cargoes and crews have intensified, threatening to increase delays.
These headlines may worry the world's major shippers, but the freight carriers are the ones stuck in the middle. As insurance companies raise rates and tack on war risk surcharges and premiums, the shippers are trying to transfer the responsibility of insurance onto the carriers. This presents a dilemma for carriers, part of which is caused by the confusion between liability insurance (which carriers purchase) and shipper's interest insurance (which shippers purchase).
Where the Risk Goes
The carrier purchases PEI (protection and indemnity) liability insurance, which covers third party damage and liability for the cargo while it is in the carrier's care, custody and control. The shipper can and often does carry shipper's interest insurance, which protects the shipper's interest on its cargo. The carrier, however, is not a party to this insurance. In fact, shipper's interest insurance is predicated on the notion that the insurance company will have subrogation rights against the carrier if the carrier damages the cargo. All carriers seek to limit their liability, and normally their pricing (freight rate) is based upon these limits, which means higher rates for increased liability assumption and lower rates for less liability.
Meanwhile, insurance companies are raising their rates on both policies. The larger shippers are transferring the risk and cost of shipper's interest insurance back to the carriers. …