The forays of logistics into other markets have entailed a paradigm shift in the types of risks that they are exposed to some unprecedented till a few years ago. Vikash Khandelwal examines the key risks.
, Logistics technology has been upgraded, better infrastructure facilitated the use of state of the art practices, the nature and size etc of the cargo being handled underwent a change, the evolving practices of their industrial clients, such as just-in-time inventory management, defined the needs and the expectations from the logistics industry. This has also led to larger and global organisations to adopt cost-efficient models whereby manufacturing facilities in different parts of the world provide inputs to a plant located in another part of the world.
Challenges and risk transfer solutions
Challenge 1: Risks related to movement and handling of cargo: The supply chain of modern day industry is no longer limited to any region or a country. It´s global. It has also created large global logistics partners who enable a single point solution for all supply chain related requirements of the organization. This has led to use of multiple modes of transport, multiple cargo facilities where the probability of accidents are higher. Risks related to loading and unloading, intermediate storage, transhipments etc would arise out of this.
Solution: It would be ideal in case it is mandatory for the consignors to bear all risks to the cargo being carried / handled against all perils other than gross negligence of the logistics partner. In the current environment, the logistics partner is faced with many risks to the cargo and thus a carefully designed risk transfer program is critical to ensure survival:
a. Carrier´s Legal Liability Insurance: Insured shall stand indemnified against legal liability arising out of physical loss or destruction of or damage to cargo, while in transit, including during loading or unloading and while temporarily housed on or off vehicles in the ordinary course of transit. Legal and other costs, incurred in the litigation against the claimants and Costs of average adjusters can also be covered. Cover can be granted for worldwide operations.
b. Marine Insurance: The insurable interest of the Logistics Partners arises out of the contractual liability resulting due to the damage of cargo.
This insurable interest may also be duly covered under a Marine Insurance Policy. Though this risk is not generally viewed as favourable by insurers due to issues related to subrogation rights against transporters/logistics partners but still this remains an extremely effective manner to cover risks related to multimodal transits, intermediate storages, transhipments and other such risks related to modern day movement and handling of cargo.
c. Insurance for warehouses and Offices: A warehouse of a logistics player is quite a high risk for any underwriter as there can be no certainty on the subject matter of storage, the time periods for such storage and the risks arising out of the nature of such cargo. The subject matter may range from steel to highly unstable chemicals. The loss history of such warehouses suggests that if left uninsured this section of risks can prove to be inimical to balance sheet.
For a global Logistics player of size and scale it is advisable to implement a global risk transfer program which ensures uniformity of coverage and ensures adherence to the regulations of the host countries. Offices across different geographies may also be covered under a well designed global program.
Challenge 2: Risks related to off shore markets: Off shore markets have exposed businesses to many critical risks such as uncertainty in terms of creditworthiness of customers, political risks, political violence, risks of non compliance with local regulations etc.
a. Credit Insurance: It´s an insurance that extends protection to businesses against failure of their customers to pay their trade credit debts. A suitably designed cover obtained from a strong under writer lends itself to building a strong partnership based on prior information of the clients´ credit history apart from providing adequate balance sheet protection.
b. Political Risks: Major Risks that can be covered under the political risk insurance program are: cconfiscation, expropriation, nationalization or seizure by foreign government, deprivation, willful destruction by foreign government, forced abandonment, non-repossession, nonpayment or contract cancellation by the Principal or the Main Contractor, nonpayment arising out of exchange transfer and currency inconvertibility problems, import export embargoes or license cancellations by either the insured´s or the foreign government, war or other forced majeure events, causing default by the insured or a counter party, calling of on-demand bid or contract bonds and guarantees for unfair political reasons.
c. Political Violence: This is relatively a new risk transfer market, some major risks which can be covered are: strikes, riots and civil commotion, malicious damage, insurrection, revolution or rebellion, mutiny, war and/or civil war, and terrorism.
d. Compliance with regulations of the host country: Non compliance might prove to be inimical for the venture per se. A detailed study of the regulatory environment is therefore of paramount importance. Some major aspects to be studied are whether the country is an admitted country or not a locally issued policy is compulsory or even an international paper is acceptable, the insurances that are mandatory to be obtained and maintained, the premium payment terms, the regulator and the general regulations issued etc.
e. Analysis of the insurance market: The local insurance market must be studied in detail to assess the underwriting capacities, claims paying track record, financial strength of the insurers, the intermediaries and level of their expertise and experience, the reinsurance structure, the covers available including the level of deductibles prevalent in the market etc.
Challenge 3: Risks related to use of international transportation infrastructure are:
a. Piracy: Recent losses due to acts of piracy by Somalia pirates has reemphasized the need for a robust risk management strategy to counter such losses as their magnitude in terms of financial as well as people related losses is huge. A specific cover against piracy is available and there are specialist insurance underwriters for the same.
b.Kidnap and Ransom: This is quite a high risk area in specific pockets of the globe. A well designed risk transfer program written by a specialist underwriter shall offer balance sheet protection in addition to the comfort of the employees.
Challenge 4: Liability Risks: Operations on a global scale coupled with the expertise required for logistical support to the modern age business has exposed Logistics players to many risks. The increased size and scale of the Logistics players coupled with the global investments through the FII and FDI routes, access to the global stock markets for funds etc has also brought in large liability exposures.
a.Professional Indemnity Insurance: Also referred to as Errors and Omissions Insurance. It extends cover against claims of damages arising out of the breach of professional duty of due care or failure to act in accordance with the applicable laws and regulations.
b.Director´s and Officer´s: Liability Insurance: It extends protection to past, serving and future directors and officers of an organization against damages arising out of alleged or actual wrongful acts they may have committed in their positions. It extends protection in the event of any actual or alleged error, misstatement, omission, misleading statement, or breach of duty.
Challenge 5: Risk to employees:
a.For employees posted and stationed in any specific country: There should be a well drafted employee benefits program which is implemented in a manner that it reflects the best practices on the global level and at the same time incorporating the practices and advantages available in the local market.
b.For employees who travel to off shore locations: There should be a well devised travel insurance policy. However it must be noted that in cases where there are employees who are supposed to be out of their home country for long durations it is always advisable that global employee benefit policies be considered.
c.Compulsory employee related insurances: The regulatory and legal environment of the host country should be studied in detail to ascertain whether there are any insurance which need to be compulsorily obtained and maintained for employees. An example of such insurance would be workmen compensation insurance policy which is a compulsory insurance in quite a few countries.
The overall insurance programme has to be a resultant of the cost and benefit analysis and for it to be holistic all possible what if scenarios should be considered. The host country and its regulatory and legal framework along with the size of the investment involved shall play a vital role in determining the risk transfer programme.
However, considering the multiplicity of environments and the factors involved in global business and risk transfer, a quality consultant will be critical in ensuring overall programme effectiveness and efficiency.
The author is Head Insurance Broking, Srei Insurance Broking Ltd.