15 min read
Cargo Insurance: Jumping to General Average [PODCAST]
By: Ian Buchanan Feb 23, 2021 11:45:00 AM
This week we feature The Expeditors Podcast with host Chris Parker. The podcast shares observations, perspectives, and discussions on front-of-mind topics impacting the logistics and freight-forwarding industry through the lens of Expeditors, a global logistics provider. Expeditors generates highly optimized and customized supply chain solutions for their clients with unified technology systems integrated through a global network of 357 locations in 60+ countries on six continents.
General average has a very deep history in maritime trade, but how is it figured out today? Is that the main concern from a freight claims management perspective? Learn about general average, misconceptions with cargo insurance, and more with Ian Buchanan, Senior Manager of Risk Management at ECIB.
Chris Parker (Host): Hello everyone, and welcome to The Expeditors Podcast, where you can hear about front-of-mind topics in the logistics and freight forwarding industry through the lens of a global logistics provider.
Chris Parker: I'm your host, Chris Parker, and today's topic: Jumping to General Average. Now speaking for myself, insurance is something I don't like paying for, but my goodness, am I thankful whenever I need it. And when looking at ocean freight, there's a lot more that can happen beyond a good old fender bender.
Chris Parker: So today, I am joined by Ian Buchanan, Senior Manager of Risk Management at ECIB, or Expeditors Cargo Insurance Brokers, to talk about an interesting term that's been hitting headlines these days whenever you're reading about disasters at sea, and that's general average. Ian, thank you so much for joining me today. How are you doing?
Ian Buchanan: Good, Chris. How are you?
Chris Parker: I'm doing pretty well, thank you. But I know that I will be better once you make me an expert in cargo insurance.
Ian Buchanan: Yeah. Well, it's a complicated topic, and we're going to cover a lot of stuff today. I can't guarantee you're going to be an expert, but I'll try to explain as best I can.
Chris Parker: All right. Well, here's hoping. Let's get a little bit of history about you. What is ECIB, or Expeditors Cargo Insurance Brokers, and what do you do as Senior Manager for Risk Management?
Ian Buchanan: Sure. So ECIB is actually a wholly-owned subsidiary of Expeditors International. And so we're set up under the Expeditors tent, but we do operate pretty independently. And as the name implies, we're an insurance broker, the "IB" in ECIB. But unlike most of the normal insurance brokerages in the world, we really only focus on one commodity, and that is cargo insurance.
Ian Buchanan: So from our birthplace as part of Expeditors, we really have stuck to what we know and specialize in, which is the world of cargo. And so we act as a broker to place cargo insurance for lots of companies around the world. And then we also have a product called Claims Management, where we handle cargo claims for those companies as an outsourced service.
Chris Parker: Now plenty of freight forwarders will offer their own cargo insurance, but how does ECIB differ from that? How do they do things differently?
Ian Buchanan: Yeah, sure. So the difference is that ECIB is really on the customer's side, right? So we would be your insurance broker; we're in your corner. And what we specialize in is taking a look at your supply chain holistically. How does your freight move around the world? What are the commodities that are at risk? What lanes are you shipping? What carriers are you using? And we're going to help you custom-tailor an insurance solution to that.
Chris Parker: So it's not even bringing an insurance solution; it's also helping them look at themselves to come up with better ideas and solutions and just find the right options for themselves.
Ian Buchanan: Yeah, absolutely. The best coverage is the coverage that covers everything that you're doing, but you're not paying for what you don't need.
Chris Parker: Yeah. No, absolutely. That's the last thing anyone would want to do.
Ian Buchanan: Right.
Chris Parker: So I guess before we get started, one last question about yourself, why is cargo insurance so interesting to you?
Ian Buchanan: I think it's just a really niche specialization that everybody sort of needs it at the end of the day. Very few people truly understand it. And we like to say that freight makes the world go round, but insurance is the financial backstop to that freight.
Chris Parker: Well, let's talk a little bit about this hidden world, and the big term for today's topic is general average. So before we get to talking about it in current terms, what is the history of general average, and how does it work in the maritime industry?
Ian Buchanan: Yeah. So this is one of the things, I think, that is most fascinating about Marine insurance in general, and also specifically, the concept of general average, is just how old it is. So the concept of general average has been traced back to the end of the Roman Empire, essentially, in shipping around the Mediterranean.
Chris Parker: Wow.
Ian Buchanan: No, seriously. It's thousands of years old, and it's this concept and tradition in maritime law, which obviously the laws have evolved over the years, but it's existed throughout. But basically, back when there were sailing ships that were moving freight, probably throughout the Mediterranean at that time, they would occasionally have instances where there would be a storm or the boat would be taking on water or it would run aground on some rocks or something like that. And you would have to make a very quick decision about jettisoning some cargo in order to save the boat, right? So you got to lose weight, you're taking on water, something like that.
Ian Buchanan: And rather than have an argument right there in the middle of the storm about whose cargo has to go overboard, you just say, "You know what, we'll figure this out later, fairly. We just need to get out of here to save the voyage." And so that's where that tradition came from, was that any sacrifice to save the boat was going to be shared by everybody once you got safe and sound back to port.
Chris Parker: Gotcha. When you're making snap decisions and having to choose which cargo to jettison overboard, you can't just be like, "All right, give me the manifest. And we'll choose two from company A and then two containers from company B." How does that all get figured out afterward? If they had to make a snap decision and one company ends up having to lose more freight than others, do the other companies pay for that? How does that get figured out?
Ian Buchanan: Yeah, they do. So to fast forward a little bit here, I mean, obviously, with today's world of giant container vessels, you don't really have those situations very often where you're having to throw containers overboard in order to save the ship.
Chris Parker: Sure. They're pretty big.
Ian Buchanan: And we'll circle back to that a little bit later with the containers overboard that have been hitting the news. But you don't voluntarily jettison containers, for the most part, anymore. What tends to happen today when a general average is declared is that it's one of three main things. Either there's a fire onboard, there's some sort of mechanical failure due to weather, or just sheerly things breaking down on the ship that leaves it stranded or some sort of grounding or foundering event.
Ian Buchanan: So in any of those cases, what's important about general average is that it's declared when there is an event that calls for an extraordinary sacrifice or expenditure from the shipowner in order to save everybody's cargo that's on board. And so the process that... once the voyage is saved, then starts this really long cumbersome process where everybody's cargo is tallied up, the losses are tallied up. And then there's this apportionment where everybody reimburses the ones that actually lost something.
Ian Buchanan: There's been a couple throughout the last couple of years. There was one called the Hyundai Fortune that happened back in 2006, where a full third of the cargo was lost due to a fire breaking out on board. And the crew was evacuated from that ship, and they had to have multiple firefighting vessels come in and put out the fire and then tugs to tug the ship to the shore. So that's that extraordinary expense that goes in. So the shipowner obviously had to pay for those firefighting vessels, those tug boats, and they did that in order to save everybody else's freight that was still hanging on there.
Chris Parker: Oh, absolutely. All right. Well, talking about today, again, a number of recent headlines have mentioned high profile shipments having containers go overboard or some other kind of disaster, like a fire, like you were talking about taking place. And chatting before with you, it sounded like general average was the first thing that comes to mind for people. So my question is, why is general average becoming such a concern? Why is it the first thing people tend to jump towards?
Ian Buchanan: I think it's because when people think of general average, they think of those big dramatic events, kind of like the fire that I just mentioned. And so, as a result, whenever they see something dramatic like 700 containers washed overboard in a storm, they tend to jump to, well, there's probably going to be a general average, right?
Chris Parker: Oh, I see. Right.
Ian Buchanan: The two go hand in hand; disaster equals general average. That's not really the case, though, because general average can really only be declared when there's a sacrifice or expenditure that's intentionally made in order to preserve the vessel and the voyage. So just having bad luck and something happening, like a bad storm, doesn't mean that shipowner actually had any sacrifice or expenditure. That's just a case where you'd want to have cargo insurance if you're the owners of those containers.
Chris Parker: Sure. Right. Okay. That leads me into the next question, and that's, what are the bigger issues at play here when it comes to understanding cargo insurance? And what's the best way to understand risk at sea, and how do customers typically mitigate these? What are their options?
Ian Buchanan: Yeah. So, there's a lot of attention that gets put on general average, but in my opinion, the thing that you should really be thinking about is, do you have a cargo insurance solution or policy that's going to respond, not just to a general average situation. Which those happen, and there's maybe a couple of dozen per year or something like that.
Ian Buchanan: But compared to the amount of just loss and damage that happens in the general course of moving freight throughout the year, it's very, very small. It would be like insuring your house against someone driving a car through your window versus insuring your house against the normal things like fire, flood, burglary that are much more likely to happen.
Chris Parker: Gotcha.
Ian Buchanan: So the insurance will cover both of those things, but I would tell people not to be so laser-focused on general average, perhaps, and maybe think about the more common loss and damage in the supply chain.
Chris Parker: So then what are... I guess, when looking at insurance then, what are the common misconceptions? If jumping to general average is definitely one of them, what other misconceptions are there or things that tend to get overlooked when insuring shipments?
Ian Buchanan: Yeah. I hear a couple of things pretty often in talking to customers or prospective customers. One of them is, "Well, I don't need cargo insurance because the steamship line or the carrier or the forwarder is just going to reimburse me. They lost my stuff; they'll pay me back for it, right?"
Chris Parker: Sure. Of course, yeah.
Ian Buchanan: Honestly, I think that makes a lot of sense when you say it that way you, you break it, you buy it sort of mentality. But there's all sorts of international laws and domestic United States laws that really limit... it's called the legal liability of carriers and forwarders, to very, very low amounts, in some cases. For example, international ocean movements are limited by law to $500 per shipping unit. So you could have a container that has ten pallets in it, and that could be ten times 500 would be all that you would get for a complete loss of that container from the steamship line. Whereas you could have hundreds of thousands of dollars worth of cargo on there.
Ian Buchanan: So the gap there can be pretty significant, and it's not a good idea to lean just on legal liability to reimburse yourself. We hear sometimes of companies saying, well, we're self-insured, or we'll just absorb the losses when they happen. And that is a viable strategy if you've really done the math through and you have a good understanding of exactly what you can expect in a given year, loss-wise. But there's always those outliers where you could have a catastrophe of an event or a truck accident or a fire or something like that – that could really hit your books hard if you don't have the backstop of cargo insurance.
Chris Parker: What else does insurance take care of that might not be as well known? Are there any other kind of like fringe benefits or anything like that that can happen by having insured your cargo?
Ian Buchanan: Yeah. Yeah, there are a couple. Obviously, the big thing everybody thinks about is getting that monetary reimbursement; it is insurance, after all. That's the big thing, no argument there. But then there's also a lot of things like setting up a survey, for example. If you've got freight that arrives and part of it's damaged, but there needs to be a third party survey done of the freight, the container to see the condition of the container, all these sorts of things, to test for salt versus freshwater. Somebody has got to arrange for and pay for that surveyor. And so that's typically something that your insurance company would step in and do to take care of you.
Ian Buchanan: Going back to the general average situation, that whole process that I mentioned that can take ten years to resolve. Well, if you've got cargo insurance, it's typically your cargo insurer who will step in, fill out all the paperwork for you, post the bond that's necessary for you to get your cargo released because you do have to put money upfront as part of the general average process. And you can get your cargo back fast, and you've been reimbursed, and you're on your way. And it's really the insurance company that will deal with that long legal process.
Chris Parker: Right. A lot of that administrative work that has to happen.
Ian Buchanan: Yeah. A lot of the admin and the paperwork, it's good not to have to do that yourself, for sure.
Chris Parker: We're coming to a close with our time, and I wanted to get to know the cargo insurance world a little bit better here. So what's going on in the cargo insurance world that is, I guess, for lack of a better term, making waves? That was awful.
Ian Buchanan: Nice. Nice. Nice pun.
Chris Parker: Don't- don't encourage that!
Ian Buchanan: Is that always what happens on these podcasts? Is just cargo puns?
Chris Parker: Just cargo puns, yeah.
Ian Buchanan: Yeah. So making waves right now, we're in what we call a hard market, and that's mostly related to pricing. So as with most other insurance industries, there's a cyclical pricing, hard, soft, and we're really entering the teeth of a hard market right now, where rates are coming up a lot. And that's really provided a crunch for some companies who are used to having, for the last couple of years, very low rates on their cargo insurance. And they're seeing 15% increases, sometimes up to 20, 30, 40% increases, even if they have no losses, which is tough on a lot of companies that are already facing increased freight spend.
Ian Buchanan: So that's all being driven by the economy at large and the history in the last decade or so of a lot of bad losses in the Marine cargo insurance industry. What we're doing to try to combat that is we're talking to our customers early and often when they're coming up for the renewal to make sure that their risk is right-sized for the policy and to make sure that they have the right amount of coverage that they need, and that they're not trying to insure more than what they're actually doing.
Ian Buchanan: So taking a look at their supply chain, what are the commodities? Is their deductible set at the right level? Did they have the correct limits that they really need? Do they have the right coverages? Are they paying for anything that they don't need? And making sure that we convey that to the insurance company so that they know that they've got a good safe risk on their hands and that there's no misconceptions.
Chris Parker: What are the kinds of things that inform these hard and soft markets? What can customers be paying attention to in the headlines in order to anticipate these kinds of conversations?
Ian Buchanan: Yeah. it's pretty hard to... nobody's got a crystal ball that can really see what's going to happen hard or soft market-wise. But I would say that one harbinger of one, if you will, is just a lot of shock losses. And so, in insurance, we talked about shock versus frequency. So frequency would be a lot of little things adding up, shock loss would be a really big event that could be hundreds of millions of dollars, potentially, in a warehouse fire or a ship foundering in storm or something like that.
Ian Buchanan: Those tend to have an outsized effect on the industry, where you have a couple of losses in; for example, the pharma industry can be a pretty large concentration of values per container. And if you have a couple of those big losses, sometimes insurers tend to get a little bit spooked.
Chris Parker: Yeah. No, absolutely.
Ian Buchanan: And they decide that they need to raise rates the next year.
Chris Parker: Gotcha. Gotcha. So there's nothing that you can really look forward to, but keep an eye on the headlines, keep an eye on how often big events are happening, and that could possibly inform you to prepare for these two kinds of markets that happen, either hard or soft?
Ian Buchanan: Yeah. And these are, like I said, they're cyclical, and they tend to develop fairly slowly. We tend to see them coming over the course of a couple of months. And then the prices really harden more and more and more. Like I said, there's nothing that, as a cargo owner, you can really do about a hard or a soft market.
Chris Parker: Sure.
Ian Buchanan: All you can do is try to just have early, often conversations with your professional broker about, is your policy custom-tailored to really what your exposure is?
Chris Parker: Well, Ian, thank you so much for chatting with me about this and for demystifying general average. I thought it was something that was really spooky in the headlines when I'm like, oh my gosh, all this craziness is going on, containers going overboard. But, A, it's just part of the process; there's a process that's laid out for it already. It doesn't happen that often, in the grand scheme of things, throughout a year. So it's not really the one factor that should decide for you whether or not you should be insuring your cargo. There's tons of other things that could be happening.
Ian Buchanan: Right. There have been more, for sure, this year already than typically happen in a given calendar year, as far as containers lost. And those do tend to make splashy headlines. There's another pun for you. But like you said, you don't want to be focused just on that one thing. A good cargo insurance policy will definitely cover you for general average, but you want to make sure that you're addressing the other risks in your supply chain as well.
Chris Parker: Yeah, absolutely. If folks wanted to get in touch with you or learn a little bit more about ECIB, where can they go?
Ian Buchanan: They can go to our website, ecibglobal.com. We've got a lot of good information there. We've started really ramping up our efforts to put out a lot of educational material, as far as whitepapers, some videos, some information that you can download on the website. And we've got a blog on there as well that we're publishing content to.
Chris Parker: That's so cool. Well, thank you so much, Ian. Really appreciate your time.
Ian Buchanan: Yeah. Thanks, Chris. Thanks for having me.
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