The collision that sent ocean containers tumbling from a container ship into Mumbai’s port channel last month may have been an unforeseen accident, but the boxes fell into very busy business waters.
The Aug. 7 collision of the MSC Chitra and the breakbulk ship Khalijia 3 was the starkest example this year of the higher profile risk management is playing in global supply chains and the higher costs shippers may face in insuring goods through global networks.
There’s a short line, risk experts say, from accidents at sea to the threat goods face on land.
“There are a lot of bad guys out there, and they are very good at what they do,” said Damon Finneran, security and logistics risk control manager with Allianz Global Corporate and Specialty.
Cargo insurance became a major area of focus in shipping after the September 11 terror attacks, when direct insurance costs grew and efforts to mitigate the myriad risks in supply chains raised operating costs. Incidents such as the piracy attacks in the Indian Ocean off the coast of Africa have raised costs for shipments moving through that region, and some shippers fear higher costs for coverage will be spread across the shipping business.
Although the number of pirate attacks reported by the International Maritime Bureau dropped in the first half of this year, shippers are paying higher premiums for the kidnap and ransom insurance that covers piracy risks, because the cost of ransoms and of negotiating ransom of the ships that have been captured has more than doubled.
The cost of most other cargo insurance coverage, however, has not increased in the last year because of low loss experience and because of increased competition.
For shippers, insurance can be expensive, but the more safeguards a shipper takes, the lower the cost of that insurance. Like auto insurers, cargo underwriters take a shipper’s record into account when they quote a price for transport coverage.
“There would be price and term differentials for companies that have proven risk management, logistics and security practices as opposed to those that say, ‘We just leave it up to our logistics company, and we’re not sure what they’re doing,’ ” said John Barnwell, global product leader for ocean cargo at Allianz Global Corporate and Specialty.
That’s why Audiovox, a major U.S. importer of consumer and auto electronics, has made such an effort to ensure the safety of its containers of electronics equipment from the moment they leave factories in China and travel by ocean or air to the U.S. for delivery by road to retail stores. Audiovox has reduced its losses so much that it is able to buy low-cost global coverage with a very large deductible to guard against major unforeseen calamities, such as the loss of containers overboard in Mumbai.
“We keep careful track of our freight claims over the years, and we have so few freight claims, maybe $200 here or $300, but anything like $2,000 to $3,000 is rare,” said Pat Moffett, vice president of global logistics at Audiovox. “We look for a company that can give us a great deal but at a huge deductible, and we self-insure for the first $25,000.”
A lean loss record like that of Audiovox is one of many elements underwriters such as Allianz review when they assess the coverage risks. One way Allianz can tell whether a company has a security program is to look at its loss history. “If they have losses all over the place for no reason and there are different losses everywhere, then we know the company doesn’t have a plan,” Finneran said. “They are hiring a freight forwarder to move their goods the least costly way.”
Audiovox said it will incur extra cost or even delays to make sure electronic goods are shipped safely from a factory in China. It will delay a shipment, for instance, to avoid having to ship less-than-containerload.
“I’m worried about the loose cargo . . . because that’s where the problems are inside the pallets,” Moffett said. “One of the things insurance companies like about Audiovox is that we buy in full containerloads, and they like that idea. That’s why a good consolidator will call all the local suppliers and say, ‘Listen, I’ve got two pallets and I need eight more to make a 20.’ Then if there is something coming within the next five or six or even eight days, he’ll call me to say he can put together a full containerload if he can wait. I’ll check with my buyer to get the yea or nay.”
Beyond damage in transit, the biggest transportation risks come from theft. “Everybody thinks that in a global supply chain the danger is overseas. There are hot spots abroad, but the U.S. has its own hot spots,” Barnwell said. Like the famous bank robber Willy Sutton, who robbed banks because “that’s where the money is,” cargo thieves concentrate on areas where the cargo flows are the biggest.
The Allianz executives say the top five global hot spots for cargo theft are Mexico, Brazil south of Sao Paulo, the area around London Heathrow Airport, northern Ireland and Malaysia.
In North America, the highest theft risks are around Miami, Los Angeles, Atlanta, the New York metropolitan area, Toronto and anywhere along the Mexican border, where “everything is up for grabs,” Finneran said.
“These bad guys are so good at what they do that many will follow a truck for up to 300 miles and very patiently wait for that driver to leave the truck. Then they will drill the door, drill the ignition and be out of there like they own the truck,” Finneran said. That’s why Allianz recommends to its clients that they always have two people on every truckload, so one person is continuously in the truck whenever it stops.
Audiovox uses two drivers on trucks in its “seatruck” operation, in which it transloads 20- or 40-foot containers that come into Seattle by ship into 53-foot truck trailers for delivery throughout the U.S. “We pay extra for a two-man team, but it’s better protection because they really don’t stop,” Moffett said.
Audiovox also avoids cargo risks at airports by paying extra for flights that arrive at times when terminals are least busy.
“We’ve done everything in the night (in the U.S.), before the flights from Europe start coming and those buildings get packed. That’s when things get legs.
“It’s a premium flight,” Moffett said, “but it’s worth it in terms of loss prevention.”
Contact Peter T. Leach at email@example.com.