Putting a premium on CSI

Putting a premium on CSI

Shippers and carriers hoping that increased security at foreign ports might quickly lead to lower marine insurance rates are bound to be disappointed. While shippers and insurance executives welcome the additional security provided by the Container Security Initiative, many say the industry will have to wait and see if the program pays off in the form of reduced premiums.

"The value of the pre-inspection program is in the security it provides." "But it doesn't directly impact any significant change in marine rates," said Terry Montgomery, worldwide ocean marine manager for the Commercial Insurance division at Chubb & Son.

Under the CSI, the U.S. Bureau of Customs and Border Protection, in conjunction with foreign governments, has deployed inspectors at major foreign ports. The program targets high-risk cargo containers bound for the U.S. and aims to protect containerized shipping from terrorism.

The U.S. has already placed about 100 inspectors in the first phase of the program, which focuses on the world's 20 largest container ports, primarily in Europe and Asia. Another 170 inspectors are in training to expand the program to 20 to 25 foreign ports chosen on the basis of cargo volume and strategic location.

The inspectors face a formidable task: Globally, some 11 million containers in circulation move more than 48 million containerloads between major seaports each year. More than 6 million of those loads are destined for U.S. ports. Before Customs introduced the CSI in January 2002, less than 2 percent of all inbound containers were inspected. Now the figure is approximately 4 percent.

"It's a monumental task," said Mark Lowers, president and chief executive of Amsec International, a leading marine security firm. "Right now, they're just raising awareness levels."

He said it's unclear what impact the program will have on marine insurance. "From the standpoint of insurance, it's a question of time to see whether the pre-inspection program works," Lowers said. "There are still a multitude of ways port security can be bypassed."

Some omissions are striking. For example, while the CSI deals with goods moving through major European ports, Latin American ports are virtually ignored. And even if all ports are included, the inspection regime could be circumvented by transfers on the high seas. The Bush administration, through the Maritime Security Act of 2002, is reviewing security conditions on some 10,000 vessels and 5,000 facilities world-wide, including some 2,500 foreign ports.

From an insurance standpoint, the region matters; the port, not so much. "Our rates don't favor one port over another," a spokesman for one major insurance company said. "However, we do favor certain regions, based on what (risk) exposures we view there to be."

The CSI has drawn especially sharp criticism from Europeans, who argue that the program compels overseas ports to pay for what is widely perceived as a U.S. problem. Foreign governments joining the program are required to provide the U.S. inspectors with high-level detection equipment, including radiation monitors to seek out nuclear devices or their components. The U.S. grants preferential treatment to ports and countries signing on to the CSI.

But the insurance community has largely welcomed the CSI. "Additional inspection is a positive development," Montgomery said. "Before 9/11, people really didn't recognize terrorism exposure as a significant factor."

Containerized shipping has been seen as being particularly vulnerable to terrorist strikes or manipulation. Insurance rates for such freight can fluctuate widely, depending on perceived risk. For example, rates for shipping goods into Mideast ports soared by as much as 700 percent during this year's war with Iraq.

Some trade officials say the additional inspections provided under CSI should reduce risk and could result in lower insurance rates for container freight. Montgomery noted that insurers react to real and perceived conditions. The reaction can be swift: During the most intense phase of the Iraq war, insurance rates changed on a weekly basis. It can work in the other direction, too. For example, Montgomery noted that insurers such as Chubb reduced rates significantly following the Bush administration's announcement in May that "major conflict" in Iraq was over.

While many believe the CSI will have limited direct impact on rates, programs linked to the initiative could

play a major role in reducing rates and assuring insurance availability. The Terrorism Risk Insurance Act (TRIA), which was enacted in 2002, is one example. The act mandates that insurers offer terrorism insurance for ships and certain shipping activities, with federal guarantees to cover them in the event of a major terrorist attack. The guarantees are underwritten by a federal fund paid into all member insurers.

"Prior to TRIA, insurers often wouldn't offer policies for cruise ships, LNG carriers and oil tankers," said Robert Housman, a maritime lawyer with the law firm of Brace-well & Patterson in Washington, D.C. "TRIA should help bring marine rates down because it guarantees a market offering terrorism insurance. Insurers now know their maximum cost liability. There's a cap, after which federal funds kick in."

Insurers agree that the program may help, but they point out that this pooling of resources may mask the real risks that would be reflected in high rates. "Insurance companies are taking a wait-and-see attitude," said David Dickman, a maritime law expert with the Washington, D.C.-based firm, Venable LLP. "The two programs (CSI and TRIA) haven't been in place long enough to show a trend impact."