Insuring your stock

16 January 2019

Whether you're an exporter or an importer covering goods on their journey requires careful consideration of the conditions in which they will be stored as as well as how they are transported.

Marine cargo movement can be traced back to traders on the Arabian Sea some 5,000 years ago. They used boats to move goods because it was often at least as safe as travelling over land where bandits roamed.

In the UK, marine cargo insurance was codified in the Marine Insurance Act 1906, one of the few forms of insurance with its own Act. Marine cargo insurance can cover cargo or goods in any state transported by sea, land or air since most goods are conveyed by more than one mode of transport.

Your freight forwarder or supplier may offer marine cargo insurance, but this can be more expensive than taking a policy out through a broker and the scope of the cover may be limited.

You may assume that your goods are fully covered by your freight forwarder, when in fact this will normally only provide cover based on a limited liability, which is calculated upon the weight of the goods lost or damaged e.g. BIFA, 2 SDRs per kilo, c. GBP 2.00 per kilo.

This means you may only receive a small percentage of the value of the lost or damaged goods, which can leave you facing significant financial loss. You can also rely on the supplier of the goods to arrange insurance but you have no control over what premium or terms and conditions may be applied by their insurers.

Lost at sea

Some businesses may look at data from the World Shipping Council (WSC) and decide that they don’t need cover.

The WSC estimates that in the period 2008-2016 an average of 2,150 containers were lost at sea each year – a number its President and CEO describes as a very small fraction of the total number of containers carried on ships each year.

However, this would be of little consolation if one of those containers was full of your goods, as there are accidents at sea, such as the fire that broke out on the Maersk Honam in the Arabian Sea in March or the MOL Comfort, which lost almost 5,000 containers in 2013.

Even if your goods are undamaged then there can be situations such as when a General Average is declared that means you can incur costs to get your goods released and be drawn into the World of Average Bonds and Salvage Guarantees (all of which are fully recoverable under a Cargo Marine policy).

As Stephen Smyth, Head of UK Regional Marine at Beazley Group, observes, assessing the risks you could be exposing your business to by not having the right cover in place comes down to balance sheet protection: “The insurer is taking risks off the balance sheet that the insured business does not want to [or cannot afford to] run.”

Bridging the insurance gap

An important issue for any company contemplating marine cargo insurance is determining the point at which this cover stops and the insurance protection for goods transfers to their property insurance policy.

Where a forklift operator drops a pallet of goods in a warehouse, for example, the owner of the goods on that pallet needs to know whether this loss is covered by marine cargo or property insurance.

“The owner of the goods may try to claim on their marine cargo insurance rather than their property policy because it usually has a lower excess or deductible,” explains Smyth.

One solution to bridge the gap between marine cargo insurance and property insurance is called stock throughput insurance. Whether through your own actions or those of a third party, stock can suffer loss or damage.

Stock throughput insurance cover takes the storage risk out of a property policy and puts it into a marine cargo policy.

Marine cargo wordings are broader and sometimes offer enhanced cover, including, for example, deterioration, infestation and vermin.

While a stock throughput policy will respond to losses from both the transit and storage of goods, it will only generally pay for the value of the goods in question. It does not pick up any business interruption costs.

Smyth notes that stock throughput cover was originally intended for finished products ready for distribution, but it has evolved in line with the evolution of logistics.

“Fewer clients hold their own inventory now, preferring to have a logistics company performing this task,” he explains.

“However, stock levels are increasing as inventory is concentrated in fewer risk locations, so we have to carefully monitor our aggregation across assureds.”

He suggests it is not necessarily the case that stock held for ‘longer periods’ should be covered under a property policy.

“Many property insurers have capacity issues when considering the buildings, office, machinery and stock so are generally receptive to marine insurers writing the stock risk.”

Sign up to our latest news & insights

Brexit balancing act

Companies may be tempted to stockpile in advance of Brexit, although Smyth believes this is unlikely due to a lack of quality warehousing capacity and companies not wishing to hold too much asset value on their balance sheets.

“It must also be observed that Brexit will affect imports and exports for EU companies, many of whom are pleading with their governments to strike a trade agreement to minimise any impact on their businesses,” he adds.

“There may be some custom delays while trade agreements are reached, but we are confident that this will be short lived.”

Smyth agrees that greater use of just- in-time delivery has led to an increased appreciation of how stock throughput insurance is underwritten.

There is still strong demand for cover from companies that hold raw materials as well as those that operate on a just-in-time basis.

He also notes that companies may have limited control over the security or working practices of third-party warehouses.

For example, can you specify that the warehouse has to have an alarm system or that it is protected by security guards if you don’t own the building?

“It is in a company’s best interests to carefully consider and confirm these details when it is working out its own financial exposure to risks, as this will allow it to determine what cover it needs,” he concludes, “because this will be reflected in the pricing and terms and conditions the underwriter will apply to the risk.”

Download Whiteboard magazine

For further information please contact Stuart Winter, CEO of UK Retail on +44 (0)20 7528 4756