Ocean cargo insurance and global supply chain disruption

By AXL XL's Andrew D’Alessio and Jarek Klimczak

With few outlets for entertainment during the COVID-19 pandemic, consumers spent less and saved more. Now that the economy has largely reopened, pent up consumer demand (boosted by the stimulus) finally has a place to go.

Unfortunately, shippers are struggling to meet that demand due to logistical challenges and increased costs. Critical links in the supply chain face a backlog of orders and a lack of available containers. Consumers are largely bearing the brunt of these challenges through higher prices.

As a global insurer of ocean cargo, AXA XL can help businesses mitigate these risks. While physical loss or damage to cargo can be insured, intangible consequences of delayed product or not being able to bring lost or damage merchandise to market is not insurable.

Impact on Marine Cargo clients

The inability to meet fulfillment deadlines poses reputational risk to shippers. They may lose market share to companies who can pivot more quickly. And the erosion of brand loyalty potentially impacts future sales.

Transporting goods in defective or unsuitable containers could result in damage or loss, rendering cargo unsellable and likely to be rejected upon delivery. In cases where goods were improperly packed at origin, the recovery against marine cargo insurance policies could be compromised depending on the terms of the policy and degree to which packing suitability deviated. Should coverage apply, the insured may incur a deductible and expend significant resources submitting claim documentation.

And that’s not all.

Faced with another COVID-19 surge, transporters will likely contend with more reductions in their workforce, further compounding these challenges. With the holiday season approaching we expect increased container shipping. Unfortunately, these challenges will get worse before they get better. Some published reports project capacity restrictions, rising prices, and labor shortages continuing well into 2022.

How to mitigate exposures

AXA XL recommends that shippers implement the following best practices:

• Utilize master service contracts to obligate transportation providers to make containers available that are fit for purpose. Shift liability to these providers for loss or damage to goods in their care, custody, and control above the low statutory dollar amounts.
• Require pre-stuffing inspections of containers using standardized forms to ensure thorough and consistent quality assurance. Ask for copies within a day or two of sailing, review them, and hold partners accountable for deviations.
• Reject unfit containers even if it means more delays. Empower and encourage your agents and fowarders to make decisions to protect the cargo with packing that is fit for purpose.
• Strengthen inspection procedures for cargo itself, including preloading inspection and validation of suitability of the container chosen. Take pictures and document the quality of both cargo and container at the time of loading.
• Temperature controlled containers should have a higher level of diligence and checking for proper seals, adequate fuel, pre-cooling, maintenance, certification for food quality, and inspection reports for machinery.
• Install recording devices in reefer containers to track temperature changes, to determine when deviations occur, and to identify its exact location. Ensure how and when you can access the recording records in the event of loss or damage. This can help to determine where in the supply chain custody damages occurred and to assign liability accordingly.
• Use and agree on INCOTERMS that transfer ownership of the product at the earliest point in the supply chain.
• Ship only through reputable Freight forwarders who will have in place a freight forwarder liability insurance policy to mitigate losses for their clients
• Finally, work with your ocean cargo insurance carrier to better understand your policy and the risk mitigation resources available. AXA XL’s underwriters and risk engineering experts can help shippers gain more control over their exposures and liabilities in this challenging time.

Marine Cargo will navigate through a number of significant challenges as 2022 approaches. Four trends in particular are likely to put added pressure on the marine cargo marketplace and supply chain.

1. Reduced supply of cargo containers.

Demand for goods has outstripped the supply of available cargo containers. Stockpiling of household goods and lockdown-induced online shopping sprees drove a surge in demand for goods that mostly travel by sea. Worldwide, about 170 million cargo containers account for 90% of goods shipped.

That lead to congestion at ports all around the U.S. – the world’s largest importer – hindering the usual turnover rate of containers.

Matters were made worse when the Ever Given, a 400-meter-long cargo ship, became stuck in the Suez Canal in late March, causing a 400-ship pileup and a chokehold on upwards of 4 million containers.

Unavailability of containers has contributed to months-long delays and increased prices of new containers, rendering shippers unable to transport goods on time without incurring significant expense.

2. Increased shipping costs.

Production of new containers is largely controlled by three Chinese companies — CIMC, DFIC and CXIC — which manufacture around 80% of the world’s containers. While production is projected to jump by 6-8% in 2021, it likely won’t be sufficient or fast enough to meet rapidly growing demand.

The crunch on capacity means new containers come at a premium. A year ago, the average cost of a new container was $1,800. Today, it’ll run about $3,500 – a 94% increase. Shippers able to absorb that cost will still have to wait three to four weeks for their new container, on average.

Overall shipping costs are also increasing at a steady rate, driven by inflation as well as rising fuel costs. Some data shows that shipping costs per container rose by $6,000 just between April and August of 2021.

3. Staffing shortages

Labor shortages across the marine industry exacerbate pressure on the global supply chain. Illness and quarantines have forced many workers to the sidelines, and low vaccination rates among marine cargo laborers haven’t helped.

According to the International Chamber of Shipping, only 2.5% of the global maritime workforce was vaccinated as of July 2021. Restrictive travel and changing requirements to receive vaccinations in home countries have stalled efforts to boost that percentage.

Delays at ports and increased demand also mean longer hours and more stress for both ship and dock workers, which may drive some to leave the industry altogether.

4. Lax adherence to quality standard

The strain on shipping companies is driving increased error rates, either due to overstretched workers, lack of oversight, or simply cutting corners to get cargo on the move on time.

Shippers report receiving containers with higher rates of visible defects, including holes, dents or faulty latching mechanisms. Refrigerated units are arriving low on fuel, at improper temperatures and in need of maintenance, indicating companies are sacrificing integrity to commence shipments.

When containers are unavailable, shippers are turning to riskier alternatives like tarped open-top containers or breakbulk, in which goods that cannot fit in standard shipping containers are instead transported in loose bags, boxes, crates, drums, barrels, or other handling equipment. These methods are inferior to containers and should be avoided.

Final thoughts

Ports in California are currently facing record backlogs of cargo. News outlets and retailers are advising consumers to start their holiday shopping early. Consumers are growing anxious waiting for furniture and appliances orders made last year. From all directions, the cargo and logistics industry is under pressure to deliver.

While these challenges will not subside overnight, boosting risk management efforts, especially loss prevention protocols, can provide a strong degree of protection against cargo and financial losses.

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