Recently I was discussing cargo losses with someone managing continuous truckload shipments of fresh produce within the United States. For the most part, a good portion of the losses never reach the cargo insurer due to carrier settlements and salvage sales, which are common in the produce transport industry, but the incidents were becoming more frequent. The manager began to wonder if losses did begin to reach the insurer, what would be a reasonable loss level to keep themselves in good standing with the insurer? The first thing they thought of was looking at the premiums paid to the insurer versus what potential claims the insurer would have to deal with if the loss trend continued upward. The manager was on the right track with their thinking, but they were not counting the right premium dollars.
Marine cargo insurers often count premiums differently than the policyholder. Insurance brokers may earn an average of a 20% commission on the premiums paid by policyholders. Of course, that number can vary, barring special arrangements between the broker and insurer; the number is reasonable for this exercise. The example broker commission means the insurer may only receive approximately 80% of the total premiums paid. Moreover, while it may seem insignificant, insurers must also deduct the cost of handling claims (What they are billed by claim handling companies or spend themselves for handling each claim) whether a claim is approved or not. The number could start at hundreds of dollars and go up from there for the cost of surveys and anything else required to settle a claim one way or another. Even if a loss was taken care of by the carrier, salvage revenue, or the claim declined by the insurer for some reason, it still costs the insurer if only because the claim existed.
While every insurer is different for claims versus revenues for marine cargo insurers, insurers like to see an average of no more than 65% of total premiums collected for a given account go for paid claims and expenses. Now consider the insurer has to pay all their operating expenses and still scratch out a profit from the remaining 35%; it is clear any policyholder exceeding more than an average of a 65% loss ratio should consider their policy in jeopardy.
With these realities applied, it leaves less operating room for claims compared to premiums, as most would think. Luckily, most of the time one claim will not get a policy canceled, even if it is a more significant claim unless there is a clear continuing risk to the insurer anticipated. Most insurers wait to see if there is a repeating problem that creates a picture for them which is the loss ratio, and whether it continues, or logically will continue, to trend upward. If losses become an issue, some policyholders look to their insurers for solutions. But, for the most part, the policyholder is looking in the wrong direction.
Some policyholders view their shipping processes through the lens of ‘cost and speed.’ Their concern is how much and how fast, as if their shipping choices have nothing to do with their cargo insurance outcome. Nothing could be further from the truth. Innovative companies begin thinking, at least indirectly, about their cargo insurance on the drawing board. Choices by shippers and policyholders on options from packaging type and size to result in a nice tight cube of a pallet, to modes of transport that suit their commodity best, should be assessed long before the commodity is ready to ship. It is a fact; cargo will experience losses. Cars have bumpers, pencils come with erasers, and there is a need for cargo insurance. Not mitigating the cargo risk as much as possible during the planning stages only raises the risk of losses becoming an economic drain.
If a policyholder finds themselves having excessive losses, neither they nor their insurer is pleased with; the outcome is not up to fate. Of course, it would be nice to imagine the insurer swooping in to make things better, but it isn’t realistic. The insurer can only help policyholders to help themselves.
Suppose things are looking bad for a policy regarding losses. In that case, an insurer only has a few corrective actions they can take, such as raising rates, adjusting conditions, raising deductibles, lowering limits (or a combination of all four), or canceling policies. These corrective actions will not prevent shipping losses; they will only stop the insurer from paying as much for them. Insurers can also consider if the client takes corrective action due to losses, and this is where the real solution hides.
One of the things policyholders can do to help themselves is develop the best long-term relationship possible with their insurer. Policyholders who jump from insurer to insurer always looking for the next best deal, are doing themselves no favors. It may seem hard to believe, but it does matter to many marine cargo insurers how strong their relationship is with a policyholder when times get tough.
If a policyholder begins to experience shipping losses, if the insurer believes the policyholder bounces from insurer-to-insurer rate shopping, the insurer is apt to cut bait and run using the logic the policyholder won’t be their customer next year regardless. Conversely, if there is a rough spot of cargo losses, if the policyholder has been with the insurer for years and not a policy hopper, the insurer is more likely to want to work to salvage things to continue the relationship. This results in the insurer using what tools they have on your behalf because as a long-term customer you are worth it.
Shippers have more ability to take corrective actions than insurers because shippers/policyholders decide how cargo is shipped, packaged, where it is shipped, carried by who, when, and what instructions a carrier receives. Regarding cargo risk mitigation efforts in these areas, the objective aligns precisely with what the insurer desires: fewer losses. Keep in mind your insurer wants to keep you as a customer. Helping them do so is in the insurer’s and policyholder’s best interest.
Corrective action can be anything from no longer using specific carriers, packing/packaging changes, not loading at certain third-party shippers, or only accepting select types of commodities. It is important to assess why each loss happened to search for underlying causes and if the cause has impacted other shipments. Once identified, changes can be made to mitigate future similar losses. The more the underlying cause surfaces as the reason behind failures, the more focus can be directed at eliminating the cause. These changes are policyholder’s best weapon against spiraling insurance costs.
Regarding loss history, even if an insurance claim was not filed, the best place to look is historical shipping data when considering loss history. Below are some questions I asked the company experiencing elevated losses. The intent was to point them in a direction they could help themselves. Again, the subject happened to be a truckload produce shipper that ships from different locations that were not their own.
Did any one carrier have more than one loss?
Were all, or most, of the losses with small owner-operators or, conversely, larger reefer carriers?
Are the carrier’s safety and inspection records checked on SaferWeb? SAFER Web – Company Snapshot (dot.gov)
Were any/all of the losses similar perishable commodities that may be more sensitive than others?
Of the losses, how many were due to clear instructions not being communicated in writing to the driver?
Were all loads that experienced a loss loaded to industry standard for the commodity?
Were the reefer temperature, humidity, and air circulation settings all reviewed and correct upon unloading?
Are there any data or rules on how old reefer trailers are or can be?
Were there losses that originated at the same shipper?
Were any of the loads found to be double-brokered?
Were the losses on short runs or longer runs of greater than 750 miles?
Were the losses for shipments that were on the road over the weekends?
The intent of asking those questions is to find commonalities in losses; even losses that were taken care of by carriers or salvage sales. When commonalities are found, those are the focus areas that can be looked at to take corrective actions.
To examine data, the data must be available. Collecting as much data as possible during the booking process is imperative. During the booking of cargo is the time that three of the links of the chain are the closest. The freight owner, or agent, requests the move from a third party; if there is one, the third-party books the shipment with the carrier, and the carrier dispatches the driver. This process is when all parties trade information and listen to each other. This trading time is ideal for laying out requirements, providing instructions, and requesting needed data.
Using the manager’s most recent loss as an example, their customer stated it was sloppy securing by the trucker/shipper. If warranted, the corrective action can be not using the trucker, shipper, or both, again depending on whose responsibility it was. They were both there when the cargo was loaded. Reinforcing, in writing, loading, and securing requirements for commodities for each load to all carriers and shippers can be a benefit. Each component in the supply chain not being made aware of exactly and clearly what is expected from them invites poor execution. Reducing the height of oversized pallets or different packaging or crates can also improve stability of cargo.
Once the freight owner starts thinking about it, I bet they can think of more areas to look at than I ever could. The challenge for the cargo risk mitigation team is getting the operational team to think about it objectively. No one knows their commodities better than they do. Knowing who, what, why, and when of losses by looking at the data allows you to have more control in minimizing the risk of those types of losses from happening again.