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SUPPLY CHAIN RISK MANAGEMENT & INSURANCE BASICS
Risk in the international supply chain is everywhere. From exchange rate fluctuations, to political unrest and labor disruptions, to natural hazards. To succeed in the global marketplace, companies must constantly monitor risk factors that could negatively impact financial position. One of these risks is the loss or damage of cargo as it moves throughout the supply chain. Whether it is raw materials headed to your factory, or finished goods going to your distribution center or customer, the risk of loss or damage is always present.
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A basic outline of the fundamentals of risk management, which includes identifying, analyzing, mitigating, and monitoring risk in your supply chain.
An introduction to the various rules, regulations, and processes to consider in regards to damages and loss to goods in your supply chain.
The tools and techniques used to protect your cargo, as well as improve certain aspects of supply chain efficiency through data and analytics.
Organizational Risk Overview
Understanding Your Environment
Risk Management Tools and Resources
Next Steps
9 Liability, Claims, and Preliminary Notice of Claims
12 Cargo Insurance
14 Cargo Insurance Brokerage
15 Cargo Claims Management
16 U.S. Customs Bonds
18 Contact Information
19 Further Reading
20 Glossary of Terms
5 Process for Managing Risk
MAJOR TOPICS
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ORGANIZATIONAL RISK OVERVIEW
By following the traditional process of managing risk, as outlined below, your organization can take a holistic approach to examining the financial exposure that cargo loss or damage presents. Your organization is then in the position to evaluate the risk and take action in accordance with organizational risk tolerance levels.
IdentifyRisks
AnalyzeRisks
MitigateRisks
Monitorand
Review
Communication& Collaboration
Process for Managing Risk
PROCESS FOR MANAGING RISK
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Identify RisksThe first step is to understand where your freight is moving throughout the supply chain. Some questions to consider when mapping your supply chain are:
• Where does the cargo ship to and from?
• Where are the factories located?
• What are the organization’s frequently used lanes or high volume customers?
• Where are the most important products that, if lost, will have the biggest impact on the organization’s financial position?
• What is the maximum shipped value on one vessel or truck?
This step is designed to identify at what points an organization is most at risk for the goods in the supply chain. This can be done by understanding the contract purchase and sales terms typically expressed using Incoterms®. The Incoterms you agree upon with your vendors or customers will define when the risk transfers to or from your company. Being at risk means you are financially exposed to lost or damaged cargo. Once your risk exposure is identified, you can then begin to look at other critical factors such as the value of the goods, the shipping lane, the mode of transit, and the packaging. You will then need to assess potential hazards based on the risk exposure analysis. These hazards could include: hurricane, flood, earthquake, theft, hi-jacking, rough handling, civil unrest, and terrorism, to name a few. While this is not an exhaustive list, this exercise should be tailored based on your shipping lanes and commodities.
Analyze RisksRisk analysis involves looking at your supply chain, determining the probability that you will sustain losses, and how severe those losses could be. The global movement of cargo renders this exercise difficult as no one can predict acts of nature or civil unrest with complete certainty. Your logistics provider will be able to provide some quantitative data but there are a number of unique variables such as commodity, packaging, mode, and carrier that can diminish the reliability of that data.
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Implement Risk Mitigation ControlsWhile it is impossible to eliminate the risk of loss in any supply chain, there are plenty of risk mitigation techniques to evaluate for your organization’s needs. Some can be as simple as diligent carrier selection or over-packing, to utilizing IoT tracking devices or escorts. The decision will need to be made as to whether one feels the implemented mitigation techniques are sufficient enough to reduce the risk of loss to an acceptable level. At this point, your organization will need to determine a risk approach:
• Avoid the risk – Stop shipping on that lane or modify your Incoterms
• Modify the likelihood and/or impact of the risk – Investigate additional loss control measures
• Transfer the risk – Purchase insurance
• Retain the risk – Simply take your chances of a loss and absorb the financial consequences
Due to the uncertain nature of supply chains, nearly every company purchases cargo insurance. This allows a company to transfer the financial risk of loss to the insurance company for a premium. When evaluating risk management techniques one might decide to use a combination of multiple techniques. For example, the decision might be made to purchase insurance on all shipments and utilize covert GPS tracking on all shipments of “high-value.” This approach can have multiple benefits as it can provide real time visibility to your high value shipment, increase the chances of recovery in the event of a theft, and if properly presented to your insurance company, reduce your insurance premiums.
Monitor and Review Risk ControlsContinual monitoring of your loss history is critical to ensuring your losses are within your tolerance level. A high number of losses may result in increases to your insurance premiums, dissatisfied customers, and possible line-down situations. Cargo insurance is an effective way to protect yourself from unpredictable and unexpected losses, while additional risk mitigation techniques minimize the frequency and severity of claims. A thorough analysis of your cargo claim history for trends and root cause is also an effective way to refine your supply chain risk management plan.
A thorough analysis of your cargo claim history for trends and root cause is an effective way to refine your supply chain risk management plan.
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UNDERSTANDING YOUR ENVIRONMENT
When there is loss or damage to a shipment, the shipper or consignee (depending on who is at risk according to the Incoterms of the shipment) has the right to file a cargo claim with the freight carrier. A cargo claim is a formal demand for financial reimbursement stemming from loss or damage to cargo in a specific shipment. Before filing a formal claim, the shipper or consignee must provide a Preliminary Notice of Claim (PNC) indicating that loss or damage occurred. The PNC acts as a reservation of rights for the shipper or consignee to file a claim at a later date. Based upon the mode of transit, the PNC must be filed with the carrier within a specific period of time. After the PNC has been filed and the shipper has fully inspected the cargo to determine the extent of financial loss, they can file a formal claim with the carrier who issued the Bill of Lading. When submitting the claim, required documents that the claimant should provide are:
• A formal claim statement detailing the items lost or damaged and the full claimed amount
• Commercial invoice with values of each commodity on the shipment
• Packing list with item numbers and weights
• Bill of lading
• Proof of delivery signed when the cargo was received by the consignee
• Photographs of the damaged cargo
• Inspection or survey report
Depending on the circumstances of the loss or damage, additional information may be requested.
To help expedite and optimize the cargo claims process, all documentation should be provided early and accurately.
LIABILITY, CLAIMS, AND PRELIMINARY NOTICE OF CLAIMS
Once the formal claim has been filed with the carrier or freight forwarder, the evaluation process will take place. The time to resolve a claim can vary between 90 – 120 days from the time a formal claim is submitted. To help expedite and optimize the cargo claims process, all documentation should be provided early and accurately.
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Limited Carrier LiabilityWhen filing a formal claim, you must understand that a carrier’s liability is limited in terms of reimbursement amount and the cause of the damage. International trade conventions such as the Montreal Convention and Carriage of Goods by Sea Act provide the carriers with many defenses against liability and define the rights and responsibilities between shippers and carriers. These conventions determine the maximum amount of compensation that a claimant will receive if the carrier is found negligent. Compensation is based on the mode of transportation, piece count, and shipment weight, not on the commodity itself. In many cases, the maximum amount of liability will be significantly less than the damaged or lost product’s invoice value, leaving shippers at sizable risk.
Not only is compensation limited under these conventions, but there are also exclusions set forth that automatically release the carrier from any liability. Damage or loss caused by reasons such as “Acts of God” (natural disasters), “Acts of War,” “Attempting to Save Life or Cargo at Sea,” or anything beyond the control of the carrier is declared free from liability and no reimbursements are required.
General Average General Average is a major maritime event in which a vessel’s crew take reasonable and necessary actions in order to save the voyage. An example of General Average is when cargo is intentionally jettisoned from a ship to avoid sinking in rough waters. Traditionally, the expenses and losses incurred to save the whole venture are proportionally shared among all cargo owners on the vessel, whether or not their cargo was damaged. The entire ship’s cargo is temporarily held until the Average Guarantee and bond are provided to the Average Adjuster. As a cargo owner, you are at risk of covering these fees out of pocket unless you have purchased cargo insurance. Cargo insurance provides the financial backing for these events and facilitates the extensive paperwork involved, no small task for a complicated and large-scale loss.
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RISK MANAGEMENT TOOLS AND RESOURCES
Benefits of Cargo InsuranceCargo insurance can protect shippers for the full commercial value of their goods, and often even includes an additional 10% to cover any unforeseen expenses due to the incident. There are various types of cargo insurance that can be purchased, but the most commonly purchased cargo insurance is “All-Risk” cargo insurance. As the name implies, this type of insurance covers all risks of physical loss or damage caused by an external source while in transit, unless specifically called out on the policy as an “exclusion.” Other exclusions may apply based on the type of commodity being shipped, but in general, the most basic and commonly found exclusions would be: loss caused by improper packaging, delay, inherent vice, or nuclear radiation. Cargo insurance can be tremendously effective due to the fact that it shifts the burden of proof away from the shipper and onto the insurance company to prove that an exclusion would apply.
Purchasing Cargo InsuranceCargo insurance can be purchased in a variety of ways. Many freight forwarders offer cargo insurance on a “transactional” basis. What this means is that you can request insurance from your logistics provider and they will provide you with a rate and bill you for insurance as a line item on your freight invoice. This is a convenient way to insure your shipments if you are a smaller shipper and do not need to insure several shipments throughout the year.
If you are a larger shipper and need to insure cargo several times throughout the year, a cargo insurance policy is going to be the best way to protect your company. Some freight forwarders have the capability to sell annual insurance policies, while others do not. Most insurance brokerage firms can facilitate the purchase of a cargo policy that can be tailored to fit the specific needs of your company. An advantage of purchasing an insurance policy over transactional insurance is that a policy is designed specifically for your needs and can be set with appropriate limits, deductibles, and special conditions. Other advantages over transactional insurance may include long term cost savings, the ease of setting up a policy, and one less step when you are booking a shipment.
Either method of insuring cargo can be an effective way to mitigate supply chain risk for your company. Cargo insurance is relatively inexpensive compared to other risk management techniques, so it has become a “go-to” method of managing organizations’ supply chain risk.
CARGO INSURANCE
Cargo damage or loss is an inevitability. One of the most effective ways to manage this risk is to transfer the risk of loss away from your organization to an insurance company through the purchase of cargo insurance.
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Special Risk ConsiderationsThere are certain shipping lanes and commodities that pose significantly higher risk than others. For example, data has shown that for cargo being shipped through Mexico, there is a much higher risk of theft. Even some commodities that would typically be considered relatively low risk, such as food products, diapers, and toiletries, are often targeted and experience theft at an above-average rate. Similarly, commodities such as cell phones, laptops, tablets, and other consumer electronics are also found to have a higher risk of loss than other general goods and should be managed accordingly. There are other factors to be considered such as temperature requirements, packaging, duration of transit, and concentration of risk.
Cargo insurance is often paired with other loss control measures such as GPS monitoring, team drivers, pre-planning routes, and maintaining a strong service provider management strategy to protect your cargo and the financial interests of your organization. It is important to work with your security and risk management teams to identify all high-risk shipments and ensure that appropriate loss control measures are being implemented to reduce the risk of loss.
It is important to work with your security and risk management teams to identify all high-risk shipments and ensure that appropriate loss control measures are being implemented to reduce the risk of loss.
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If the information that you just read is overwhelming, finding a cargo insurance broker could be beneficial for you and your organization. Insurance can be complex, particularly when filing a claim. Time is of the essence when it comes to claim resolution, so employing a knowledgeable cargo insurance broker to set up your cargo insurance policy and guide the claims process can make a world of difference.
In larger organizations, the Risk Manager is generally the person to procure a cargo insurance policy. In smaller organizations, it may be a Controller or CFO that serves this function. A common way to obtain a cargo policy is to use an insurance broker. The broker’s role is to understand your business needs, how your freight moves, and find the best policy for your organizational requirements. They will gather some basic underwriting information, such as:
• Estimated annual shipment values
• Limits needed per conveyance
• Deductibles desired
• Commodity type
• Shipment lanes
While the broker works for you, they have access to a variety of insurance markets with the ability to “shop” for your policy. The broker will take this information to a few markets and obtain quotes for you to review. Then, you will select the policy that works best for your organization based on the coverages and premiums. It is important to note that many large insurance companies do not work directly with insureds but rather deal exclusively with insurance brokers.
CARGO INSURANCE BROKERAGE
Insurance can be complex, particularly when filing a claim.
When selecting an insurance broker, it is essential to understand what is most important to your business. There are generally three types of providers in this field.
• Large, global providers that handle many lines of insurance on a global basis with cargo insurance as a smaller part of their portfolio. Their role is to access markets and connect you directly with the insurance companies.
• Small, regional brokers still handle multiple lines but within a smaller geographic area. They often hire a third-party to assist with policies and claims.
• Niche brokers specialize in a particular field. These brokers often handle just one line of insurance, such as cargo insurance, and tend to have a much deeper understanding of their field. They are often better equipped to tailor a policy based on their area of expertise to your business needs and assist with claims.
Regardless of your selection, taking the time to evaluate what is important to your business can help ensure you have the right partner alongside to set up your cargo policy and navigate the claims process when the time comes.
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Many underestimate the challenges of navigating the complex rules surrounding liability claims.
As previously mentioned, a formal claim should be filed to recover any money that may be owed to the cargo owner of a damaged or lost shipment. While the owner of the goods can file the claim themselves, many underestimate the challenges of navigating the complex rules surrounding liability claims. These challenges include:
• The carrier denying a claim for reasons which may or may not be valid
• Frequent follow-up which is necessary to get many carriers to pay claims
• Documentation requirements: knowing which requests are valid, and which are unreasonable
• Time bar restrictions
Possessing the knowledge to navigate these challenges is just one part of the battle. Cargo claims routinely take weeks or sometimes months for even a seasoned claims handler to resolve. This means that an organization with even five claims per week will quickly find that they need to manage 50 claims at various stages of the process at once.
CARGO CLAIMS MANAGEMENT
For this reason, many organizations choose to outsource the claims process to a vendor who specializes in cargo claims management. By utilizing trained employees and a process built to most efficiently handle cargo claims, these vendors are able to offer the following benefits:
• Less administrative work for internal resources
• Increased carrier recovery by cutting through invalid denials
• Faster resolution of claims
In addition to these up-front benefits, the most advanced claims management vendors will offer the ability to analyze the data collected across all claims handled. This data can be produced in several ways:
• On-demand, downloadable reports filtered to a user’s specifications
• Periodic (typically monthly or quarterly) reports pushed out to users
• The ability to “red flag” claims above set thresholds for visibility
This enables risk and logistics managers at an organization to know the answer to questions like how many claims they have, which carriers are causing the most, and which products are most often being lost or damaged. Knowing the answers to these questions can help an organization make informed decisions around carrier selection, packaging, and route selection.
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U.S. CUSTOMS BONDS
Types of BondsBonds can be issued either as a continuous bond, which covers all activity over a 12-month period, or on a single transaction basis that covers one shipment or transaction at a time. Most commonly, importers prefer the benefits and ease of having a continuous bond versus filing tedious single transaction bonds. These benefits include cost, time, faster Customs review turnaround, and more reporting possibilities.
The most common type of Customs bond is an importer bond. This bond allows companies to import into the US. In addition to importer bonds, other common types of Customs bonds include:
• FTZ Bonds – Cover the activities involved with operating a foreign trade zone
• Drawback Bonds – Cover the activity of filing for and redeeming accelerated duty drawback
• Warehouse Bonds – Cover the activity of operating a bonded warehouse and bonded trucking
Customs bonds can be obtained through most Customs brokers or other trade-focused insurance agencies.
To further mitigate risk and conduct certain trade-related activities involving U.S. Customs, a company is required to post a Customs bond. A Customs bond is a contract between three parties – United States Customs, a principal (i.e. an importer), and a surety. A bond’s purpose is to ensure that all the duties and fees associated with the rules and regulations of importing or other Customs activities are paid to Customs by the principal. If the principal is not able to meet their financial obligations to Customs, the bond is there to protect Customs revenues up to the limit of liability on the bond. However, it is the principal’s responsibility first and foremost to pay all their fees before surety involvement.
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NEXT STEPS
FOR MORE INFORMATION: CONTACT US!
Expeditors is here to help you navigate the complexities of supply chain risk management by providing professional support with legal liability, claims, cargo insurance, and Customs bonds. Additionally, ECIB, a wholly-owned subsidiary of Expeditors, can provide custom-tailored risk management services, such as brokered cargo insurance policies and cargo claims management programs.
Expeditors Risk ManagementWebsite https://www.expeditors.com/services/supply-chain/risk-management
Email [email protected]
LinkedIn https://www.linkedin.com/company/expeditors/
Expeditors Cargo Insurance Brokers, Inc. (ECIB)Website www.ecibglobal.com
Email [email protected]
LinkedIn https://www.linkedin.com/company/ecib/
Expeditors Customs BondsEmail [email protected]
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FURTHER READING with Links to Articles and White Papers
All About Incoterms
Three Purposes of Incoterms
Explaining Declared Value
What is Carrier Liability
Managing Supply Chain Risk Amid Trade Disruption
Carrier Liability vs. All-Risk Cargo Insurance
Useful Tips for Filing a Cargo Claim
5 Benefits of a Cargo Claims Management Program
Claim Drain: Don't Let Your Resources Go To Waste
How to “Sell” Your Supply Chain to Insurance Companies and Save
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GLOSSARY OF TERMSShipper The party that is sending a shipment to a receiver, or consignee. Often the seller. Also referred to as
the cargo owner depending on the shipment’s status.
Consignee The party that is receiving a shipment from a shipper. Often the buyer. Also referred to as the cargo owner depending on the shipment’s status.
Carrier The contracted provider that is moving a shipment from point A to point B.
Insured The beneficiary of an insurance policy.
Timebar Time limit in which a claim is to be resolved.
Incoterms Set of international shipping terms that determines when the risk, cost, and responsibility of a shipment is transferred from the seller to the buyer.
Loss Ratio The losses an insurer incurs due to paid claims as a percentage of premiums earned.
Supply Chain A system of organizations, people, activities, information, and resources involved in supplying a product or service to a consumer.
IoT(Internet of Things)
The network of physical objects—“things”—that are embedded with sensors, software, and other technologies for the purpose of connecting and exchanging data with other devices and systems over the internet.
Line Down Situation where a production facility or other kind of manufacturing or distribution facility must stop operations due to the lack of a specific component of that operations activity.
Bill of Lading Contract of carriage issued by a carrier to move a shipment from a shipper to a consignee.
Bond Financial contract that acts as a guarantee to pay a debt in the event a payment is needed.
Inherent Vice The tendency in physical objects to deteriorate because of the fundamental instability of the components of which they are made, as opposed to deterioration caused by external forces.
Team Drivers A technique in long-haul trucking where there are two individuals taking turns driving in order to minimize transit time.
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