Keeping cargo safe: as seaports around the globe increase cargo protection initiatives, marine insurers look for more information, but also face more bureaucracy.

The international shipping industry faces a challenge: enhancing cargo container security without impeding traffic flow. Marine insurers, meanwhile, face their own challenge: writing policies in accordance with an increasingly bureaucracy-laden system.

For while some seaports around the world increasingly use container scanning technology to defend against terrorist movement, U.S. Customs and Border Protection, the unified border agency within the Department of Homeland Security, relies on a multi-layered security approach that begins with paperwork.

Prior to institution of the Maritime Transportation Security Act--which required vessels, maritime facilities and ports around the country to implement increased security measures by July 1, 2004--a trucker could just drive into a port area. Not any more: an estimated 9,500 vessels, 3,200 facilities, and 40 offshore oil or natural gas rigs were directly affected by the legislation, according to the DHS.

So while an ongoing test of a private sector security system with Hong Kong Container Terminal Operators Association Ltd. shows signs of hope that intense scrutiny and expeditious cargo traffic tan coexist harmoniously, back in the United States, the Customs and Border Protection begins its incoming cargo inspection with review of shipping manifests. From there, suspicious cargo loads-say, from a country unfriendly with the United States--are set aside for additional scrutiny.

The additional levels of bureaucracy imposed upon inland marine carriers--including facets of the MTSA and the Interstate Commerce Commission Termination Act of 1995--also subject the insurer to additional scrutiny. Insurers need to properly evaluate the inland marine risk associated with any inland carrier, said Christopher Raleigh, an attorney with Cozen O'Connor, New York, who specializes in marine cargo claims. Insurers should also be careful to review the type of transit the carrier is transporting, plus all forms, contracts and documents used by the carrier, as well as established practices and procedures.

Marine cargo insurance policies cover cargo going in and out of the United States, while inland marine policies cover common carriers moving across the country. The two converge when cargo coming into the United States is trucked inland, or transported by rail and then trucked inland, Raleigh noted.

"You can get some interesting situations there," he said. Insuring a trucking risk is tricky. "As an insurer, I would be looking at whether or not a trucking company is transporting cargo out of a port of call that increases my risk analytically, as opposed to a trucker who's picking up in Arkansas and bringing to the city of New York. There's a whole different layer of risk there."

To stay ahead of terrorist schemes, some U.S. ports have initiated security measures over and above federal requirements. "Each port is issuing 'sealink cards,' which link an individual trucker to a particular trucking company. Individual ports are doing it for a heightened level of scrutiny," Raleigh said.

Some of his marine insurance clients believe that federal regulations will soon include such identification links as part of Customs and Border Protection port security initiatives. But for now, "It's being done on a port-by-port basis," Raleigh said.

With an inland marine shipment, a trucker can actually see the cargo for the most part; but with ocean marine shipments, the cargo is coming in a container that's been sealed, Raleigh noted: "The trucker really has no idea what is in the box other than the paperwork he's seeing."

There also is more risk for an insurer signing an inland carrier based on the type of cargo he's transporting. "Virtually any insurance company who is writing these risks is going to be affected by this," Raleigh said. Most marine insurer reactions to the MTSA legislation are that it's "a pain in the neck," he added.

The "24 bout rule" of the MTSA requires that the United States have advanced information on all cargo being shipped into the country. Customs and Border Protection uses a nonintrusive inspection technology system to examine sea containers and other cargo designated as "high risk" based on documentation it receives in advance of the shipment, said Customs and Border Protection spokesperson Paula Keicer.

Customs and Border Protection was formed in March 2003 and comprises the U.S. Customs Service, U.S. Immigration and Naturalization Service Animal and Plant Health Inspection Service, and the U.S. Border Patrol. It has some 42,000 employees, about one-fourth the total employee base of the Department of Homeland Security.

"CBP's primary mission is preventing terrorists and terrorist weapons from entering the United States, while also facilitating the flow of legitimate trade and travel," Keicer said. That involves moving the U.S. border theoretically outward--the Container Security Initiative, for example, has customs officers placed at 40 foreign ports to inspect shipments destined for the United States--to ensure that American soil is the last line of defense, not the first, she said.

New Scanning Technology

Customs and Border Protection's largest and most powerful scanning inspection unit, the "Eagle" Mobile Sea Container X-Ray System, tan penetrate more than a foot of steel. A prototype was deployed to Miami in early 2001; two upgraded models have been deployed to the ports of Savannah in October 2004 and Baltimore in December 2004.

Meanwhile, a Hong Kong port pilot test by Science Applications International Corp., San Diego, of its latest scanning technology, the Integrated Container Inspection System, has twice been extended, and U.S. government interest in the pilot has been piqued, noted Ron Zollars, spokesperson for SAIC a research and engineering company.

Using gamma ray imaging and radiation scanning, ICIS enables a port terminal to scan high volumes of containers in normal traffic, while providing timely data to help identify and inspect high-risk containers. The initial pilot of ICIS was extended from an August completion date through September and now, through December.

"As we moved toward the end of [the second] phase, it was mutually agreed that the next phase of this pilot would be to introduce some additional variables and to investigate additional methods and protocols through which the data from ICIS could be used to improve container security," Zollars explained.

In addition, "The U.S. Government has invested in a number of visits and discussions with foreign government officials and the private industry to explore how this public-private partnership could result in increased application of global container screening," Zollars said. The government continues to explore various ways through which information generated by ICIS might fit into "current protocols and bilateral agreements," he added.

Achieving the Impossible

Given the large volume of container traffic coming into the United States and the commercial desire to keep imported goods moving at a timely pace, providing complete security is probably impossible, said Mark Blackman, executive vice president and chief underwriting officer at NYMagic Inc., New York. NYMagic is an insurance holding company with property and casualty insurance subsidiaries that specialize in writing ocean marine, inland marine and nonmarine liability insurance.

"All the deep draft ports have met the MTSA requirements, or mandates, for protecting their facilities, but port security is relative to the threat levels that a port or even a country might have," noted Aaron Ellis, communications director for the American Association of Port Authorities in Alexandria, Va. The AAPA ix a trade association representing more than 150 port authorities in the United States, Canada, the Caribbean and Latin America. "So some ports have instituted much more state-of-the-art types of technology than others."

U.S. port security measures are adequate, but could be better, he said, noting that the United States has the technology for GPS tracking of individual containers, but has yet to put that technology to use.

"Any security system is going to have to involve a cost-benefit analysis. Nevertheless, improvements could be made in the current system," Blackman said. "With respect to imports, consideration should be given to x-rays of containers, at least on a random basis."

"In addition, the United States should work with other countries in developing inspection, certification and container locking procedures at the country of origin," he added. "Diplomatic efforts should be made to improve political relations with countries that spawn terrorists."

Catastrophe risk modeler RMS Inc. of Newark, Calif., released its fourth annual U.S. Terrorism Risk Model in September, citing that while the risk of terrorist activity continues to increase globally, the risk of an attack on U.S. soil by terrorists has slightly decreased due to improvements in counter-terrorism security measures.

"Terrorists fear failure much more than death," noted Dr. Gordon Woo, chief architect of the terrorism model for RMS in London. "Accordingly, terrorists are extremely sensitive to security improvements, and enhancements do affect the likelihood of attacks at different targets."

He forecasts an increased risk of "extreme events" over the next five years: terrorist attacks using chemical, biological, radiological and nuclear weapons. The presence of coalition forces in Iraq will continue to incite violent aggression against the United States and its allies, Woo said.

Marine underwriting policies already exclude such things as acts of war or terrorism unless a higher premium is paid, Raleigh noted. Yet he added, "Risks are increasing because of security issues."

A Question of Rates

The marine industry has been writing insurance against war, terrorism and civil commotion for more than 200 years, Blackman said. "Marine underwriters are required to keep apprised of world political conditions. To the extent that such risks can be quantified, the marine insurance industry has a track record of providing coverage for such perils at rates, terms and conditions that reflect the perceived exposure."

"The fact that shipping by definition exposes one to risks of every type all over the world, the policies are already tailored to pretty much any situation," said Christopher B. Kende, a Cozen O'Connor attorney specializing in marine insurance. And so underwriting changes for marine cargo are more likely to be a rate issue, than an issue about how the policy was written.

Marine cargo is "a very perilous business by definition and by nature," Kende added. "Many of these concerns have been in the marine context for many years."

Since the United States has considerably tightened border and port security, the risk of a port attack is reduced, Woo said. A biological attack is the most likely since screening for biological weapons is especially difficult. A chemical attack is less likely because weapons acquired abroad tend to be deployed abroad (in the Middle East, for example) for logistical reasons. A nuclear attack is a very low risk because of the extreme difficulty in terrorists procuring such a weapon, Woo said.

"By comparison, a dirty bomb is more likely than a nuclear bomb, but would not have the lethality of a biological weapon like anthrax or smallpox," Woo said. "Ironically, steps taken to address the avian flu pandemic risk--nature's biological weapon-may help mitigate the risk from a terrorist biological attack."

At some U.S. ports, guards, not fences, are used to control access, Ellis said.

"This can be an effective security control, but possibly not the most effective," Ellis said. "The point is that security is an evolving process, and ports must stay steps ahead of the 'bad' guys to have effective protective protocols. That takes a continuing investment in infrastructure, software, personnel, training programs and maintenance."

"The primary concern would be the political climate in countries involved in the course of transit," Blackman said. On imports, NYMagic is less concerned with a specific cargo carrier and more concerned with the country of origin. On both imports and exports, they're also concerned with the interior transit exposures.

"An improvement in security and a decrease in the perceived exposure to terrorism would result in improved rates, terms and conditions," he added.

"Virtually any insurance company who is writing these risks is going to be affected by this. It's a question of how effective is it?" Raleigh said. A determined terrorist could study American security efforts and find a way to breach them. "If somebody wants to bite in under the wire, they're probably going to do it."

Raleigh defended the United States' use of import manifest scrutiny as a first line of defense, however, noting a recent Customs and Border Protection experiment with X-raying containers on the Mexican border. While the technology is good, the system still needs document backup to be truly effective, he said.

"Any technology I've seen is not flawless; you do need the paperwork," Raleigh said. "When you're exposing a container and looking inside of it, it's not going to be squeaky clean."

Key Points

* Recent security legislation has made evaluating marine risks more complex for insurers.

* New technologies may enable ports worldwide to increase security measures against terrorism.

* The political climate in countries involved in transit should be given more consideration than the cargo carrier in pricing cargo coverage.

More Than One Way

The Customs and Border Patrol division of the U.S. Department of Homeland Security uses a multi-layered security approach to screen incoming cargo:

Automatic Targeting System--Enables agents to collect and analyze cargo shipping data from manifests, analyze the data against a 10-year database of manifests, and distinguish high-risk shipments before they reach U.S. shores.

Radiation Portal Monitor--More than 470 drive-through detection devices are in use nationwide. The units use non-intrusive means to screen trucks, cargo containers, rail cars and other conveyances for radiation.

Personal Radiation Detector--A small, sensitive device carried by port officers and border patrol that sounds an alarm if radiation is detected. More than 10,500 are carried nationwide.

Radiation Isotope Identifiers--A hand-held device that can detect gamma and neutron emissions from radioactive sources. More than 500 are in use.

Large-scale Gamma-Ray/X-Ray Imaging Systems--These massive units can transmit and reflect images of the contents of a cargo container, rail car, vehicle or trailer-truck. Approximately 166 are in use nationwide.

The Ins and Outs of Marine Cargo

* The United States shares 5,525 miles of border with Canada; 1,989 miles with Mexico; and has a maritime border that includes 95,000 miles of shoreline.

* It is served by more than 360 commercial ports that provide some 3,200 cargo and passenger handling facilities.

* More than 500 million people cross the borders into the United States each year; some 330 million of whom are noncitizens.

* More than 2 billion metric tons of cargo more through U.S. ports each year.

* Foreign ships make some 51,000 calls at U.S. ports annually.

* About 90% of the world's trade is transported in cargo containers.

* In the United States, almost half of all incoming trade (by value) arrives in containers aboard ships.

* Nearly 9 million cargo containers arrive on ships and are off-loaded at U.S. seaports each year.

* Deep draft ports (for ocean-going vessels) move more than 99% of U.S. overseas trade by weight and 61% by value.

* In 2002, the United States accounted for 19% of the world goods trade and 15% of world services trade, making it the largest trading nation.

* During the five-year period from 2003 to 2007, public port spending is predicted to reach a record $10.4 billion, compared with actual expenditures of $7 billion from 1998 to 2002.

* The total amount of foreign trade moving through U.S. ports by 2020 is forecast at more than double that of 2001 tonnage levels.

Sources: Science Applications International Corp., San Diego; U.S. Customs and Border Protection, and the U.S. Department of Homeland Security; and, the American Association of Port Authorities, Alexandria, Va.

NYMagic Inc. A.M. Best Company # 58436 Distribution: Corporate underwriting group

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