Vanishing Act.

Cargo theft has mushroomed in the last few years, giving insurers new headaches and new opportunities.

Truckloads of shrimp moving from the port of Miami to inland warehouses are now accompanied by armed guards. A shipment of pharmaceuticals worth $5 million disappeared from an airport in Germany. Children's toys that used to be considered innocuous merchandise are now being targeted by organized theft rings.

Around the world, the incidence of cargo theft is on the rise, forcing marine and inland marine insurance operations to focus on ways to curb these losses.

Defining the size of the increase and the scope of the problem is difficult, because there is no centralized method for reporting cargo losses. The Federal Bureau of Investigation estimates that cargo theft-related incidents account for $3.5 billion in merchandise losses each year in the United States. That's up from between $1 billion and $2 billion in 1977, according to "Intermodal Cargo Transportation: Industry Best Security Practices," a report published in May 1999 by the John A. Volpe National Transportation Systems Center, an agency of the U.S. Department of Transportation. Because the data is based on reported thefts, which are estimated to represent about 40% of actual thefts, the annual total could equal $8.75 billion, the report said.

The National Cargo Security Council, an association of transportation professionals, estimates a total of $10 billion in cargo theft in the United States each year, said Executive Director Joe Baker. That figure, based on data from freight carriers and insurers, represents the value of the stolen merchandise, which is not the only loss associated with cargo theft. Adding associated losses, such as the cost of reordering and reprocessing goods and filing and investigating claims, raises the estimate total to between $20 billion and $60 billion each year, said Ron Thornton, president of the Inland Marine Underwriters Association.

Forward-looking estimates predict that the actual value of goods stolen in transit will reach $20 billion annually, Thornton said.

Individual insurance companies are feeling the effects of more thefts. American International Group, the leading writer of inland marine insurance in 1999, has seen an increase in the number and size of cargo-theft claims, said Frank Reilly, a senior loss control surveyor with American International Marine Agency, a division of AIG Marine.

Chubb Group of Insurance Cos., which ranked No. 5 in inland marine insurance in 1999, saw a substantial increase in cargo theft two years ago. In 1997, Chubb, based in Warren, NJ., estimated that it paid cargo-theft losses of about $3 million in the high-tech industry, said Richard Soja, vice president and commercial inland marine product line officer. In 1998, Chubb's total cargo-theft losses in the high-tech industry jumped to $15 million.

"While cargo theft from our perspective has been an issue ever since we've been writing the business, in 1997-98, it really spun out of control and was to the point where we needed to make an absolute, dedicated commitment to doing this at the highest level of professionalism in the industry, or we needed to get out because we were losing so much money," Soja said.

More and Bigger Claims

The increase in the size of claims is the result of mushrooming values of cargo. A truckload of computer microprocessors can be worth millions of dollars. Almost all appliances now have computer chips, which raise their value substantially. "We used to insure a toy manufacturer that would have an average value of $100,000 per container, and theft of that container wasn't of major concern," Soja said. But today's shipment of video game players is worth about $600,000, and that is a concern, he said.

Other attractive targets are designer clothes, liquor and cigarettes.

The increase in the number of cargo-theft claims has a variety of causes, not the least of which is the absence of mandatory uniform penalties. With cargo theft, first-time offenders are being given plea bargains for possession of stolen goods, which is a misdemeanor instead of a felony.

"If you get caught dealing in drugs, there are mandatory sentencing guidelines, and you go to jail for years," Thornton said.

But the courts view cargo theft as a victimless crime, Thornton said, and they leave insurers, reinsurers and shippers to take care of the losses.

And that's only if the thieves are caught, Thornton said. It's hard to grab the attention of law enforcers, because "they're all jammed up with drug cases, smuggling, laundering money, gangster activities and murders," he said.

The high value of the merchandise and the low risk of paying a penalty have made cargo theft attractive to organized groups of thieves. Merchandise is taken from seaports and airports; unattended trucks disappear; and moving trucks are hijacked en route. The thieves rarely harm drivers, because they want to maintain the victimless aspect of the crime AIG's Reilly said. "One group actually called the police and told them where they left the driver duct-taped," he said.

The frequent occurrence of disappearing trucks and revealed routes suggests a high degree of insider involvement. Kemper Insurance Cos., the 15th-largest writer of inland marine policies in 1999, stresses the importance of background checks on employees, particularly for small employers, said Brian Marburger, senior loss control consultant.

Also, the increased number of shipping receipts being transmitted over the Internet gives hackers an opportunity to find out where and how expensive merchandise is being shipped. "These thieves with their computers are as fast and as smart and as knowledgeable as we are," Reilly said.

Goods in transit have become more vulnerable because warehouses have been made more secure, Soja said. "If you can't steal something sitting protected, you steal it when it's moving. There's far less protection, and it's more difficult to protect," he said.

Fighting Back

Faced with burgeoning cargo-theft losses, insurance companies have found ways to fight back. After its bad experience in 1997-98, Chubb implemented measures that cut its transportation loss experience by more than half, Soja said.

One of Chubb's top strategies was "creative alternatives," Soja said. For example, one of Chubb's clients was purchasing computer chips worth tens of millions of dollars. The terms of sale made the client responsible for insuring the chips from the manufacturer's premises to their location. "Our existing client approached us and asked what we would charge," Soja said. Chubb looked at how the chips were being shipped and discovered the client was planning to use a commercial freight carrier.

"My question was if they were shipping dollar bills or gold bullion, would they ship it with this carrier? The answer is, of course, no," Soja said. "This is the ultimate theft target, so why would you entrust computer chips to a standard motor carrier, when you would entrust cash to an armored truck?" he said.

The solution was Brink's Inc., an armored-truck company, which ultimately transported and insured the shipment. "We didn't leave our insured high and dry, but we were able to help them by offering a creative alternative," Soja said.

Another strategy Chubb uses is partnering with clients to reduce risks. Denial of vulnerability can be a problem. "Our field underwriters have been intensively trained to more appropriately handle these situations, and they work closely with our clients to help them see the problem and find solutions," Soja said.

In some cases, manufacturers will choose freight carriers based on price rather than knowledge, said John Tichenor, senior staff surveyor for Inamar, an Ace USA company based in Philadelphia. Inamar cautions clients to be sure they're getting the trucker they contracted for and not a subcontractor, Tichenor said. Also, the insurer tells clients to use companies that require background checks for their drivers. Ace INA Group ranked 17th among inland marine writers in 1999.

On certain routes, depending on the value of cargo, Inamar likes to see teams of drivers move the freight nonstop. "Cargo at rest is cargo at risk," Tichenor said.

AIG is a proponent of additional locking devices and high-security seals, Reilly said. The insurer also urges "just-in-time" deliveries. "Don't let it sit at an airport or a pier for any length of time," Reilly said.

Despite insurance companies' best efforts to work with clients to reduce incidences of cargo theft, in some cases underwriting structures have to be changed to reduce losses. Chubb implemented some lower limits, higher deductibles and more aggressive use of facultative reinsurance, Soja said. Facultative reinsurance allows the insurer to accept or reject each risk separately, instead of having to accept a package of risks.

Legislative Changes

In the long run, however, insurers want to see new laws correct the problems that make stealing legitimate cargoes more attractive than stealing cocaine. In 1999, the Interagency Commission on Crime and Security in U.S. Seaports, a national group appointed by President Clinton, reported that while there was seaport crime, a substantial amount of cargo theft occurred from the trucks going to and from the port area. As a result of the report, several senators are sponsoring legislation to address the issues, IMUA's Thornton said. Sponsors of the bill are Sens. Robert Graham (D-Fla.), Ernest Hollings (D-S.C.), John Breaux (D-La.) and Max Cleland (D-Ga.). Sen. John McCain (R-Ariz.) has also shown interest in the bill, Thornton said.

To help shape the bill, members of the National Cargo Security Council and IMUA and representatives of insurance companies, including Chubb and AIG, have met with representatives of the Senate Commerce, Science and Transportation Committee. Mandatory sentencing guidelines for cargo theft are at the top of the list of measures the group hopes will be included in the bill, Thornton said.

Secondly, the group is asking for the establishment of a national incident base-reporting system, which would use the existing uniform crime-reporting system with a new code added for cargo theft. Currently, the uniform system doesn't include a code for cargo theft. "If law enforcement is successful in stopping a stolen trailer truck, they might code it as vehicle theft. The truck may be worth $150,000, but it may have $500,000 worth of cargo," Thomton said. With a specific cargo-theft code, there should be more accurate figures for describing the scope of the problem.

"We also hope the bill will include funding for task forces that have been formed around the country," Thornton said. Los Angeles, Miami and New York--three of the areas where the highest incidence of cargo theft occurs--have formed task forces of law enforcement officials to address the problem. The FBI has identified 32 cargo-theft task forces in the United States, Thornton said. "We think the way to attack this is multijurisdictional task forces made up of everybody, including FBI, Customs, state police, Coast Guard, local port authorities, railroad police and local police," he said.

"It also has to be viewed as a global issue. You can do everything you want to domestically, but it is still a global issue," Thornton said.

The insurance industry has worked hard to convince law enforcement officials that cargo theft does have victims. Insurance companies are victims, which raises the price of transportation insurance and may force attendant vehicle warranties, meaning that if nobody's with the truck, it's not coyered, Thornton said.

Cities and counties are victims, too, Inamar's Tichenor said. If there is significant theft in an area, shippers stop sending goods through the area, creating an economic impact. "If half your shirts get stolen en route, your buyer doesn't want to see you darkening his door next year," Tichenor said. "So even if your insurer pays for the goods, you've lost that goodwill,"