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Capacity returns: with cargo insurance capacity now plentiful, buyers are beginning to look at the fine print in their contracts, from concealed-losses clauses to so-called delay coverage.

It's been four years since the aviation markets plunged, along with the World Trade Center on Sept. 11, 2001, and insurance capacity for air freight is available once again, for a reasonable price, of course. The mad scramble to find fair coverage is over. And that means actuaries and underwriters have a little more time on their hands to look more closely at agreements to make sure that--well--insurance carriers are carrying their load.

One area that is gaining significant attention is coverage for concealed losses or theft of cargo, says Patrick J. Murphy, managing director, New York Marine & Energy Division, at Marsh Inc.

"Carriers recognize that cargo can appear to be untampered with upon arrival, only later to discover that goods have been damaged in transit," says Murphy. "Most policies are now crafted to respond to these types of losses via concealed-damage clauses." These clauses serve to protect the air-cargo carrier from concealed losses discovered 30 to 60 days after arrival.

Lest readers be reminded that cargo theft isn't cheap.

Barry Conlon, business development director at risk mitigation vendor First Advantage Corp., estimates that annual global losses due to cargo theft range from $30 billion to $50 billion. In the United States, thieves steal upward of $18 billion to $20 billion, with about 85 percent of that number resulting from collusion.

Cargo presents a particular challenge in that by the time owners realize they've been filched, the crime may already be several months old.

In addition, says New York-based John Johnson, a senior vice president responsible for marine syndication at Aon, "many air-cargo carriers are looking into delay coverage--typically an exclusion from most policies--to protect valuable, time-sensitive cargo."

Pharmaceuticals or live organs, for example, often need to travel at constant temperatures. Coolers are rated to keep cargo at those temperature for a set time. If the coolers are not reloaded with dry ice, the drugs spoil, and there is typically limited coverage for deterioration due to delay.

Companies that ship a large number of time-sensitive materials are also looking to expand a cargo carrier's liability for damage to cargo in transit, brokers say.

Cargo carriers' liability has largely been limited as a result of the Warsaw Convention of 1929, which restricts recoveries.

Large express carriers like FedEx and DHL have limits of $l00 per package, while other carriers are typically liable for just 50 cents per pound. But in this day and age, when aircraft can carry the freight equivalent of 850 passengers across two continents, this covarage is downright inadequate.

"This is not adequate liability coverage for companies shipping large amounts of valuable goods," says Johnson.

In 1975, the Montreal Convention amended the Warsaw Convention with regard to air-cargo issues. The Montreal Convention, which entered into force in the United States in March 1999, also furthers U.S. efforts to ensure that U.S. air-cargo carriers and shippers can take advantage of technological innovations to expedite the processing of international cargo. The Montreal agreement, for example, permits an air-cargo shipment to move without written documentation, saving significant time and administrative costs.

Cargo-theft legislation has largely focused on the shipping and trucking industries, and would make it a crime to use a vessel to smuggle terrorists or dangerous materials--including nuclear material--into the United States; would impose stiff penalties for providing false information to a federal law enforcement officer at a port or vessel; and would increase penalties for anyone who fraudulently gains access to a seaport.

The legislation, introduced as the Patriot Act Reauthorization Bill (H.R. 3199) was passed by the House in July.

Some of the most high-risk geographic areas known for cargo theft include Brazil, Malaysia, Mexico, the United States, the United Kingdom and Canada.

But new technology, including new aircraft, should also help cargo carriers address concerns about international cargo theft.

"The post-Sept. 11 airline industry overall is a safer place, due to improvements in technology and the reduced age of the global fleet, which will ultimately translate to air-cargo carriers," says Steven Doyle, global manager, global aviation, at Aon's Global Practice Group in London. "This should translate into safer operations, which will lead to additional premium reductions and greatly reduce air-cargo carriers' risks."

And it's all coming not a moment too soon.


Air freight is the fastest growing segment of the U.S. cargo industry, with overall revenues for U.S. domestic air freight reaching $29.9 billion in 2002, according to data kept by the U.8. Department of Transportation's Bureau of Transportation Statistics.

The total value of air freight moved in the United States doubled from 1993 to 2002--growth faster than any other segment of the cargo industry--and now totals more than $2.7 billion per day. This increase is largely attributed to U.S. businesses seeking timely delivery of valuable goods, creating greater demand for air, truck and other intermodal transportation services.

While the air-cargo market slowed down following the events of Sept. 11, 2001, the industry has recently begun its return to profitability. "Most statistical measures, such as industrywide revenue, traffic volume and daily express-shipment counts, have returned or are approaching the peak values achieved in 2000," notes Robert Dahl, project director of the Seattle-based Air Cargo Management Group, an aviation consulting and airfreight market-research firm.

According to the ACMG's U.S. Domestic Air Freight and Express Industry Performance Analysis, released in July, daily traffic volume in the mature U.S. domestic express market now stands at 6.847 million shipments per day, an increase of 2.8 percent, which follows three years in which domestic express shipments declined.

The 2004 volume is approximately equal to the number recorded in 1999, and is just 1.8 percent below the peak of 6.976 million daily shipments in 2000.

Although air freight's overall tons and ton-miles remain small compared with the annual totals for other transportation modes--less than 1 percent--according to the DOT's Bureau of Transportation Statistics, the use of air cargo continues to grow. From 1993 to 2002, totals for tonnage carried by air grew about 46 percent, and totals for ton-miles grew by about 63 percent. The value of freight moved by air-truck combinations virtually doubled from 1993 to 2002. Almost $1 out of every $13 shipped in the U.S. travels via an air-truck combo.

"Because of the nature of intermodal transportation, we typically don't differentiate between air cargo and other marine risks," notes Murphy, of Marsh. "Most brokers now offer global transit policies that cover both ocean and air shipments, in addition to goods shipped by rail, truck, etc. Air rates have historically been lower than other marine risks, as the duration of risk for goods traveling by air is shorter."

As the market begins to turn around, capacity is plentiful, and the market is very competitive for attractive risks. "Following several years of losses, the marine market--which includes air cargo--has returned to profit," says Stephen Sozansky, senior vice president, marine division, at Willis of New York. "Where business is attractive, the market can be highly competitive. But where loss experience is unfavorable, underwriters are taking corrective action. More often than not, this goes beyond a straight increase in premium and includes implementing some form of self-retention. Insurers are now retaining increased net lines due to reinsurance costs.

In response, Willis Marine introduced the RADAR system, an Internet-based cargo management tool that can be used to hold and maintain a library of policy wordings, procedure manuals, and other important documents for easy access from clients' offices around the world. The program allows for premium declarations and calculations to be made online, and enables online reporting, tracking and management of claims, including full workflow.

"The transit market is a heavily loss-rated market, driven by actual exposures," says Murphy.

Because exposures in the air-cargo market have remained relatively low, insurance rates remain low as well. But certain markets are open to greater scrutiny.

"Underwriters are asking more questions about individual exposures in specific high-risk countries, based on the potential for terrorism, cargo theft and other risks," Murphy also says. "Cargo carriers need to identify their global transit exposures, as clients are being subjected to more scrutiny in clearing customs and tracking cargo."

MINDY TORAN is a freelance writer in Huntingdon Valley, Pa. She can be reached at
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Author:Toran, Mindy W.
Publication:Risk & Insurance
Date:Sep 15, 2005
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