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Scary sailing: insuring international shipments.

Since the earliest days of ocean exploration, successful trade has required understanding a variety of often-hidden perils.

When the early ocean explorers set off in search of new trade opportunities in the late Middle Ages, maps were marked "here be dragons" to indicate uncharted waters concealing unknown perils. At the time, unfamiliar regions encompassed the majority of the planet.

Today, we can determine the coordinates of any place on earth. We also enjoy faster, safer modes of transportation and advanced technology that helps us navigate and communicate from just about anywhere. And, judging by the trends of the last decade, the desire to seek trade opportunities in distant lands hasn't abated a bit since ancient times.

For instance, the International Monetary Fund reports that 20 percent of the worldwide gross domestic product in 1997 resulted from international commerce--double the trade-related activity of only a decade ago. Similarly, the number of American companies sending goods overseas is expected to reach 1.2 million this year, triple the number of exporters just five years ago. That total is expected to double again by the year 2015, according to projections by the U.S. Department of Commerce. And U.S. exports are less than half the total picture--as a nation, the United States runs a trade deficit, importing more than it exports.

Despite the attractive statistics, companies involved in exporting and importing still face "dragons"--a variety of conditions and circumstances that can lead to losses or damaged or delayed shipments. And in today's expanding global market and just-in-time operating environments, one incomplete or missed delivery can make good customers breathe fire or, even worse, buy from someone else. As a risk manager, knowing where the dragons lurk will help you protect your company's shipments and bottom line against the hazards that goods may encounter when they are sent overseas.

Coming to Terms

The first step toward completing any successful transaction is for the buyer and seller to agree on the conditions of the sale. This includes the payment terms, the point at which title to the goods is transferred between the parties and, most importantly from a risk management perspective, the point at which the risk of loss is transferred (see below).

For example, if you ship goods "free on board," you, as the seller, are responsible for seeing that the cargo is properly packed, delivered and loaded on the transport vehicle or vessel. Your buyer agrees to assume the risk of loss during actual transport and delivery to his location. Be aware, however, that you still incur a contingent credit risk if you have sold the goods on credit; your buyer may refuse to pay if the shipment is lost or arrives late or damaged.

While terms and conditions can vary widely from country to country, most jurisdictions will defer to Incoterms, a set of uniform rules developed by the International Chamber of Commerce for interpreting contract provisions.

Shipping Risks

Environmental conditions, facilities, equipment and worker skills can vary widely by individual destination and mode of transport. The key to delivering merchandise on time and in good condition is understanding how international shipping differs from domestic shipping, and packaging cargo to withstand the most strenuous leg of the journey. Your shipment may encounter any or all of the following hazards before it reaches its final destination:

* Cargo shipped by sea is subject to rolling, pitching and heaving as well as wave impact, water damage, temperature extremes and navigation-related exposures.

* Air cargo may face changes in atmospheric pressure and temperature, as well as turbulence and other forces caused by rapid acceleration and deceleration.

* Surface transportation (by rail or truck) exposes cargo to shock and vibration, sudden braking and acceleration. Goods may also be damaged in an accident, stolen or, if shipped by truck, hijacked.

No matter what method is used to move goods, damage or loss can occur during loading, offloading or storage. A shipment originating in or arriving at a modern port or cargo facility will almost always be handled by skilled laborers using automated equipment. However, if it's bound for a small port in a developing nation, it may be offloaded manually, increasing the risk of workers dropping or otherwise mishandling it.

The more often a shipment changes carriers or mode of transportation, the greater the potential for accidental damage. Goods stored at any point along the route may also incur additional risk through crushing or improper stacking, fire, water damage, pilferage, contamination or spoilage.

Protecting Shipments

Fortunately, there are ways to protect against these exposures. The first is to eliminate or minimize the potential risks through proactive loss prevention, including appropriate packaging, well-planned routing and selecting carriers and freight forwarders carefully. These measures should be backed up with marine cargo insurance that provides a financial safety net for lost or damaged shipments.

Despite its name (a reminder of its origins), modern "ocean marine" cargo insurance covers overseas shipments whether the goods travel by air, land or water. You should look for comprehensive protection that covers your financial interests virtually door-to-door-from the time your goods leave your facility to the time your buyers take legal possession. If the terms of sale expose your company to contingent credit risks, you can buy an insurance policy that responds if the buyer refuses to pay for lost or damaged goods.

Because marine insurance is a highly technical field, it requires skilled underwriting. Only a handful of the 4,000-plus property/casualty insurers in North America offer marine policies and only a few maintain a full-time staff dedicated to marine business.

Unlike many types of commercial insurance packages, ocean marine coverage shouldn't be viewed as an "off-the-shelf" commodity. While certain coverages are standard, your company's policy should have limits, terms and rates tailored to your particular needs. Among the underwriting variables considered are the types of cargo, the destinations and modes of shipping. if your company has been involved in international trade for a period of time, rates also will reflect your previous loss experience.

Despite the specialized knowledge required for underwriting ocean marine policies, the coverage is readily available. If your company ships small quantities of goods, you may find it more cost-effective to purchase cargo insurance through your freight forwarder because policies purchased from an insurance carrier are typically subject to a minimum premium. The business volume enjoyed by freight forwarders provides economies of scale that may benefit their customers.

As you explore options, it's a good idea to obtain quotes from your agent or broker, as well as your freight forwarder, and compare rates and protection. And remember that as your trade business evolves, your risk management needs will probably change. Working closely with your broker or freight forwarder, as well as your insurer's underwriting and loss control staff, will help ensure your company has the protection it needs.

Evaluating Insurers

Like any type of insurance, marine policies are only as good as the companies behind them. Regardless of your shipping volume, you should look for an insurer with a substantial track record and an extensive international network of claims and recovery services. If you're in New York and your cargo arrives damaged in Hong Kong, you'll need someone able to handle the investigation, arrange salvage or recovery services and rush payment to your customer (if required by the terms of sale), preferably in a local currency. Nothing hurts a customer relationship faster than a shipment gone awry, compounded by a slow or inaccurate claims payment.

Equally important, you'll want access to loss prevention services, such as representatives familiar with international port facilities, climates, political conditions and indigenous exposures, as well as local customs and personnel. These individuals are in the best position to advise you on issues associated with packaging, documentation and routing, and can provide specialized services such as marine surveys and operational reviews.

Larger companies should also be concerned with an insurer's overall capacity, available limits and the sophistication of its products and services. Arrangements such as high-deductible policies with stop-loss coverage, captive insurance operations and other alternative risk financing approaches may be financially advantageous.

While these international shipping guidelines are not meant to be exhaustive, they will help you define the critical issues and ask good questions of your agent, broker or freight forwarder. And, as our predecessors in trade would surely attest, knowing the exact location of today's dragons will enable you to chart a straighter, safer course for your company as it sets out to explore new business opportunities.
Common International Sales Terms

Types of Sale Risk Transfer Point (Seller to Buyer)

Ex Works Seller's factory, warehouse, etc.
Free Carrier Specified depot, country of origin
Free Alongside Ship Upon effective delivery alongside vessel
Free on Board Onboard vessel at specified port of
Cost & Freight Onboard vessel at port of shipment
Cost, Insurance Upon delivery to final destination
 & Freight At specified point at frontier, but
 before customs border of adjoining
Delivered at Frontier country
Delivers ex Quay At port of destination (on quay or wharf)
 (duty paid)
Delivered ex Ship Onboard vessel at port destination

(Reproduced from Ports of the World, 15th edition, p. 95.
CIGNA Companies)

Richard Decker is senior vice president of INAMAR Insurance Underwriting Agency, Inc., a CIGNA Property & Casualty company in Philadelphia.
COPYRIGHT 1998 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1998 Gale, Cengage Learning. All rights reserved.

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Author:Decker, Richard
Publication:Risk Management
Article Type:Cover Story
Date:Jun 1, 1998
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