With the beginning of the first century of the new millennium, the world of marine cargo insurance continues to evolve. As the world economy continues to expand, so does the volume of international ocean cargo shipments, which in turn needs to be insured.

However in recent months, the overall marine cargo insurance marketplace has been experiencing a self-correction process, which for many buyers of coverage means increased rates, increased deductibles, or both. It would be worthwhile to review here the basics of marine cargo insurance, and then comment in detail on current market conditions and developments.

Marine insurance has three major subdivisions: cargo, hull and freight. The cargo insurance policy is much different than other standard property and liability insurance policies-the scope is truly global, and the extensions of coverage available are specific to the industry and much broader than other lines of coverage. For coverage purposes, "cargo" is considered to be any goods sent abroad by sea, air or post.

The owner of the shipment, not the ship owner, is usually the purchaser of cargo coverage, and it is usually a trading company or an import/export company. Policies are available for both individual shipments, usually applicable to a specific delivery of goods or goods sent on an irregular basis, or under an ongoing contract known as an "open policy."

The more common open policy is an insurance contract that covers goods shipped anywhere in the world, with no specific values stated, and the limit may be applied to any one conveyance or location. Cargo insurance covers such risks as theft, sea water damage, shortage, contamination, fire, explosion, jettison and loss overboard, general average sacrifice, general average contribution and salvage charges.

Coverage usually applies on a warehouse-to-warehouse basis for containerized cargoes, and port-to-port basis for bulk cargoes, depending on the terms of sale or terms of purchase. Perils available under other insurance products, such as fidelity, etc. are excluded.

Defining Costs

The premium (cost) for cargo insurance is based on individual experience, shipment volume, mode of transit and values shipped.

The underwriter must determine the premium required to meet the anticipated losses and expenses for each client. Other factors that can affect premium include additional coverage, such as processing in a foreign country, exhibition coverage at sales conventions, and temporary storage locations.

Shipments can be reported monthly to the insurance company and billed at the end of each month, so unlike standard property policies, the cargo policy can be issued on a "pay as you go" basis.

The coverage can be tailored based on cargo type. For example, some cargoes are susceptible to particular hazards, requiring unique treatment. Leakage associated with barrels containing liquids, or powders shipped in paper containers, may require a higher deductible. Coverage for fragile cargoes like eggs or chocolate may exclude the risks of excessive heat or breakage, for example.

Even if you're the buyer and are importing goods from overseas on terms of sale such as C.I.F. (invoice cost, insurance plus freight), where you may not be required to insure the goods, you may still have a contingent exposure if the seller placed coverage that was limited in some way, not offering the broad terms available in the insurance marketplace.

Stormy Seas Ahead

With the marine insurance market tightening since the beginning of 2001, some feel we are in for exciting times ahead, though this means higher prices for insurance buyers. Steve Connor, the ocean marine director for Kemper Insurance Companies, feels this way, although increases must be validated for the customer.

"We're seeing a hardening of the market for all commercial marine lines," Connor says. "The reinsurance market is going through total trauma right now. The problem is they're trying to get all their price increases in one fell swoop rather than gradually."

Connor, who sits on the board of the American Institute of Marine Underwriters and participates in Kemper's reinsurance negotiations, comments that reinsurers are looking for rate increases of 20 percent to 30 percent, "regardless of losses. Expenses are up dramatically, and primary carriers are then passing these costs gradually on to the buyer," he says, adding the state is such that, even though increases may not be popular, they must be done, otherwise there won't be a market five years from now.

Outside the U.S., specifically in the London marketplace, the same conditions are being seen as underwriters attempt to curb losses and turn a profit. Joyce Webb, cargo and specie class underwriter at London's Marlborough Underwriting Agency and chair of the Joint Cargo Committee, comments the market is obtaining average increases between 10 percent to 15 percent, and expects this trend to continue through 2002.

"Underwriters are looking at the wordings more closely, and in some cases more restrictive terms are being offered," Webb says. Typically, much more information is now required to place business, a development that should favor the quality brokers. Webb comments further, while there's still plenty of capacity, the market just isn't hungry for income: "Many underwriters are keeping their pens dry in anticipation of the fourth quarter of 2001, which we anticipate will be good as rates continue to harden," she says. Some additional trends being seen in London, according to Webb:

• Less binding authority, as underwriters are less willing to "give away their pen."
  
• More business being placed in the open market, as opposed to off brokers' covers.
  
• Less underwriters writing business 100 percent trend back toward more of a subscription market.
  
• Greater attention to brokers' solvency requirements.
  
• Credit control has become a key, with cover being cancelled if terms of credit aren't met.

Philip Pavey, a broker in the special risks group at The Miller Insurance Group Ltd., a major London independent broker, agrees with Webb, commenting that claims and loss control are becoming important factors.

"The market has been hit by increased claims, especially theft losses of high valued cargoes at airports," Pavey says. Pilots are also becoming increasingly concerned about the risk of hijacking when carrying highly valued goods.

Pavey says these views of anticipated price increases, increased attention to controls, etc. are shared by the majority of underwriters at Lloyds.

In addition to cargo, the marine transit marketplace is also faced with price increases, as well as increased concerns that may not be 100 percent insurable. The ongoing frequency of oil tanker spills has led the courts to hold tankers liable regardless of negligence-they just have to show that the oil in the water belongs to a given ship.

Transit insurance prices are also increasing due to the same reinsurance reasons as cargo. Buckley McAllister, vice president and general counsel of McAllister Towing and Transportation Company Inc., a tug and towing company in New York, says, "without question, the market has turned. Underwriters are seeing that their reinsurance has dried up. This is the time for insurers and their customers to show loyalty to one another. It's time to put lip service to the test."

The general consensus is to budget for marine cargo insurance rate increases of 15 percent or more, due to what Kemper's Connor describes as a, "reinsurance market in chaos." These conditions are expected to continue for the foreseeable future. The only other alternative is to retain more risk, which could prove disastrous in the event of a catastrophic loss.