Whether shipping by ocean, air or ground, cargo insurance should be an important part of your supply chain risk management plans.
With 95 percent of global consumers living outside the United States and more than 80 percent of the world’s purchasing power located overseas, businesses are increasingly required to operate within a complex global supply chain, relying on buyers and suppliers from all over the world. Consequently, a vast amount of cargo is transported every year – by land, sea and air freight. According to the World Shipping Council, around 130 million freight containers were transported by the international shipping liner industry in 2016, with an estimated value of over $4 trillion. And the International Air Transport Association (IATA) predicts that 62.5 million metric tons of cargo will be carried by air in 2018.
If your business has a 6 percent profit margin and loses $232,000 worth of goods, you’ll have to sell $3.9 million in new goods to recover the cost.
Most of the time, carriers do a good job and your cargo arrives at its destination unscathed and on schedule. But every so often, bad things happen to good cargo. SensiGuard reported 649 cargo thefts throughout the United States in 2017, with an average value of $146,063 per theft, while an average of 568 containers (not counting catastrophic events) were lost at sea every year between 2008 and 2016. If you include catastrophic events (such as a shipwreck), it’s an average of 1,582 lost containers every year.
Statistically, that may not sound disastrous. But what happens when it’s your cargo on the line, and your business has to deal with the reality of losses that are potentially worth millions of dollars? That’s where cargo insurance comes in, helping to protect you against all types of risk.
What can go wrong with your cargo?
Transport risk is unavoidable, particularly as supply chains become more complex and goods remain in the supply chain longer. From piracy to natural disasters, accidents to fire, these high-impact, low-probability events are impossible to predict. For shippers who deal with high-value goods like designer clothing, jewelry, electronics and artwork, cargo theft can also be a problem. Even with robust supply chain risk management and special security procedures, risk will always exist in critical areas of the supply chain.
Argus, an oil and pipeline construction company, discovered as much in 2012. In two separate incidents, a cargo ship and a truck transporting their goods caught fire, resulting in losses totaling almost $1 million. Fortunately, Argus had their claim settlement paid in full through their comprehensive cargo insurance policy offered through UPS Capital Insurance Agency, Inc. Without cargo insurance or any form of risk management protection, they would have faced a million-dollar loss, which could have had a disastrous effect on their business.
The real cost of cargo loss
Overcoming a large cargo loss can be extremely difficult. Although there may be legal penalties, the greatest cost of lost or damaged cargo is the loss of the goods themselves. A reduced inventory could result in lost sales, as well as lost market share. Losing a customer’s cargo can also cause severe damage to your brand image. In addition, you’ll probably have to sell a substantial amount of product to offset the loss. For example, if your business has a 6 percent profit margin and loses $232,000 worth of goods, you’ll have to sell $3.9 million in new goods to recover the cost. That’s a tall order, and dwarfs the initial cost of cargo insurance.
If you're shipping via an ocean vessel, the risks can be even greater. In the event of an emergency and the safety of the crew is at risk, the captain may sacrifice (jettison) the cargo. Even if your goods remain unscathed, you’ll still be required to pay a percentage of the loss before your goods will be released from the port. This is known as a “general average” loss.
Put simply, the potential cost of cargo loss can cripple a business. As many as 20 percent of businesses that experience a supply chain disruption shut down within 18 months. The question is: Can you afford not to take out cargo insurance?
Supply chain risk management solutions
Given the potential hazards of global commerce, identifying, prioritizing and mitigating risks are extremely important. A layered approach to supply chain risk management is often the best way of protecting your cargo, and includes solutions such as these:
- Conduct frequent security audits and educate drivers about how to avoid cargo theft.
- Identify the correct type of packaging for different items.
- Remove identifying marks from outer packaging if commodity is considered high risk for theft.
- Choose the best type of transport for your cargo.
- Utilize visibility and cargo tracking systems.
- Make sure that loads are secured correctly.
- Evaluate the concentration of risk in shipments and consider distributing across loads, carriers or modes.
- Expedite shipping times and use direct shipping routes.
- Stage loads at secured company yards. According to SensiGuard's Supply Chain Intelligence Center, 75 percent of U.S. cargo thefts in 2017 took place within unsecured parking areas.
Of course, extreme supply chain challenges cannot be completely avoided. That’s why it’s so important to have a last line of defense: cargo insurance.
Cargo insurance vs. carrier liability
It’s important to understand the difference between cargo insurance and carrier liability. Many shippers rely on carrier liability, believing it’s insurance. It isn’t, and making this mistake could end up costing your business millions of dollars.
“Carriers have to provide some type of coverage by law. However, they have many defenses they can use to deny claims,” says Dave Zamsky, vice president of marketing at UPS Capital. There are many exclusions to carrier liability claims, including acts of God and inherent vice, and the claim settlement is based on the replacement value, package count or the weight of the shipment, rather than the actual valuation of your cargo. Relying on carrier liability is a roll of the dice, and why gamble with one of your most important business assets?
The benefits of cargo insurance
Cargo insurance is the best way for businesses to reduce financial exposure and mitigate supply chain risks. An all-risk cargo insurance policy doesn’t require you to prove fault on the part of the carrier, and claim settlement is based on invoice valuations. In addition, coverage is door-to-door, regardless of how many different carriers you used.
UPS Capital® cargo insurance solutions offer far-reaching coverage for shipping risks, as well as warehouse risks and contingency losses. “Our CargoEdge® policy is one of the most comprehensive broker policies available,” says Zamsky. It offers the convenience of worldwide, multimodal (sea, air and land) coverage, and there are customizable programs for goods with unique qualities, so you can tailor your policy to the needs of your business. UPS Capital Elite™ for Vintners provides coverage for wine shippers, while CargoEdge for Time-Sensitive Goods is specifically for businesses shipping perishable, time-sensitive commodities. The claims process is also extremely fast, and 92 percent of claims are paid within five business days of receiving complete paperwork. “Customers are able to take that money and put it right back into their working capital,” adds Zamsky.
Supply chain disruptions can happen at any time, and your level of preparedness determines whether your business will be able to cope with the financial effects. Cargo insurance is one of the most effective risk mitigation tools, keeping your bottom line safe and your supply chain protected.
Learn more about the cargo insurance solutions UPS Capital can provide your business.
Note: Insurance coverage is underwritten by an authorized insurance company and issued through licensed insurance producers affiliated with UPS Capital Insurance Agency, Inc., and other affiliated insurance agencies. UPS Capital Insurance Agency, Inc. and its licensed affiliates are wholly owned subsidiaries of UPS Capital Corporation. The insurance company, UPS Capital Insurance Agency, Inc. and its licensed affiliates reserve the right to change or cancel the program at any time. The insurance coverage is governed by the terms, conditions, limitations and exclusions set forth in the applicable insurance policy. Coverage is not available in all jurisdictions.