Posted on January 2, 2022 in News

Supply chain delays further complicates and could increase the cost of Cargo policies

The supply chain issue we are now facing is delaying the delivery of everything from manufactured goods to raw materials. This issue manifested itself in the early days of the COVID-19 pandemic when plants were shut down and workers were completely unavailable. As we near two full years into the pandemic, the impact of these supply chain issues on the Cargo Insurance industry remains multilayered and complex.

For well over a year now, demand for finished items has been very high while supply remains low because many have chosen not to return to work or would prefer to work in other industries. Other members of the labor force have decided to work for themselves from home. Meanwhile the collective retirement (or in some cases early retirement) of Baby Boomers has exacerbated the labor shortage.

We should know in the coming months whether these supply chain challenges will directly lead to higher premiums at renewal for Cargo and related policies, said RB Jones Marine Cargo Manager John Gambino. “In all likelihood, the answer is yes,” Gambino said. “Inflation alone has already had an impact and although there is some opening up of the supply chain, shortages will have an adverse impact on pricing until it returns to normal.”

Cargo policy prices were already rising before COVID

Supply chain issues at a macro level are not new to the Cargo industry. When Just in Time (JIT) manufacturing was introduced roughly three decades ago, the marine industry as a whole had to react to the needed increased speed of transits that reduced importer’s reliance on warehouse storage which in turn reduced their overall costs. Goods in transit are more difficult to steal than goods in storage so insurance rates dropped due to less risk.

Over time though, storage risks and values increased on Ocean Marine Underwriters’ books of business as the stock found its way back into those policies from the standard property markets.

Prior to the Covid-19 pandemic, policy rates were rising simply because many Marine portfolios were not profitable, Gambino said. “We saw double-digit premium increases for many clients because there was a need for the market to readjust to the trends of higher risks and an increase in claims.” He expects premiums will increase slightly in 2022 because of these trends and the pandemic’s influence.

Operating a business in COVID comes with new challenges

We have all had to learn to live with COVID both personally and professionally. Yet some of the outcomes from COVID were not anticipated: early retirements with a Stock Market run-up from April 2020 through November 2021; fits and spurts of lockdown activity globally and ships being stuck in port for weeks or even months at a time. Even the truck driver shortage which started long before the pandemic, has become worse, further stalling delivery times for products, components, and raw materials as the shipping and container delays grew exponentially.

There are recent signs that these delays have gradually become more manageable but time will tell,” Gambino said, adding that these examples may signify a “new normal.”

Logistics and shipping company Maersk estimated in November that the supply chain issue will more noticeably ease in the third quarter of 2022 at the earliest. So, it may be some time before some of the adverse outcomes of the supply chain backlog will lessen.

Thefts, accidents, and higher prices

The supply chain delays have caused liability to increase within the Cargo industry, Gambino said. The extra time that containers have been sitting at ports while waiting for “final mile” trucks has led to an increase in theft of products and materials. “Product at rest is product at risk so we have seen thefts increase because of not just more accessibility for criminals but a higher demand and more overall volume of containers.”

Between having less available labor, and the delays that more often leave containers unattended after unloading, cargo theft is on the rise. For example, theft of PPE equipment early in the pandemic was common at shipyard and docks because these products were so high in demand. The pandemic has made other products even more valuable than ever, making them a bigger target for thieves.

Vessel size has increased over time and that too has led to more physical stress on the vessels and the containers they carry. So, the Marine Cargo industry has seen more accidents involving containers falling overboard and being lost at sea. The “Covid” effect has been seen with the MV Zim Kingston which lost over 100 shipping containers while anchoring in the Strait of Juan de Fuca near Alaska in October awaiting a berth at a West Coast port. It is believed that the lost cargo includes hazardous materials and could lead to environmental issues.

The increased cost of product and freight costs realized by the importer which leads to higher valuations and limits that insurance companies must provide on these products, Gambino said. “Large companies like Costco and Apple have been forced to buy more in bulk than ever before at higher prices,” he said. These prices are then passed down to consumers which in turn increases the valuation when there is a loss.”

What comes next

It is hard to know what the short or long-term effect will be on the Cargo industry, Gambino said. While the supply chain backlog is improving, a new variant of COVID and unnecessary lockdowns could set things back further. He believes that labor will continue to be a challenge, especially if the flow of new immigrants into the U.S. continues to slow down.

Meanwhile many Marine and Cargo portfolios are still not profitable and the rising tide of rates will affect all boats – or in this case clients.

I expect we’ll see carriers push for higher rates to ensure a necessary return for investors, but those prices could get even higher if the supply chain is not “back to normal.”

Of course, we may never really know what the “new normal” for the global supply chain will be. So, until then expect the unexpected. “My advice is to stay in close touch with your insurance broker to review your limits, valuation, and market trends,” Gambino said. “With so many factors changing the market, you want to be prepared for anything.”