How are worldwide shipping delays affecting the insurance industry?
For many industries, the global supply chain crisis has already become a tangible reality. The accumulation of shipping containers at ports around the world has led to shortages of materials and caused delays in almost every corner of the globe. This is having an impact on all types of economic activities, and the insurance industry is no exception: the delays that are now building up across distribution chains are changing the way these major trade operations need to be covered.
Freight transport is one of the main drivers of the global economy, especially shipping by sea: more than 80% of world trade involves maritime transport, and in the most developed countries this percentage is even higher. Our economies are highly dependent on the movements of large cargo vessels, and the best demonstration of this is the domino effect and the multi-million figure losses that just one of those ships, the Ever Given, caused when it blocked the Suez Canal for a week at the beginning of this year.
As explained in this article, several factors have come together to create the backlogs currently being experienced in world trade. The reactivation of purchasing and production that had been postponed during the first phases of the pandemic, along with government stimulus plans, have caused demand to ramp up again sharply, and logistics networks have been unable to respond quickly enough to this avalanche of orders.
The main problem, however, is that there are not enough ships available to step up the pace of deliveries. The ships that are used these days to transport containers are gigantic vessels around 400 meters (1,300 feet) long that can hold more than 20,000 containers, making it both difficult and costly to expand the fleet. “There are only a certain number of ships, and they can’t be built in just one year”, explains José Manuel Castillo, head of Global Marine at MAPFRE Global Risks.
The equation is clear: increasing amounts of freight waiting at the ports, but with a limited number of cargo ships, with the result being the bottlenecks that have caused substantial increases in shipping times. These increases vary depending on the routes involved, but some deliveries that should usually take 30 days are now taking more than 100, and these delays are causing headaches not only for the people who buy and sell that freight, but also to the insurance companies that provide coverage for it.
Longer shipping times mean:
- More risk
Incidents can affect freight on land as well as at sea. Insurance policies cover damage and losses that goods can suffer from the time they leave the port until they arrive at their destination, including any periods of storage in between. Castillo explains that because of this, the departments that perform risk assessment for these operations place particular focus on intermediate stops, when shipping containers are held up at logistics terminals. In fact, the most common accidents are fires, in addition to ships colliding or running aground. Freight that remains in one place for a longer time is more likely to suffer a claimable event, but in addition, delays have caused some ports to fill beyond their capacity and containers must sometimes be diverted to other terminals, where the security conditions may be uncertain. Considering the complex circumstances that can exist in some countries through which maritime routes pass, evaluating new scenarios and their associated risks is no easy task.
- Variation in the price of goods and assets
Fluctuations in the value of freight can start to represent a problem when travel times become months longer and the prices of certain goods are highly volatile, with this volatility being increased by the supply crisis itself in some cases. For example, because of a scarcity of raw materials, steel is now almost 2.5 times more expensive than it was at the beginning of the year. This in turn increases the indemnification that must be paid out when claims occur, because those payments are based on invoiced value, which can increase during the time it takes for transport to be completed. Policies contracted prior to this crisis had limits that were sufficient and reasonable, but these are now being exceeded. The insurance company also has higher risk exposure in such cases, because indemnification would increase even though the same goods are being covered. Even the cargo ships themselves are being affected by this situation: their value is rising because of the high demand, and there is also the opportunity cost of being unable to transport the billions in merchandise that remains waiting at the ports.
All of these factors are having a serious impact on the activities of insurance companies, which have received tremendous numbers of applications for new policies and requests to expand existing ones. Worldwide traffic congestion makes it necessary to insure cargo for longer periods of time (many freight shipments are covered by policies designed for pre-pandemic time periods) and with higher indemnification limits. All of this presents a challenge for the people that must evaluate the risk, who are now faced with entirely new and changing scenarios. Nevertheless, MAPFRE Global Risks believes that this will be a temporary situation, and there are already signs that these extraordinary circumstances are starting to improve. This means that the difficulties described, as well as the resulting cost increases, will begin to return to normal.
However, in addition to the congestion being seen in maritime shipping, there have been other obstacles that have contributed toward a perfect storm with a huge impact on worldwide freight transport. As part of the same supply chain, shipping containers that are offloaded at a port are then carried to their destination on trucks. As was first brought to light in the wake of Brexit but is now happening throughout much of the Western world, the trucking industry is suffering from a lack of qualified drivers, which is causing people with less experience to take on these jobs. Again here, the insurance industry is noticing the effects because this lack of qualified professionals has been causing a slight upward trend in the number of claims. This is a type of activity where the most typical incidents are overturned trucks, although thefts are also gaining weight in certain regions such as Latin America.
Globalized economies need all of these transport networks and supply chains in order to function, because they operate like a complex set of gears where all of the pieces need to fit together properly. As we have seen during this crisis, if just one of those parts is out of place, a whole series of major, unforeseeable consequences can be unleashed.