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Trade Disruption Insurance |
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(Article published in the Oct 15, 2008
issue of Manila Standard Today)
On
Friday next week, the 24th of October, from one who is most
likely the oldest living icon of Philippine insurance will come a half-day
seminar on what is most probably the newest risk management tool to
considered by businessmen in the country: trade disruption insurance (TDI).
TDI
is a logical progeny of the modern phenomenon of globalization of trade.
Trade, for most countries, is no longer confined within their
borders.
In
many instances, raw materials are sourced from one country, transported by
vessels of another, through waters within the territory of a third, to be
processed and manufactured in factories located in a fourth.
The finished goods then travel to a fifth for packaging, stored in a
sixth to await distribution to wholesalers in a seventh who contract with
retailers in an eighth who sell to the consumers in a ninth.
In
the meantime, the producers of the raw materials hire seasonal workers from
across the border from a tenth; the officers and crew of the transporting
vessels are nationals of an eleventh; the factory workers are migrants from
a twelfth; the packages are imported from a thirteenth; the inventory in the
warehouse is monitored by IT specialists in a fourteenth; wholesalers are
represented by salesmen from a fifteenth; retailers have children studying
in a sixteenth; and the consumers are attended to by caregivers from a
seventeenth.
The
line from the raw material to the consumer is extremely long; the physical
and legal terrain traveled is complex; and the people involved and their
involvement are just as diverse. Risks to the supply line abound all around and all the time.
And, in some instances, they crop up in unexpected places. No one seemed to have predicted, for instance, the flare up
of hostilities between Russia and Georgia.
“Any trade that was passing in and around that region and certainly
through Georgia would have been impacted," noted, Tim Press, director
of special risks at Miller Insurance Services Ltd. in London.
Property
insurance have been the traditional defensive response to the risks of
business. But, until recently,
in order to protect against the risks to the entire supply line, one has had
to put together a complicated patchwork of different types of stand alone
insurance policies, each one providing specific and limited coverage for the
different stages in the process. The portfolio of policies would generally
contain marine insurance, property insurance, political risk insurance, and
others addressing particular perils.
But
even, the most meticulously sewn quilt of standard stand alone property
insurance policies may in some instances not fully compensate for the damage
caused by the occurrence of a risk feared.
For
example, when a devastating earthquake occurred in Colombia in January 1999,
coffee that were contracted to be delivered in January and February simply
could not arrive on time. The insurance covering the transport will not pay for the
damage because the coffee beans were not damaged.
But still, on account of its non-delivery on time, the supplier
suffered some loss. The buyer
balked at receiving the delayed goods.
The standard property insurance did not cover that loss because the
property insured was not lost.
What
distinguishes a TDI from a standard property insurance is the fact that TDI
is not triggered by any direct property damage to the insured.
The insured can claim on the TDI if he suffers damage resulting from
disruptions of the trade flow arising out of a variety of perils. Cases
abound which demonstrate time and time again its utility in answering for
what we call “consequential damages.”
For
instance, a
company was committed to delivering annual supplies to remote regions
of US Vice Presidential Candidate Sarah Palin’s Alaska. Ice regularly
blocked many of the access channels to the offloading points which were open
only a few weeks of the year. Still, the company was obliged to deliver the
product on time each year; otherwise, the company would lose future
contracts not only from its current customers but from future buyers.
When in a freak year the ice unexpectedly formed and blocked the
usual offloading points ahead of the usual time, the company had to spend
more than the usual costs because it had to offload at other points and
transport the cargo over land, to meet the delivery deadline.
The
TDI Policy taken out by the company came in handy.
It paid for Extra Costs and Expenses in delivering the cargo by
alternative means when the ice disrupted the voyage.
At the same time, it provided the company the funds unexpectedly
needed to meet its obligation on time.
The company did not lose the profits it expected from its disrupted
delivery and it rested secure in the thought that future contracts would
continue to be forthcoming because customers were convinced of the
company’s ability to deliver as it were, come what may.
As TDI
developed, it has come to be a comprehensive coverage for a big bundle of
perils including but are not limited to the following: marine transit; fire;
lightning; explosion; storm; flood; snow; ice; earthquake; volcanic
eruption; aircraft impact; overturning; derailment; collision or emergency
closure of any road, bridge, railway line, airport, port or navigable
waterway; and political risk exposures. The compensation, on the other hand,
has come to consist in the insured being generally protected to the extent
of loss of earnings, additional cost and expenses, and contractual
penalties.
More insights, I am sure, are forthcoming from De Dios’ speakers: Mr. Mark
Cooper who is managing director of TFC Brokerage, Inc. and Mr. Alex
Morrison, president of Hill & Associates. The venue is the Conference
Hall of the Insurance Institute of Asia and the Pacific, at the 26th
Floor, AyalaLife-FGU Building, Ayala Avenue, Makati City.
The seminar is De Dios’ way of giving back to the country’s
non-life insurance industry; it is free of charge.