Covering all bases — Exporter Magazine
Poor packing is now the biggest risk in international transit. Exporter looks at the key aspects of managing the risks involved in getting your goods to export markets and getting paid.The common perception that poor packing is the single biggest cause of lost or damaged goods in international transit is now a proven fact, says Graeme Orchard, marine product manager at QBE Insurance (International).A recent analysis by the ten biggest shipping companies representing 52 percent of global container capacity showed half of cargo loss incidents were due to poor or incorrect packaging and 66 percent of these involved dangerous goods.Another 21 percent of losses were due to misdeclared goods, leading to poor packing, handling or stowage.The effects were product leakage in 51 percent of cases and fire or explosion in eight percent.One infamous case on the Indian Ocean in 2002 involved misdeclared fireworks being stowed against the ship’s main bulkhead. During the voyage they exploded and the whole ship went down.“Pack goods for the conditions you could possibly expect for transit. Trucking to Wellington is very different from a trip to Europe,” Orchard stresses. “Prepare to spend on increased packaging to export markets, and include that in the pricing.”He says in standard A Clauses of a marine/cargo insurance policy, goods that are ‘unsuitably packed for ordinary transport’ are excluded from cover if packed by the exporter, but loss is covered if they are packed by a freight forwarder (who QBE also covers).Orchard says sturdy retail packaging could also comply as transport packaging, useful for saving labour when unpacking to the shelf. However, display packaging can attract thieves in transit.
Brokers as business partners
The broker takes his client’s contract to the insurer; they negotiate and the insurer sets a premium.Orchard says “the broker needs to ask about the exporter’s business in detail and not just about moving goods from A to B.”Almost-universal law dictates brokers’ responsibilities as agents to tell insurers everything – for example, the client’s transport methods and country risks and who’s doing the packing. The broker has to disclose all known circumstances to a ‘prudent’ insurer, or insurance could be void.“We will insure goods on the back of a yak all the way to a remote destination,” says Orchard. “But a prudent insurer needs to know if the yak is going where the roads won’t be very good – and we can do it, but we have to differentiate the price.“We often say ‘no’. Some insurers’ perceptions of risk differ and brokers find soft underwriters quickly – but long term they may not stay that way!“If a claim comes along and we don’t know what you were insuring; after a series of claims insurers say ‘go find a new insurer’. Eventually no one will insure you. So it’s the broker’s responsibility to represent the clients’ best interests.”Orchard advises seeking a broker with marine experience. Visit the website of the Insurance Brokers Association of New Zealand (ibanz.co.nz) and talk to your peers at Export New Zealand or at business functions; ask who they use and how they find them.“The broker can arrange insurance for anything, but a bigger value-add is to offer risk management that negates the need to buy insurance, even!” Orchard says. “Your broker is as important a business partner as your accountant and lawyer for managing business risk.”Marine specialist broker at ICIB Insurance Brokers, Matthew Davies, recommends exporters work out their exact supply chain, identify the holes (risks) and patch them with terms and conditions that shift liability to the other parties; and get insurance.Incoterms identify where risk transfers, and exporters need to understand those. Problems can arise with payment, damage, loss, delay and rejection of goods at the border.“It’s our job to ensure the maximum cover and that your next year’s premium won’t increase,” Davies says. “I’m a mediator, a middle man. I get it from both sides!” he says.“Insurers need to know the exporter’s risk management strategy; how he operates. I have to sell that to the insurer.”Because ICIB brokers for a sizeable percentage of the wine industry, it has been able to agree with insurers the grape value at ‘X’ amount per tonne and the bottle at ‘X’ amount; so there’s an agreed value for whenever damage occurs, without the need for proof of value.Davies recommends using the same insurer for all policies to gain economies of scale, better price and negotiation. It also helps with claiming.“But you can’t insure everything so we try to maximise risk management. Insurance is the ambulance at the bottom of the cliff.“You might get a good payout or not; but don’t depend on insurance as a solution – you could still have carriers and customers chasing you; and have damaged the goodwill factor.”
Money in the bank
The customer’s happy receipt of the goods is one thing, but paying the exporter the amount owing is another. However, exporters can apply to the Government’s New Zealand Export Credit Office (NZECO) for ‘payment insurance’.Manager Chris Chapman says when the buyer has not paid in the contracted 30, 60 or 90 days after delivery, exporters who have been declined by private insurers can ask NZECO for help.“We cover in cases where the buyer owes money because he has gone bankrupt or chooses not to pay for another good reason – for example, he has no cashflow and is struggling to pay creditors.”Credit insurance does not cover when a ‘Rena’ hits and goods don’t get to China so the buyer won’t pay: that comes under the heading of marine and freight insurance. NZECO doesn’t underwrite commerical risks.“We help small to medium businesses with their foray into exporting, with their first or second buyer,” explains Chapman. “Ironically with SMEs their buyers are sometimes companies with strong credit but private insurers are not keen on a low amount of insurable turnover. They charge one premium for all your buyers, but we underwrite one buyer, so our premium is slightly higher.“If a company insures receivables from a [credit-worthy] buyer in advance of payment, a bank is more likely to advance lending because it’s a form of collateral. The company has our policy then goes to the bank for additional funding [for example, to pay their suppliers].”As an example, for a one-off shipment or commodity to a supermarket chain wanting $1 million of stock every two months for a year, NZECO provides a policy that underwrites every shipment for that year – then the policy has to be renewed.“Then we are obliged to get exporters to try private insurers first,” Chapman says.The exporter applicant benefits from NZECO’s rigorous due diligence on the buyer, he says.“If we won’t underwrite an applicant, that’s a red flag to them. So applying to us is a good discipline for a business.”Invariably the buyer’s company is new to NZECO and not a big listed company. So to understand its financial strength NZECO asks the buyer for their financials, and goes to credit agencies.“If there is no data it’s likely we will say ‘no’. This happens in one of every three or four cases for various reasons. The buyer might agree to provide their financials then just not do it.”Private trade credit insurer Coface Australia connects with the global offices of its French parent company Coface. Owner and managing director of the New Zealand agency for Coface Australia, Chris Murphy, says there are many grey areas with this type of cover.“You don’t necessarily claim when the payment is late: there has to be insolvency or a stand down of 150, or even 180, days for a claim to be paid, for the insurer to deem the insured has done everything in their power to get paid.“So this is not a licence to kill.”He cites one example of a claim: three shipments went to Europe and the first two were accepted and paid for; but for the third, the buyer said the vessel was contaminated. The New Zealand exporter knew that was a false accusation but Coface had to verify this with the shipping company, and then paid the claim. The accuser is still waiting for their day in court in Europe for payment breach.A mitigating strategy can be for an exporter to sell that unpaid portion at a discount with the price difference covered by the common clause, ‘contract repudiation’ or ‘non acceptance’.Trade credit cover is never involved with quality, quantity or delivery, although sometimes it overlaps with marine and liability insurance, Murphy says. Insurers are covering payment risk, so goods have to be received first.
Trends
QBE’s Graeme Orchard says a new trend in freight forwarding is Chinese freight forwarder subsidiaries in New Zealand sometimes passing the job to other freight forwarders, adding charges that may not be transparent but may also happen innocently.“But once the English were new to New Zealand! So get into their culture, guys, and know your trading terms and how they do business.”Countries’ risk levels for transit are also constantly changing.“For example, the civil war in Sri Lanka used to cause risk to goods in transit. The politics themselves are irrelevant, but the risk is relevant to us,” says Orchard, citing Russia as another example.“Trains loaded in St Petersburg to go to Moscow have been stopped by army trucks and all the goods taken, so maybe marine insurance won’t cover the exporter beyond entry to Russia. [As an insurer] I have to ask, ‘Where in Russia? Which route?’“Someone else might get their goods through to a destination but not you – maybe because they were packaged better,” Orchard suggests.
Mary MacKinven is an Auckland-based writer. Email marymackinven@orcon.net.nz
The people risk
You may have the risks to your export goods all covered, but what about the exporter’s people who make it all happen; the people risk?Cecilia Farrow, co-founder and executive director of Triplejump, says many small businesses that are building export markets rely on the founders/owners to develop the market – to find customers, manage the sales process and often manage the sales promises as well. The customer relationships, intellectual property and trust often sit with them.Their serious health events or loss could mean the business loses the relationships, so insuring key people should be considered.Insurance for a New Zealand resident based offshore can usually be obtained from New Zealand insurers but the person would usually be required to return to New Zealand if their claim was for long-term disability, Farrow says.
Freight insurance explained in new short course
The word insurance can be scary; the thought of uncertainty and risk verses a cost to obtain freight insurance. Is it all worth it?A special short course by IVS (Independent Verification Services) is designed to empower you with the knowledge of how to buy freight insurance, why it is very necessary, and how to submit a claim. You will gain knowledge of what insurance to buy and how to buy it.Insurance has been around since the 14th century, so insurance corporations have had many years of practice to define their insurance policies. The bottom line is that insurance policies do offer good solid protection to importers and exporters, providing the elements of the policy are adhered to.Insurance, like law, is not emotional. It’s pragmatic and there is no sailing past the policy wording when making a claim. Interpretation in standard wording is to be clear and concise. When freight forwarders quote freight movement costs, these movements should have the requirements of the goods or freight characteristics taken into account. For example, you would be unwise to move icecream worldwide, unless it was in a refrigerated (frozen) container. Insurance is the same. A majority of claims are declined due to poor or insufficient packaging and where the mode of transport itself was detrimental to the goods. This is called ‘Inherent Vice’ – a term covered in the IVS short course. In other words, the goods would have sustained damage in any event and therefore should not have been moved using this transport type or packaging.Remember, carriers, shipping lines and airlines have no legal duty to settle any claims for loss or damage.This short course is well worth investing in, says IVS, describing it as “not expensive, fast moving and well detailed”.
Lisa Arundell, operations manager from freight logistics firm Redfort Group, has attended the one-day IVS course and had this to say: “As a freight forwarder I found this to be really useful – with lots of information that I can pass on to my colleagues and our clients. Glenn’s knowledge and presentation skills were spot on and he did a great job keeping us interested, on what could have been a long day, with relevant stories!”
Publishing Information
Magazine Issue
Exporter Magazine Mar/Apr 2014 issue 32
