CARGO DELIVERS CARGO NEWSLETTER JULY 2016

HOW TO BE A ‘GOOD INSURED’?

COMMODITIES DOWNTURN

How to improve insurers’ views of your standing in the insurance market

Slowdown in China causes downturn in commodity pricing

Page 4

Page 6

DEMISE OF FREIGHT

ALSO IN THIS ISSUE

Circumstances have converged to send rates of charter plummeting

Satellite insurance communities

5

Attending ICIC

5

Have you met Ash Ganesan

7

Page 8

Supply chain disruption Cargo underwriters Huw Davies from Acappella Syndicate and Richard Golder from Hiscox joined Tony Achinelli and Ranjit Kular from JLT Specialty’s Cargo team in a roundtable to discuss supply chain disruption, stock throughput policies and the importance of information. What are the key elements when it comes to supply chain disruption? Tony: Each industry will have different elements that it needs to be concerned with when it comes to supply chain management. But there are three main elements: product flow, information flow and financial flow. The product is one element, but the information that sits around this is key. The carrier needs to know all of the supply chain details, for example where it is being stored and how it needs to be stored and moved. The more information that we can give to

the underwriter and the more accurate it is, then the pricing will fall into place. If you are not painting the full picture, then the underwriter will rightly take a view on how they price that risk out. Huw: One of the main areas of concern for pharmaceuticals is the contract that the company has with the shipper. The product may only have a shelf life of 48 hours, but if the trucker doesn’t know that, it will be treated like any other cargo. Also shipping time during a working week is important as certain

destinations may be closed on a weekend or in certain countries working weeks are slightly different. That is the sort of information that underwriters look at, so they can be satisfied that it is being packaged correctly and shipped in the right way. Ranjit: The more information we get, the more we can build out the form, so we can get proper delay extensions in the policy which are not conventionally given, for example.

Continued on page 2 

WELCOME We are delighted to welcome you to the third issue of Cargo Delivers. As we all know relationships are the cornerstone of our industry and it is vital that all parties understand each other’s needs so that the right outcome is achieved for everyone concerned. We believe that the sharing of information, market news and intelligence is a vital part of the process and is why Cargo Delivers is now a regular feature for clients, markets and colleagues alike. Our roundtable brings together some of London’s leading cargo underwriters and key personnel from JLT Specialty’s Cargo team, to discuss why good quality information on cargo is vital to ensure the right level of coverage, and in negotiating relevant extensions. Stock throughput policies, particularly, have emerged as a popular product with cargo clients, and we outline why we expect these to continue gaining ground. We discuss the rise of insurance hubs in places like Singapore, Miami, and Dubai, and consider how they measure up against the London market. In answer to the perennial question that we hear from clients — ‘What makes a ‘good insured?’ — we lift the lid on what insurers really want from their insureds. With oil and commodities prices in the doldrums, we unpack the potential rise of supply chain risks, whether cost cutting, falling investment, or increased moral hazard, and we discuss pro-active steps to manage these risks. Finally, we round up all the news from the International Cargo Insurance Conference (ICIC), in Oxford, UK, in June 2016, and we introduce one of the Cargo team’s newly appointed account handlers, Ash Ganesan. We would also like to take the opportunity to wish you all an enjoyable summer.

Gordon Longley CEO of Cargo and North American Property JLT Specialty Limited

2 CARGO | CARGO DELIVERS | July 2016

 Continued from page 2

Why is the basis of valuation so important in this area? Richard: Understanding the basis of valuation is important in terms of how underwriters view and manage the risk. Tony: On the more complex accounts, the valuations can be vast in scope, from the replacement cost to the selling price. So the basis of valuation is key to how the client is indemnified in the event of a loss. These are elements that need to be understood by brokers and underwriters - where those valuations take place, where the move is, and what the potential effect could be if a claim is made. Huw: With pharmaceuticals it can be big numbers – you can have a huge uplift on a drug, with, for example a replacement cost of USD 300,000, but a selling price of USD 49 million for the same quantity of drug. Richard: On complex risks, it is crucial that the broker, the insured and the underwriters are all in harmony and understand what the risk is. We as underwriters are there to indemnify, and to also to understand those risks all the way down the line. This is because the basis of valuation for a drug might be the selling price but there might be some still in the warehouse, so the client may not

have lost a sale, and it can be replaced. In another scenario, that might not be possible or practical, in which case the selling price (full value) would need to be paid. So if you can get the understanding between the market and the client, you can get a better deal for everybody.

What sort of additional covers are clients looking for, and are underwriters able to consider these? Ranjit: From a coverage standpoint, with perishable goods, it is delay extensions. Custom delays, weather delays, port blockage – clients need to get the product to market. It is a challenge to give outright delay coverage but I think it is about getting information, claims history and so on, and then building out extensions in the programme to cover some of these perils. Huw: We give delay coverage where we are comfortable with the risk and it is a product that we know and understand where the pitfalls are. But it is very difficult for us to give blanket trade disruption insurance (TDI) cover as each product is different and each country an insured operates in will be different. Richard: Elements of these covers, together with contingent business interruption (CBI) are increasingly being added in, but again, CBI is a difficult area

www.jltspecialty.com | CARGO DELIVERS 3

Left to right: Tony Dowding (Journalist), Tony Achinelli (JLT Specialty), Huw Davies (Acappella Syndicate), Richard Golder (Hiscox) and Ranjit Kular (JLT Specialty)

for underwriters as you often don’t know where the risk is and what the risk is, and how you quantify it is problematic. We have to be careful because people want these extensions but they are generally not prepared to pay for them.

How does the London cargo market compare with other global cargo markets when it comes to offering coverage and solutions for supply chain? Richard: Capacity is important as there is a pooling of underwriters, and the knowledge base that comes from that. It is one of the big strengths of the London market – a broker-driven market. Tony: Everything is bespoke as each industry has its own specific requirements and nuances. The flexibility of the London market and how stock throughput has evolved, along with the add-ons and additions that make it such an attractive product, makes London an attractive market to come and place business. Whether you are a pharmaceutical company or an agri business, or a distributor of goods such as alcohol or hi-tech, there will be a bespoke wording and clauses that can be built around you as a client.

The London market will be open to looking at, taking a view on, and writing the business specific to a variety of requirements. Huw: If something goes wrong with an account, most people in London, especially the leaders on different product lines, will try to find a solution rather than just having a knee-jerk reaction and coming off a risk. What we have found with clients is that they do want continuity. Price and coverage is important, but they also want to build a relationship with their insurers, and meet the people that are writing their business. Tony: We encourage clients and underwriters to meet because it builds that relationship, trust and understanding of the client’s business. Clients will come to London, and equally we, and the markets, go out to wherever the client is, and sit down with them to understand their business and how they operate. Richard: We gain a lot when risk managers sit with us underwriters, face to face. It is better that everyone understands what is being covered. Ranjit: It is also about responses. It is not just about contract formation, it is on-going amendments and changes.

The London market is very good at responding and it is about being able to get in front of an underwriter, get something to negotiate and get back to the client, especially if they have a pressing issue, and not hanging around waiting for emails to be exchanged and so on. Huw: Where London has prospered is the stock throughput programmes that we put together, that fit into the supply chain. Previously you would have had stock in a warehouse and then a separate transit programme and there was always going to be some type of grey area as to where a potential loss would fall. But with a stock throughput programme, it is designed to be a product that offers a ‘cradle to grave’ approach and enables companies to protect their product through all of the stages of the supply chain. Tony: Once a client has switched from a traditional stock in a property policy, and perhaps an ocean cargo policy and an inland transit policy, and they catch it all in a stock throughput policy, it is very rare that they switch away from that. For more information please contact [email protected] 

4 CARGO | CARGO DELIVERS | July 2016

How to be a ‘good insured’? We are regularly asked by clients to explain what makes a ‘good insured’ in the eyes of insurers and how could they improve insurers’ views of their standing in the insurance market. It is an important question which is quite difficult to answer; however, we recently had a potential claim which we think demonstrates the good behaviour that any insured would be advised to consider: Our Client, XYZ entered into a contract with its counterparty, CCC, to sell grain with payment due under the contract on 180 day payment terms. A down payment of 5% of the total contract value was payable and paid on signature of the agreement and a guaranteed by CCC’s parent. Several cargoes of grain were shipped to CCC over a period of six months and, initially, CCC made prompt payments to XYZ to the value in excess of USD 10 million. After a delay of two months, CCC, who had been citing a lack of liquidity as the reason for non-payment, proposed that the payment dates be formally delayed by six months as additional funds would be generated through ongoing activities. To ensure this would not prejudice any party, insurers were consulted. They agreed and the policy was similarly extended. When the revised payment date was reached, the balance of in excess of USD 30 million remained outstanding but only USD 1 million was received. No further payments were made for a considerable time despite a further agreement by CCC to pay the money over an additional extension period of three months.

As required by the policy, the insured kept insurers through JLT Specialty, fully appraised of all developments and their discussions and correspondence with the buyer. When the latest repayment schedule was defaulted upon, the insured asked for insurers’ comments on their wish to call the parental guarantee for the full amount outstanding. Insurers agreed that, as a prudent uninsured, the insured should consider this option and this process, despite pleadings from CCC, having already started. This involved considerable time and costs to the insured utilising their internal insurance and legal teams as well as external legal experts, however they were adamant that they only wanted to claim on their insurance once all angles had been exhausted. As the policy covered the failure or refusal of the guarantor to honour its debt obligation in accordance with the guarantee, JLT Specialty advised that, subject to the policy terms and conditions, the claim payment date would be deemed to be 180 days (the waiting period) from the failure or refusal by the guarantor – this being 1st January 2014. Over the next four months, as a result of constant pressure by the insured, intermittent payments were received from CCC totalling USD 3.5 million, so the insured submitted a proof of loss to insurers, through JLT Specialty for an amount of USD 28 million. Insurers agreed to appoint a loss adjuster to

investigate the situation and a meeting was held with the insured the following week. There were, as always, a small number of outstanding queries and issues arising from that meeting which were dealt with by the insured within the following two weeks. The adjuster reported to insurers and, following a meeting between the claims agreement parties and JLT Specialty’s Credit Political and Security Risks Claims Director, the adjuster wrote to JLT Specialty confirming that, subject to a final computation of the quantum of the claim amount, coverage had been triggered and that insurers were willing to pay the claim if XYZ decided to submit a formal claim. The insured’s main board discussed the submission of the claim in great detail and decided that they would not submit a request for payment at that stage. The insured did, however, initiate proceeding under LCIA rules against the guarantor for the full payment owing and, after the arbitrator had found in their favour, they began to identify assets owned by CCC worldwide – again, with the prior agreement of insurers. At the end of February 2015, the insured’s trader reported that he had been called by CCC to discuss another repayment plan and was presented with a contract amendment which he had been asked to sign. This had a contractual change to the original payment dates which would require board approval. Having discussed this

www.jltspecialty.com | CARGO DELIVERS 5

with the insured’s legal director, it was decided that they should seek external advice as to the ramifications of this including whether the extension of the payment dates would affect their rights under the arbitration, how it would affect the parental guarantee and whether CCC’s local obligations would be affected on currency issues. The insured did decide, again with insurers’ prior agreement, not to sign the amendment but to see if payments were made. Beginning on 1st March 2015, the insured received daily payments from CCC– even taking into account bank holidays – up to 15th July when the full debt had been paid. The insured wrote to the LCIA advising that they had received full payment and requested that the arbitrator cancel his award which he duly did. A final payment was also subsequently received from CCC

relating to contractually owed interest. The insured benefited financially through these activities, not least they ended up gaining full recompense of their financial loss as they did not have to pay the 10% deductible and they received full reimbursement of the interest charged which collectively amounted to a number of millions of dollars. They also achieved their aim of not claiming from insurers and retaining a very good relationship with insurers, with whom they have developed long term relationships.

Attending ICIC

As readers will imagine, insurers were extremely pleased with the actions and pragmatism of the insured’s decisions, which has already resulted in favourable treatment being accorded to the insured on new opportunities/initiatives in relation to the terms offered by Insurers. A firm partnership has now been cemented to the benefit of all concerned. 

JLT Specialty’s Senior Partner, Garry Cordess attended the conference which was this year split over two full days which provided attendees with the opportunity to hear a wider range of topics from some of the industry leaders. The first session opened with a thought provoking panel discussion on whether the cargo market is fit for purpose, which generated a healthy contribution from delegates. Other topics on the opening day included safety of life at sea (SOLAS) amendments and the latest requirement that container weights need to be declared, the revised York Antwerp Rules and a session on container losses and how they could be better risk managed.

Satellite insurance communities The past 20 years has seen a marked increase in the capacity of the satellite insurance communities that serve the cargo market. Today’s competitive insurance hubs, such as Singapore, Miami and Dubai, are staffed with professional underwriters and are accessed by both local brokers and global brokers. These markets enjoy a number of advantages over London including regulatory expertise, common languages and an understanding of the dynamics of their own domestic economic space. This has allowed hubs to sweep up a lot of the regular business that once came to London. “Where London was guaranteed leadership and full access to an oil trader’s cargo or a cargo-orientated start-up project, that dynamic has changed. Where the main limitation on a local market was unavailability of local capacity, that issue has now changed completely,” says Nick Peck, Chairman of JLT Specialty’s Cargo team.

In order to compete it is vital that the London market adds value through product focus. “London can offer product design and policy form. Whilst any local market can write transit and storage when you dig below the surface, you often find the policy forms are quite rudimentary and don’t really serve the needs of a global business,” Peck says. Also, the London market has upped its game in terms of paper and the clerical process. “The speed of response in London impresses clients from around the world time and time again. Relatively complex business risk scenarios are agreed by insurers quickly but not in a cavalier manner,” adds Peck. 

The International Cargo Insurance Conference (ICIC) was held in Oxford (UK) in early June. This was their third conference and was fully subscribed and well attended by insurers, brokers, cargo surveyors, maritime lawyers and subrogation experts from around the world.

Day two turned its attention to South America and aspects associated with cargo claims handling and continuing with a real international flavour, a US insurer gave a policy overview of the demands and coverage requirements of the modern market. Misappropriation losses on various fronts were also presented and cargo modelling all featured in the final sessions. Before the subrogation experts brought the conference to a close with an abundance of delegation participation throughout, particularly on the seemingly constant picture of protection and indemnity (P&I) clubs turning more and more to lawyers to handle their claims regardless of size. Thereafter the conference closed with main dinner and the many networking opportunities for the other 250 plus delegates. ICIC intends to returns to Oxford next June and is already in the planning stages for 2017.  For further information please contact [email protected]

6 CARGO | CARGO DELIVERS | July 2016

Commodities downturn – an insurance perspective There has been a marked downturn in commodity pricing in recent years as a slowdown in China has converged with an over-supply of oil to send values plummeting. The slump in prices has inevitably produced a number of challenging issues for companies within the sector as falling profits can impact on many areas, including the risk transfer process. The Bloomberg Commodity Index (BCOM), a diversified commodity price index that tracks the price of futures contracts on 22 physical commodities, has dropped markedly from 162 at the start of 2011, to stand at just 78 at the end of last year. In the last 18 months alone the price of Brent crude has dropped 15% while LME base metal prices have dropped 15-20% over the same period. Key drivers of these falls have included OPEC, led by Saudi Arabia, embarking on a strategy of protecting its market share by pumping yet more crude oil despite falling prices. At the same time the Chinese economy continues to be in serious slowdown, which has a significant effect on global commodity prices simply by reason of its prolific consumption of raw materials. This fall in value of traded commodities has a significant direct impact on declared insured values for cargo insurance purposes, which in the majority of cases will be fundamentally linked to a market price.

INSURANCE MARKET Despite these falling insured values the cargo insurance market remains soft, due in most part to a general market over capacity and a fairly benign recent catastrophe loss history. As a consequence insurance rates have been maintained, or even reduced, with the commodity portfolio premium base consequently continuing to fall. With falling profit margins as a result of falling prices, there has to be an even greater focus of commodity clients generally in ensuring that they are still obtaining the best possible product at the best possible pricing. “As a longstanding specialist commodity insurance broker this is where JLT Specialty can continue to differentiate itself. Through our collective expertise, both on the placing and claims side, we are able to ensure that our clients or prospective clients can rely on the fact that we are talking to insurance providers who know their business and are willing to partner with them to provide comprehensive cover at competitive pricing through the good times and the bad,” says James Divine, Cargo Deputy Chairman at JLT Specialty.

Whilst insured values are down this does not necessarily mean that paid claims are down proportionally. As Divine explains “Experience has shown us that a depressed commodity market and sluggish general economy can actually lead to an increased frequency of loss within certain areas of the supply chain as a consequence of cost cutting, falling investment and increased moral hazard”

MARKET PRICING However these factors alone are not enough to influence any general market price change at this time, and the London cargo insurance market remains extremely strong, active and competitive in commodity business. It remains important however for JLT Specialty to assist its clients in differentiating themselves from any possible worsening market perceptions of risk and return in the sector. Divine says: “We see it as our mission to ensure that the work being undertaken by our commodity clients, in terms of active loss prevention and control and the employment of other risk management, compliance and audit techniques to address matters of concern in these challenging conditions are fully conveyed to insurers and are

www.jltspecialty.com | CARGO DELIVERS 7

duly rewarded. The business should be aligned with those insurers who we know are committed to partnership in this area to achieve the most effective product and pricing structures.” Although there have been recent signs of stability in the commodities market, the Bloomberg Commodity Index (BCOM) had recovered to 90 by the start of June, there are few signs of an extended recovery. “For the immediate future we would

expect to see various smaller individual commodity price swings, up and own, based on usual pricing factors, in particular where in response to the latest key economic numbers from the US and China, with a consequent mirroring in insured cargo values for both transit and stock risks. In terms of insurance costings we see the soft cargo market conditions

prevailing for the foreseeable future, so general cargo pricing should continue to be extremely competitive and even more so where we can use our experience to assist our clients in demonstrating attractive risk profile differentiations,” concludes Divine.  For further information please contact [email protected]

Have you met… Ash Ganesan WHAT EXPERIENCE DO YOU BRING TO YOUR ROLE? I spent over eight years in the cargo claims team and recently got the opportunity to move over to the account handling/placing side, which I started doing alongside my claims role in January, and full-time since March.

WHAT DOES YOUR NEW ROLE INVOLVE? When a quote comes in, I make sure that I would be happy with it as a client. Once a quote is bound, we are on standby for the client at all times, delivering good customer service by responding promptly and accurately to any queries they may have. I find my claims experience very useful in my new role because I can talk to clients about the range of exposures I’ve seen with other clients, and ways they can manage those risks. I also try to look at things differently and think what else are we not capturing? How is the client exposed? In addition, my claims experience is useful for carrying out coverage comparisons and providing risk management/loss prevention advice.

WHAT’S A TYPICAL DAY LIKE?

WHAT CHALLENGES ARE YOUR CLIENTS FACING?

As a team we receive a number of new enquiries, existing renewals and queries from clients. So part of my role is not only to service clients myself but also to help the team service clients from a management perspective.

The economy is probably the main challenge – especially with the reduced commodity/oil prices, which are affecting everybody. That creates a moral risk hazard for our clients and their customers and suppliers because everyone is under enormous pressure to meet their targets while their prices are being driven lower and lower.

WHAT INTERESTING CLAIMS/PLACEMENT HAVE YOU WORKED ON? In terms of claims, I find misappropriation losses most interesting. I worked on some huge, multi-million pound misappropriation claims; they are very complex by nature, and can lead to prolonged discussions with insurers. In terms of placements, I’m currently working on an interesting placement for Brazil. Brazil is very complex because a proportion of the risk needs to be retained locally because of local regulations. I am also currently undertaking an extensive review of a global account with numerous local placements involved, assessing which regions require compulsory local insurance and those which can be placed directly into the London market.

WHAT’S CURRENTLY HAPPENING IN THE CARGO INSURANCE MARKET? It has been a soft market for the last 18 months to two years, and it’s just getting softer. I think the market is waiting for a huge catastrophe loss to boost premiums back up, but even then, they might not rise. 

I try to look at things differently and think what are we not capturing? How is the client exposed?

8 CARGO | CARGO DELIVERS | July 2016

JLT Specialty Limited provides insurance broking, risk management and claims consulting services to large and international companies. Our success comes from focusing on sectors where we know we can make the greatest difference – using insight, intelligence and imagination to provide expert advice and robust – often

Demise of freight The global freight market sees the trading and chartering of the world’s merchant shipping fleet. The use of vessels is sold on the basis of time, voyage or freight charter with a number of other options negotiable from the degree of control of the ship to the responsibility for crewing and maintenance.

unique - solutions. We build partner teams to work side-by-side with you, our network and the market to deliver responses which are carefully considered from all angles. The Cargo team are leaders in the London and International market and provide specialist programme design and transactional services to a broad spectrum of industries around the world by combining in-depth sector expertise with innovative claims solutions.

CONTACTS Gordon Longley Cargo, JLT Specialty Limited +44 (0) 20 7466 6555 [email protected] Jay Payne Cargo, JLT Specialty Limited +44 (0) 20 7466 6236 [email protected]

This publication is for the benefit of clients and prospective clients of JLT Specialty Limited. It is not legal advice and is intended only to highlight general issues relating to its subject matter but does not necessarily deal with every aspect of the topic. If you intend to take any action or make any decision on the basis of the content of this newsletter, you should first seek specific professional advice. JLT Specialty Limited The St Botolph Building 138 Houndsditch London EC3A 7AW www.jltspecialty.com Lloyd’s Broker. Authorised and regulated by the Financial Conduct Authority. A member of the Jardine Lloyd Thompson Group. Registered Office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. Registered in England No. 01536540. VAT No. 244 2321 96. © July 2016 272266

The market is a key part of the global economic system with around 80% of all internationally traded goods and commodities carried at some point by a ship. In 2013 the world’s ships carried over 9.6 billion tonnes of cargo, a record volume for seaborne trade. However, the market is a vast, complex one where rates can fluctuate wildly as they are buffeted by a bewildering array of variables. In recent years circumstances have converged to send the rates of charter plummeting from a high of USD 200,000 a day in 2008 to under USD 5,000 a day at present. Shipowners and operators are at the mercy of this extremely volatile environment, which has been exacerbated by an over-supply of vessels. Freight rates can fluctuate for many reasons, including commodity demand, seasonal pressures and oil price movements. However, it is the excess tonnage currently plying the world’s oceans in a global merchant fleet size numbering approximately 55,000 and continuing to grow that is at the heart of the issue. A lack of scrap value has seen older ships utilised for far longer than previously. Meanwhile the production line of new, ever larger, freight vessels being built mainly in China and Korea takes just three years to complete a new mega-ship. For those chartering vessels, the fact that it now costs less than USD 400 to move a 40-foot container from Shenzhen to Rotterdam, which is barely enough to cover the cost of fuel, handling, and Suez Canal fees, presents an opportunity. They can charter vessels for less and increase the profitability of their trading.

It also means that it is cheaper to store USD 1 million-worth of cargo on a vessel anchored off the coast rather than use an onshore warehouse. Something many traders are taking advantage by creating strategic floating storage facilities. However, these rates are unprofitable for shipping lines. And although the bigger shipping lines are able to absorb the losses, a number of the Greek shipping lines are struggling with the country’s wider economic travails adding to the problem. “From a trading client point of view the current freight rates are a thumbs up, but when you’re running ships as cheaply as shipowners currently are things like safety and other things can be overlooked. If you’re not making as much money on your fleet of vessels you’re going to have less money to invest in the undertaking safety checks and employing the right crew,” says Jay Payne, Senior Partner in the Cargo team at JLT Specialty. The increased volume of older vessels in the freight market as well as question marks about the quality of materials and workmanship on the new ships means charterers should be selective over the tonnage they use. Fortunately the over-capacity in the freight market means traders can be choosy even at times of greater seasonal demand, such as the Australian grain harvest. 