In today's challenging economic climate, logistics companies really need to think twice before cutting their insurance budgets.
Providing coverage for the logistics industry has never been an easy task for insurance providers in the Middle East.
On the one hand, warehousing and transportation companies are still educating themselves about the importance of insuring their operations; while on the other hand, insurance providers are catching up with the complexities of the sector.
Then, with both parties on the brink of common understanding, the global recession leads to cost-cutting initiatives and the relationship is brought back to square one. Ironically though, at a time of economic slowdown,
the need for adequate liability insurance has never been greater.
“In many cases, services are provided by logistics operators without full consideration of the contractual obligations,” points out Ian Lush, marketing director at TT Club, a global provider of insurance policies for warehousing and transportation. “According to such contracts, it’s the logistics operator that assumes the risk, which means they’re fully-liable for late deliveries, for example, which could result in a non-performance penalty.”
For this reason, liability insurance has particular relevance to the logistics industry and should form a major component in the risk management strategies of companies throughout the Middle East. “It’s sensible for operators to carefully review their contracts before agreeing on what might be onerous terms, for example, full value liability,” adds Lush. “Whilst there is an increasing awareness of onerous liabilities, it remains good practice to consult professional legal advice when reviewing contracts for the provision of logistics services.”
Fortunately, there are many legal advisers in the Middle East to share their expertise with the logistics industry. Law-firm Holman Fenwick Willan, for example, has a dedicated logistics team to advise its clients on managing issues that may arise from their operations.
According to Siân Knight, a lawyer with the Dubai office, liability insurance provides a risk management tool in the broadest sense. “Without insurance coverage, the operator is exposed to full financial risk and becomes reliant on limitations in either the contract or local law to reduce their liability,” she explains.
“A regular review of existing insurance is also imperative because a gap in coverage is not normally discovered until a claim is declined by the insurer.”
Knight believes that increased levels of insurance coverage are essential for the development of a safe and reliable logistics industry, and that there has never been a better time to focus on this.
“It’s mandatory to purchase third-party liability insurance in countries such as the UK, which puts this into context,” she says. Whilst the Middle East is lagging behind when it comes to similar mandatory schemes, some countries have started to move in the right direction.
For example, a Memorandum of Understanding (MoU) was signed by the National Association of Freight Logistics (NAFL) and the national government last year to establish mandatory liability insurance for Dubai’s thriving logistics industry. Further working in the favour of companies wanting to upgrade their risk management, Knight points to the increasing number of insurance providers that have started to offer specialist solutions for the logistics sector.
Hemant Barke, executive committee member of the Supply Chain & Logistics Group (SCLG) and CEO of Dubai-based Prudence Insurance Brokers, agrees. “Our region has well-established local insurers in addition to internationally-renowned providers from Europe, USA and Asia,” he states. “Combined, they offer state-of-art insurance solutions for the entire gamut of logistics operations.”
Understanding the perspectives of both the logistics and insurance industries, Barke is confident that logistics operators now have a good blend of global insurance protection with local coverage for their assets, income and liability exposures. “There is a wealth of insurance expertise available,” he says. “With operations evolving in this region, the scope to enhance awareness and penetration of insurance is really strong.”
Last year saw one of the largest insurers in the Middle East, AXA Insurance Gulf, launch its new product ‘Logistics Secure’, a policy that specifically deals with the requirements of freight forwarders in the GCC. The solution aims to be ‘flexible and versatile’ in offering coverage, ranging from simple haulage risks to more complicated logistics operations. “Logistics Secure is a unique product and the only one of its kind available in the market.
We have received a very heartening response to date,” says Toby Sizeland, chief officer of corporate solutions marine and large risks at AXA Insurance Gulf. For a concerned logistics company, having a product developed with its
specific needs in mind can only be a blessing. Like Knight, Sizeland’s advice to logistics companies is ensuring their insurance requirements are fully covered without the gaps that could expose them to losses.
“A logistics company needs to be aware of their potential liability under contract and also within the law of the areas in which they operate,” he says. “The uncertainty of the judicial processes in the region is another factor that the company should consider, since they might be found to be negligent even in instances that might release them from liability in other jurisdictions.”
The timeliness of logistics insurance policies such as ‘Logistics Secure’ is ambivalent. Just as the logistics industry has been coming to grips with the necessity of insurance, economic slowdown means that companies are introducing cost-cutting measures to ensure a viable future. In Sizeland’s opinion, this could swing two ways.
“On a positive note, it could encourage the freight forwarder to take insurance for their exposures and act in a prudent manner,” he suggests. “Or it could work negatively and the freight forwarder could consider the expenditure on insurance an avoidable one that can be deferred until the economic situation improves.” The latter choice could have very serious consequences.
“The benefits of having comprehensive coverage can far outweigh the costs, particularly as the nature of logistics means that companies can be open to litigation from their clients around the world,” Sizeland emphasises. “This is especially important in today’s uncertain scenario where a little foresight can save a business enterprise.”
Sanjay Babur, chartered insurance broker and managing director for Cosmos Insurance Brokers, echoes this viewpoint. “In current market conditions, logistic providers must arrange liability cover as soon as possible,” he advises. If anything, Babur believes commercial disputes will increase during the economic downturn, stating “history has shown us that cargo claims increase during a recession.”
His views are supported by a recent study from Conning Research and Consulting, which predicts that general liability losses and expenses are expected to rise faster than premium increases in the next couple of years. There are also other factors to play. During tough financial times, there is a greater tendency towards what Babur refers to as ‘moral hazard’, namely fraud or other white collar crimes. The outshoot of these increased risks means that logistics insurance is even more essential during economically-challenging times.
“In absence of adequate insurance, logistics operators could endanger their profitability or business, especially in the case of small and medium sized operators, who cannot absorb a large loss,” says Babur. Even before the recession, these operators were lagging behind when it came to comprehensive insurance.
If anything, with the current economic situation spelling out lower premiums and higher risks, there has never been a better opportunity for logistics companies to reconsider priorities and help to boost, rather than detract from, the
importance of insurance.
As a new player in the regional market, Momentum Logistics, a subsidiary of international port management company Gulftainer, welcomes the insurance sector’s efforts to ease logistics companies into risk management. “Established operators and insurers are aware of the nature of business and the inherent risks,” highlights Matthew Derrick, general manager at Momentum Logistics.
“These days, there are so many different options to choose from, whatever your intentions and activities. It’s just a question of finding the right insurer and working closely to tailor the coverage to your company’s particular needs.”
Whilst he accepts there may be a temptation to compromise on insurance during tough financial times, Derrick recognises the implications would be far more severe in the event of insufficient cover. “In the logistics sector, as with any other, there are inherent risks in the nature of business and no matter how well we plan our activities and train our employees, the fact is that things can go wrong,” he admits.
“There are simply too many variables outside of anyone’s control and to ignore that fact is naive and irresponsible. In the logistics industry in particular, not to have liability insurance is to make oneself a liability.”
Liability Insurance for the middle east Logistics Sector
Hemant Barke, executive committee for the Supply Chain & Logistics Group (SCLG) and CEO of Prudence Insurance Brokers, explains the basics behind liability insurance.
What advice would you give to logistics companies seeking to update their insurance?
In the logistics industry, insurance protection should be based on your liability clauses under Standard Trading Terms & Conditions (STC) and prevailing laws encompassing your scope of services. You need to prepare an appraisal sheet, listing risk exposures and other issues.
What should basic insurance involve?
It should cover 3PL operators’ liability insurance and public liability insurance, in addition to pollution and environment impairment liability insurance. It should also seek to have stocks, assets and business interruption insurance.
Is the Middle East logistics industry educated about insurance coverage for their operations?
We have a mix of local and international logistics providers, posing a healthy competitive challenge. Whilst international firms normally extend their global insurance protection to regional operations, there are coverage gaps in more localised companies. Some may not have their Standard Trading Terms & Conditions (STC) or these might not be well-communicated before a contract is entered with the customer.
How can the situation be improved in the future?
From an insurance perspective, there is scope to update insurance protection plans in our regional industry and, with regard to international firms, there is also room to synchronise global insurance plans with local programmes, providing comprehensive and adequate risk protection.