Thursday, October 16, 2008 Geronimo: Trade Disruption Insurance By Atty. Reynaldo Geronimo The Trust Guru
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 has 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 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.
