Lost in transit: how to minimise project cargo risks

Supply chain disruptions are growing, creating heightened risks for organisations shipping high-value, heavy-duty equipment.

Already strained shipping routes are being tested to the limit by global crises, which are forcing companies to reroute, causing significant delays, and even leading to challenges with insurance cover.

Significant problems started when the COVID-19 pandemic caused issues at ports, due to global restrictions of movement.

Even when things started moving again, there were restrictions on personnel entering any port facilities. Firms innovated quickly in this case, using remote surveying to keep track of goods. This created more work for the companies themselves, as well as their insurers and brokers, who needed to collate all the information like dimensions and weight of a product, while also having someone conduct a desktop or remote review with the master of each vessel.

It also caused problems with the validity of project cargo insurance policies. Richard Landers, senior cargo underwriter at RSA Insurance, explains: “This led to breaches of policy terms and conditions, such as the Marine Survey Warranty, which is usually a requirement under a project cargo programme.

“This clause requires a surveyor to physically inspect critical items being loaded or unloaded. If this is not done, there is a breach of the warranty, which means that cover could effectively be reduced or removed completely.”

Fortunately, the insurance industry created retroactive policy language to deal with remote surveying, but it shows the wide-ranging impacts that supply chain disruptions can have.

The new wording is now being used by a wide selection of RSA’s brokers to protect against a similar event happening in the future.

COSTLY RISKS

While the impacts of COVID-19 are finally lessening, supply chains are still facing significant disruptions – due in part to multiple concurrent geopolitical crises.

Both the ongoing war in Ukraine and the attacks in the Red Sea are leading to products being rerouted, causing significant delays.

For some locations, rerouting isn’t possible at all or is prohibitively expensive.

Landers says: “Some insureds are being forced to take the more dangerous route and go out of the Red Sea into the Suez Canal or even to travel through Russian waterways.

“The financial consequences can be tens, if not hundreds, of millions of dollars lost. So, the biggest issue that we find is that project companies are still prepared to go through those dangerous areas because they cannot afford to pay the extra freight to go round the Horn of Africa or wherever they need to go.”

These cost concerns are also leading to other heightened risks, as companies look to strip expense out of the process or minimise the threat of travelling through dangerous waters.

Even where companies are prepared to accept the delays associated with avoiding the Red Sea, they may then try to put all their project cargo onto one vessel, instead of spreading it across two or three as would be usual. They might also risk sending poorer quality vessels out.

Stephen Fiddimore, underwriting leader – cargo at RSA Insurance, says: “Where cargo vessels are travelling through the Red Sea, you might find risks are enhanced because the tonnage that’s being used is of poorer quality as the ship owners don’t want the better vessels to travel through that part of the world.”

Landers adds: “We see accumulation of risk all the time, but now we’re seeing it on projects that have critical items, and they take a year or 18 months to rebuild. If they’re lost, then that potentially causes a financial disaster, not just for the project itself, but also for insurers, because the losses would be potentially massive.”

Another critical issue facing the sector is scarcity of minerals, precious metals and other natural resources. This is causing significant issues in industries like renewable energy.

At the same time, growing demand for electric vehicles means more lithium-ion batteries being made, with demand for graphite and other natural resources far outstripping supply.

As a result, organisations need to think carefully about where they are sourcing materials, and have back-ups in place in case a route becomes unsustainable. As competition grows, this will be harder and more expensive to achieve.

NAVIGATING A PATH FORWARD

Amid these growing supply chain issues, RSA says it is always looking to minimise risks, while educating clients on mitigating tactics.

Landers says it is crucial to allow plenty of time to plan alternative routes and suppliers. “Don’t leave Project Cargo until last. Work out where you’re going to get your resources from and whether there are alternative suppliers, and put them on notice. Don’t rely on one supplier.”

“Think about the routes that you’re going to be taking, too. For example, we’ve had projects right in the middle of Uzbekistan. When we took them on, the routing was naturally through the Black Sea, the Sea of Azov and across the bottom of Russia, and at the time of placing these risks, it was perfectly acceptable to do that. But when the war in Ukraine broke out, the Kerch Strait and the Sea of Azov were off limits, as were the waterways in Russia and any territorial waters.

“How else can you get to Uzbekistan from say, China or Japan? The simple answer is that there isn’t really another way, unless you go by rail overland. And even then, you need to go into Russia. So, you really need to think about contingencies.”

Finally, Fiddimore concludes that project companies should reach out to experts to better their understanding.

Insurance partners and brokers are a good place to start, but he also recommends other third parties such as specialised marine surveyors.

He concludes: “Engage with people who are local to the territory, who understand the dynamics of that area that they’re working in and know the complications that might be faced. It’s all about sharing knowledge.”