Cargo insurance:A critical component to protect shipments amid uncertainties

Published: Thursday, February 16, 2023

The global cargo transportation insurance market was valued at US$53 billion in 2021. It is forecast to grow at 3% annually with more shippers seeking protection for their goods amid continuing uncertainties in many parts of the world.

By R. Chandrakanth

Airlines transport over 52 million metric tons of goods a year, representing over 35% of global trade by value but less than 1% of world trade by volume. That is equivalent to $6.8 trillion worth of goods annually, or $18.6 billion worth of goods every day, according to the International Air Transport Association (IATA).

That is humongous volume of goods criss-crossing continents and certainly not without risk of delay, damage, loss or destruction, due to factors both internal and external associated with transporting the cargo.

MC99 single universal treaty

The Montreal Convention 1999 (MC99) establishes airline liability in the case of delay, damage or loss of baggage and cargo. MC99 is designed to be a single, universal treaty to govern airline liability (including for passengers) around the world.

MC99 offers unbreakable liability limits for cargo carriers, offering them predictability in respect of their potential liability making it easier to obtain insurance, avoid protracted litigation and simplify claims handling. Shippers can organize specific insurance for any high value, low weight items.

Supply chain efficiencies through digital adoption

With MC99 laying emphasis on digital adoption, shippers and those involved in the air cargo supply chain benefit from the ability to make claims without the need for expensive and time-consuming litigation.

Replacing paper documents of carriage, such as Air Waybills, with electronic versions, is facilitating faster and more efficient trade. Airlines are also benefitting from greater certainty about the rules governing their liability across their international route network. MC99 establishes the legal framework that allows airlines to make use of electronic documentation for shipments, thereby reducing costs and increasing efficiency.

SDR 19 per kg

However, under MC99 the special drawing rights (SDR) for cargo is limited to 19 SDR per kilogram which may not cover the total value of goods being shipped. Hence, it calls for shippers to separately insure the consignment.

Inthe supply chain, from origin to destination, there are other players (freight forwarders, warehouse, multi-modal transportation providersetc) which may cause delays / damages, but do not come under the ambit of MC99.

As the airline’s responsibility or liability begins with the acceptance of the goods and terminates with delivery to the consignee (or from airport to airport), other players in the supply chain are not covered by MC99, thus calling for insuring the goods, beyond airports.

Timelines for claims

From airport to airport, the Montreal Convention clearly defines the responsibilities of the contracted party in air freight movement, timelines to make a claim etc, making it easier for freight forwarders to approach the concerned airline.

For instance, the deadline to file a claim for total loss of cargo is 120 days from issuance of airway bill; for partial loss and damages it is 14 days from receipt of goods; for delays it is 21 days from when the cargo was placed at the disposal of the consignee.

The shipper or consignee (who is mentioned in the master airway bill) must make a formal claim within the said period. In case an insurance company or recovery agents want to make a claim, they have to submit a letter of assignment from the contracted parties, along with all the relevant documents such as shippers’ commercial invoice; packing list; documents pertaining to extent of damage or loss; letter of assignment etc.

Beyond airports coverage

Beyond airports is what the shippers need to furtherensure insurance coverage. There are dime a dozen insurance providers who provide end-to-end coverage whether it is for partial damage, partial loss, full loss or delays.

Insurance providers offer policies which provide compensation for the entire value of the merchandise plus transport-related costs; provide door-to-door insurance (as against airport to airport in MC99); easy claim settlements and attractive premiums in a highly competitive market.

For a shipper it is always advisable to insure the goods with simplified claim processes, cash flow gets protected from unforeseen stoppages and profits are still generated if coverage includes it. Insurance covers damage due to loading/unloading, weather conditions, piracies and other risks faced by airlines.

Insurers provide open coverage which covers freight for a specific period (usually for a year) and multiple shipments can be included under one policy. This is an efficient tool to manage risk for frequent shippers. It also has both renewable and permanent coverage policies, the former can be renewed after a shipment is delivered, making it more suited for single trips and voyages; and the latter can be enforced for a certain period and allows unlimited shipments within that time frame.

Cargo transportation insurance market growing at CAGR 3%

There aremany insurance players across the globe as the cargo transportation insurance market is huge, valued at US$53 billion in 2021, growing at a CAGR of 3 percent during the forecast period of 2022-29. This market is expanding as security of shipments or freight protection is critical for trade.

While the market seems encouraging, air cargo industry has been tardy when it comes to adoption of digital technologies to alleviate certain pain points, including insurance. Air freighters are yet to go totally digital, away from paper transactions, call centres and other conventional methods.

It is observed that the freight forwarding community still depends upon paper-based processes to exchange shipment information in the supply chain, which is not error-free, and primarily limiting the end-to-end visibility, a key factor in the journey of the goods from origin to destination.

Cargo tardy in digital adoption

IATA has been insisting that the air cargo industry embrace digitization at a much faster pace, just like passenger airlines which offer diversity of booking channels, enable transparent product comparison, electronic tickets etc. With this tardy implementation and lack of data integration and standardisation, the industry runs the risk of error in the supply chain.

e-freight, the way to go

IATA is strongly promoting its programme called “e-freight”. This aims to implement an end-to-end paperless transportation process, where paper documents are replaced with the exchange of electronic data.

This will—Reduce costs by eliminating paper handling and processing costs; Reduce freight “wait time” promoting faster shipments; Improve visibility by providing electronic messaging for tracking of freight status; Increase quality by providing unified and shared quality standard; Improve sustainability by reducing paper consumption; and, allow for greater trade facilitation by providing easier and more efficient risk profiling.

Today, over 33% of global trade lanes have fully electronic customs procedures and, where regulations support, paperless shipments are in place, but the move should be towards 100% adoption.

In the carriage of air cargo involving countries that have not ratified MC99 but continue to be subject to the Warsaw Convention 1929 (WC29) and Hague Protocol 1955 (HP55) regimes, physical paper records are required in order for the carrier to rely on the liability limits set out in the Convention.

This means that paper documents of carriage such as the air waybill must accompany the shipment throughout its journey, which can be cumbersome.

The shipper should be aware of what insurance companies offer in terms of coverage and in what instances the insurance companies do not make settlement of claims. For instance, insurance companies reject claims, if a) the damage is due to inadequate packaging; and b) damage is due to flawed products.

Some insurance providers don’t insure hazardous materials, certain electronic products, and other highly-valuable or fragile products; and some insurers cover freight only when it is on board a ship, a plane or a truck and not otherwise.

It is imperative for shippers to be well-versed with what the insurance companies cover and do not cover and what gets covered under MC99. All said and done, it is better to pay a small premium and have peace of mind than end up losing the consignment, partially or fully without any claim.