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Stock throughput insurance is not intended to replace supply chain insurance. However, using stock throughput insurance in conjunction with a business interruption policy can be a comprehensive, holistic and progressive way of addressing transit risk in today's complex global supply chain.

Stock throughput coverage is not new but it has gained validity in recent years. Stock throughput insurance combines transit (ocean and inland cargo) with "static location" coverage, insuring owned goods in both storage and transit by sea, air, or land most anywhere in the world.

Q: Who are the major insurance markets for stock-throughput insurance?

A: Almost all marine insurers will provide a stock throughput policy. This product is more attractive to high volume stock/inventory clients. Thus, the London market with its capacity and ability to write warehouse values in the hundreds of millions tends to insure a high proportion of stock throughput risks. Some first tier players are Travelers, Chartis, Starr Marine, Allianz, ACE ... not so big players: Chubb, Hartford, and One Beacon.

Q: Do you have a sense for what's the total premium written and/or total capacity out there for this product? Or just a general sense of how commonly purchased it is?

A: Difficult to quantify. The IUMI (International Union of Marine Insurers) most-recent figures indicate that total worldwide marine cargo premiums for 2009-10 were expected to be $12.41 billion. We estimate a significant portion of these premiums has a stock element involved.

There are more players in the last three to five years because of the increased inventory controls and risk awareness (zero inventory approaches make the supply chain more sensitive to loss). A property underwriter has more opportunity if they also write stock throughput. Some underwriters I spoke to attest to a big increase in submissions in the last three to four years. This says the product has become more attractive. But the product doesn't seem to have a mainstream attractiveness yet.

Q: What sorts of limits, rates, and terms and conditions can a risk manager expect when shopping for stock-throughput? What's the best way for them to determine that they're getting the best coverage to suit their exposure?

A: This depends entirely on the risk. Limits and conditions are dictated by the maximum values at risk per conveyance or location and the type of goods involved. Rates are predicated by the loss history and the exposures: e.g., the geographical limits of the voyages and the physical location of the warehouses.

In most cases, a risk manager should ensure that he/she is getting "all risks" cover throughout the entire duration of the risk, that the basis of valuation is set at selling price (thus insuring the profit element is covered for goods in the supply chain), and that catastrophe risks are not excluded or sublimited to a massive extent. A full disclosure of all elements of their business--i.e., imports, exports, domestic transits and the terms of sale/purchase--will ensure that the correct coverage and price are obtained.

For example, an insured that sells predominantly to U.S. buyers on a basis whereby the buyer collects the goods from their warehouse would only need a "contingent" coverage for those risks with the corresponding reduction in premium that this would provide.

One of the reasons stock throughput left the property market and came to the marine market is for the CAT capacity. More often then not, risk managers select their stock throughput carrier based on premium and do not apply the measures mentioned to properly evaluate the product. The differentiator is price, and coverage is secondary, it seems.

It's not a big service product. Some underwriters price it and write it. Some underwriters loss survey it like Travelers and work harder to value the product so they may better rate the product for the customer.

Q: You had mentioned how some insureds purchase stock-throughput from their property carriers. Can you explain here again the benefits of that strategy?

A: In some circumstances a customer can receive a proportionate reduction, or more, in the premium for removing the stock element from their property policy and purchasing a stock throughput policy. In addition the deductibles would be to their advantage to carve out a separate policy because the stock throughput policies tend to have significantly less risk transfer points than property policies.

Also, a stock throughput policy gives access to better catastrophe limits than does a property policy. Furthermore, stock is product that moves. Times where there is cross over into the property carrier's domain, finger-pointing may arise if the carriers are not the same.

May 1, 2010

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