By Benjamin Cruz, Vice President, Ocean Cargo, Munich Re Specialty

Natural hazards and other developments lead to road closures and require drivers to make detours to reach their destinations. Similar conditions arise at sea, forcing commercial ships to re-route to different ports – a situation that is resulting in the accumulation of ocean cargo risks.

Risk accumulation occurs when multiple insured property items are exposed to a single loss event. In marine cargo, re-routing can send multiple shipments to the same port. If a natural or human-caused disaster should hit the port, more cargo than anticipated could be damaged or destroyed. This reality makes the monitoring of cargo insurance limits more important than ever.

Re-routing of shipments is a serious concern, due to many contributing factors. Munich Re’s 2024 Marine Trend Radar report, for example, notes five different trends:

Climate change impact. Climate change may cause re-routing in multiple ways. Increased storm activity can endanger certain routes of travel or close ports completely which, in turn, drives ships and cargo flights to adjust routes and destinations. Storm surge and flooding of some coastal ports is increasing and projected to escalate. At the other end of the climate spectrum, severe heatwaves and drought cause challenges for cargo in transit by lowering water levels, such as in the Panama Canal. 

Labor issues. Labor shortages across the supply chain are another cause for concern in the cargo market. From dock workers to truck drivers to experienced seamen and stowage experts, the number of skilled contributors is declining, even as the need for such workers increases. This shortfall contributes to port congestion and delayed delivery.

Geopolitical risks. Political instability and war may force cargo carriers to choose alternate pathways and alternate ports. Attacks on commercial vessels and conflicts adjacent to main navigation routes have been triggers for re-routing to ensure safety for crews and cargoes.

Cargo value concentration. Also playing significant roles in the growing risk of cargo accumulation are the proliferation of megaships and economic inflation, which is raising the value of cargo even before it leaves its port of origin. To illustrate the scale of these massive cargo ships, the Dali container ship that struck the Baltimore bridge in April was roughly as long as the height of the Empire State Building, with a capacity of nearly 10,000 containers. Today’s largest container ships can carry more than twice that load. With ships of this size and values on the rise due to inflation, the amount of cargo value in transit in one location at any given time has skyrocketed past historical precedents.

Insurance market conditions. The increase in the market capacity and competitors have a significant impact. The market is transitioning from a hard to soft basis, and insurance companies have a challenge facing pricing and establishing the ideal conditions of the different components of any insurance program, affecting portfolio performance expectations.

Risk accumulation is a problem not only for cargo owners but also for the marine insurance industry. Cargo insurance limits typically are intended to cover values in any one location. Under open cargo policies – a broad form of all-risk coverage that can encompass marine, air, and ground transportation – cargo owners do not have to issue a schedule of values for every individual item; goods that are part of a shipment are assumed to be insured.

When the value of goods accumulates in one location, those combined values may exceed the cargo insurance policy limits of a given insured and leave the shipment, or shipments, inadequately covered. This is a different but related concept from the “accumulation clause” often found in marine insurance policies. The accumulation clause specifically limits the amount an insurer will cover if the insured value of cargo in a specific location exceeds the declared amount of a shipment. This is useful for protecting a cargo insurer from unexpectedly inflated claims and to help control the insured’s premium costs. 

Underinsured or inadequately covered shipments can be financially devastating for a cargo owner. For example, a distributor of high-value electronics may plan to have one shipment entering through the Port of Los Angeles one week and another shipment the next, while a third shipment is planned to travel via the Panama Canal to the East Coast to be delivered later. A disruption of the canal could easily cause re-routing of the eastbound shipment and significant port congestion and delay in Los Angeles. This means three shipments that were never intended to be in the same place at the same time could all be at the Los Angeles port together. Now if a storm, fire, or other incident causes cargo loss at the port, what happens? Individually, each shipment may have adequate coverage, but together the accumulation of values may significantly exceed the shipper’s limits of insurance. The consequences of such a loss could put a shipper out of business.

Cargo insurance brokers and insurance companies can assist cargo owners in mitigating exposure to accumulation risks. For brokers, a big challenge is acquiring a complete understanding of cargo owners’ insured values and extrapolating the potential for accumulation. Once brokers and cargo owners can clearly see the values in play, they can project the potential for loss and determine necessary coverage limits.

Underwriters may agree to temporarily increase limits for specific shipments or location, often for an additional premium, but such decisions are based on the underlying limits of a cargo insurance program. For this reason, brokers and cargo owners should make certain that the limits of the program align with the exposure.

For insurance companies writing cargo risks, one or more insurers may be needed to provide adequate limits for a cargo owner’s situation. The most direct solution insurance companies can provide is to offer higher limits on cargo policies. Because cargo insurance deals with property in transit or in temporary storage, the risk of loss is different from static property, and as a result, limits on any single risk are usually relatively low compared to other classes of property insurance. For clients shipping high-value or high-volume goods, brokers generally need to create layered cargo programs. Not only is layering time consuming, not all insurers may respond to accumulation loss in the same way. Munich Re Specialty has addressed this problem by increasing local underwriter authority by 150%, up to $25 million per risk.

Cargo insurance is the bedrock of international trade. Not only does insurance make a cargo owner whole when physical loss or damage occurs, but it also helps to pay for salvage, cleanup, and expedited replacement. Uninsured or underinsured shipments are not feasible for most shippers, and supply chains are disrupted when shippers face inadequately covered cargo loss. Properly insured cargo is also hugely important to insurers, who base their pricing on the projected cargo risks. Market stability can be jeopardized by underinsured shipments. Getting the limits right the first time means a broker has achieved several beneficial things: it spares the client from headaches, reduces the possibility of devastating financial loss, and protects the supply chain and cargo insurance market. 

Munich Re Specialty combines underwriter expertise with technical tools for data management and overall analysis of a client’s risk portfolio to identify the threat of cargo accumulation and offer the best solution. We are prepared to discuss cargo risk accumulation, as this is a crucial topic in the complex world of trade.

This article was produced by Business Insurance in collaboration with Munich Re Specialty.