Australia’s import market has grown an average of 3.8 per cent a year over the last five years. The opportunity is there for brokers, especially as coverage can be quite complex for importers and any loss would be considerable.
From the car you drive, to the smartphone you carry, to the shoes you sport – Australians rely heavily on our nation’s growing import market.
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Department of Foreign Affairs and Trade (DFAT) stats show we imported a total of $349 billion in goods and services in 2015-16, a figure which has grown at an average of 3.8 per cent each year over the last five years.
The market is dominated by China (18.4 per cent) and the US (13.6 per cent), while Japan (6.7 per cent), Thailand (4.7 per cent), Germany (4.6 per cent) and the UK (4.3 per cent) round out the top six.
From goods being lost, stolen, damaged or destroyed, to goods that do not meet Australian standards and expose a business to possible litigation – importing into Australia carries numerous risks which can vary significantly.
“The biggest consideration for an importer is that under the Trade Practices Act for example, if they’re importing a product into the Australian market, they’re deemed to be the manufacturer,” explains Whitbread’s General Manager of Broking Ben Bowen.
The biggest consideration for an importer is… they’re deemed to be the manufacturer… the buck is going to stop with them.
“So that’s key to their liability exposure. The bottom line is the buck is going to stop with them.”
Bowen adds that a good broker in this space is one who makes their client a more attractive risk to insurers
“At an absolute minimum you’d want to ensure your client has seen the full specs from the manufacturer. And if it’s an operation that’s large enough, you may work with your insurer to get a risk engineer out there to look,” he says.
Then there’s making sure their standard property risks are covered, adds Bowen, which in a nutshell is how and where goods are stored.
“We’ve seen claims where items are left in a shipping container in the yard, not actually inside a building. An insurer can try and avoid a claim based on that being technically in the open air,” he says.
Marine risks to keep in mind
On the marine transit side of risk, Neil Hiller from Austbrokers Hiller Marine says potentially insurable risks include physical loss or damage, delay (consequential loss), non-delivery due to contact default, cargo liabilities, fines and penalties, and cyber threats.
Other key transportation risks for importers to consider, adds QBE’s Les Rout, National Product Manager of Negotiated Lines, include unexpected transit delays due to natural disasters and the bankruptcy of shipping lines.
[Combining covers into one product has] come to very little because the risk assessment considerations, underwriting processes, required information and pricing criteria are very distinct.
“The global economy has put significant financial pressure on the shipping industry with the costs of running a vessel increasing and reduced freight volumes,” he says.
Then there are the risks – or gaps in the market – that are generally not insurable under traditional insurance covers, says Hiller.
These include commercial risks (unsuccessful competitive strategy), supplies or parts no longer being available, reputational risks (buying from suppliers that are found to employ child labour), being unable to sell depreciating stock, currency exchange rate risks, and political risks (sanctions).
Finding the right fit
Juggling these risks ends up being quite the task. Hiller says that over the last 30 years a number of Australian and international insurers have attempted to combine cargo insurance, products liability and trade credit covers into one product – to no avail.
“They have generally come to very little because the risk assessment considerations, underwriting processes, required information and pricing criteria are very distinct,” Hiller explains.
SUPPLY CHAIN RISKS AND THE BURDEN OF PROOF
“Underwriters from three different departments with three different reinsurance programs have found it virtually impossible to have the same risk appetite for the one account.”
With that being the case, is plain old cargo insurance enough for most importers?
“In most cases it is”, says Rout, “cargo insurance provides protection for importers transporting goods by sea, air, rail, road, post or courier – domestically, or to and from international destinations.
“Marine insurers are continually working to simplify wordings to provide coverage ‘without gaps’ using the standard Institute Clauses as the base.”
That said, Hiller says that while cargo insurances based upon the Institute Clauses make up the vast majority of covers in Australia, they leave importers exposed to shortfalls.
Some of the gaps include delays in delivering goods to customers and consequent lost sales, liabilities in relation to the transport, import, storage or delivery of the cargo, and legal disputes that arise with suppliers, customers or transporters, Hiller adds.
With the aforementioned gaps in mind, just how well prepared is the average importer for the level of risk they face?
Replies Bowen: “My view is that at the higher end of town, it’s adequate. But in any market that is more price driven from a premium perspective rather than coverage driven, there is always potential to be underinsured.”
There are cases where the importer has purchased the goods on cost, insurance and freight (CIF) terms… [and] shortcomings in the cargo coverage are only discovered when the need to claim occurs.
Rout meanwhile highlights another common hiccup: “Unfortunately, there are cases where the importer has purchased the goods on cost, insurance and freight (CIF) terms where the seller is the only party required under INCOTERMS (international commercial terms) to obtain insurance cover and is only obligated to secure minimum coverage.
“In these cases, shortcomings in the cargo coverage are only discovered when the need to claim occurs.”
Trends and challenges
Bowen says brokers should expect to see increasing premiums in the foreseeable future, particularly in the property and liability spaces.
Meanwhile, Rout says brokers need to keep their eye on the changing regulatory environment, including the tightening of biosecurity and an increase in sanction controls.
“This changing environment can mean importers are exposed to risks not covered by a standard cargo insurance policy,” he adds.
Yet with the import market growing consistently year to year, there are no shortage of opportunities for brokers.
“Brokers have a vital role, but should not expect their customers to have a full understanding of the workings of international trade,” says Rout.
“Brokers can also add value in the claims process, especially when dealing with the complexities of a marine claim as there are important differences between the Marine Insurance Act 1909 (MIA) and the Insurance Contracts Act 1984 on how claims are adjusted.”
Adds Bowen: “Look at your client’s current policy and pick holes in it. There will be up-sell opportunities, whether it’s increasing policies or increasing policy limits.
“It’s about engaging with the client to make the client a more attractive risk to insurers, to essentially drive the price down but not impact on the cover.”