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Weekly Updates[ILLUSTRATION OMITTED]
With so much "stimulus" sloshing around surely by now we would have settled on a unique moniker to describe these economic times! For example, over 50 years ago the Korean conflict treated us to a hound dog of an economic storm, the 1973 oil embargo was described as a global bummer and the Dot-com bust of '02 was a melt down.
But no matter what history winds up calling the austere part of this current economic cycle, sadly, its length has already passed all but one previous contender.
Today's global austerity puts every cent of overhead supporting each sale under scrutiny.
So let's define this overhead: it is nothing less than your Ocean Marine Cargo (OMC) cover attaching and transferring risk from the moment of your financial interest at origin. Your cover continues through overland transit, container stuffing, vessel movement, unloading, drayage, unstuffing, storage, etc., until final delivery of your goods to your buyer or consignment warehouse.
Meanwhile, valuation in the event of a claim under your OMC has tracked the highest "valuation state" (spot, sold, fixed, or call) pricing of your goods etc. Now let's make some objective measurements. Just like the FDIC stress testing of banks serves to reveal capital needs in a worst case scenario, this self test is designed to evince operational stress arising from the adequacies (or not) of your risk transfer procedures. The results will range anywhere from speed dialing your broker to pruning OMC overhead as a result of better assumption of risk.
In the boxes provided, please write in the number closest to your view of each italicized proposition. 1 = disagree 3 = begin tomorrow 5 = already there
1 Security--my bankers and financial partners have asked for security beyond the assignment of my market capitalization alone. Now they want an insured security interest in my goods pledged as collateral to my line of credit and have asked for an OMC "Bankers Loss Payable Endorsement." I understand this helps perfect my banks' collateral interest in my goods--putting them at the front of any insurance payout line despite even my company's error or omission (read the clause).
2 ocean carriers and my containerized goods--the back of a bill of lading tells me that the Ocean carrier's liability under global "Carriage of Goods by Sea Act" conventions (COGSA) barely extends beyond the movement of the container. Most types of loss such as fire, shortage, wet damage, general average outlays, etc. are for my account as shipper. For the basic ocean risk, my company budgets at least 0.10% of all annual sales/shipments revenue to cover the marine peril exposure of my goods.
3 Sales on terms customary to trade--means that "delivered" or "free mill" or "CIF" terms are all variants of my OMC "all risk" warehouse-to-warehouse cover extended to include trade specific clauses such as country damage, contamination, shortage (theft), infestation and condensation. Covering goods from origin warehouse to buyer warehouse with these extensions is worth at least 0.15% additional for the risk transfer of tough commodity specific exposures.
4 Terms to buyers and payment--since we book ocean freight on "FCL" container terms without conclusive proof of the load and stow of goods at the time of container seal and tender to the ocean carrier, we have no way to fix our legal burden as to the delivery of quantity and quality of goods at any stage before delivery. And since my credit cover cannot be triggered by a disputed physical loss, our company's goal is to always sell CIF or landed terms with payment by L/C or open account net 10 days after order.
5 Truck transit prior to and/or after vessel movement--my company usually checks the truckers' Acord insurance forms to ensure theft, robbery and mysterious disappearance perils are covered with "A" rated underwriters. But even with our own heavy-duty container seals, nevertheless our company policy is never to buy or sell on FOT or FOB container terms because accountability for the goods becomes muddled during any remaining transit to/from vessel or container yard.
6 Commodity pricing--our company policy is wherever possible to sell on "call" terms allowing us to both hedge futures and fix prices up to delivery. Though my OMC may attempt recovery from warehouses for losses of fire, theft, flood, concealed damage etc., I know that the legal basis of recovery is limited to actual cash value (spot) not invoice or call. To protect against huge basis point price differences from time of order, my company uses the OMC "call" fixation clauses.
7 Damage--In the event of loss or damage to my commodities anywhere, there is a whole class of salvage buyers whom we know pay promptly and are secured with the safeguard of arbitration clauses and trade association membership; moreover I have the time and enjoy spending it with any number of salvage buyers.
8 War, strikes, riots, piracy,or 'terrorism are active perils everywhere we trade. But since we avoid such current hotspots as Ivory Coast, Syria, Somalia, Sudan, etc., our company policy is ' to exclude war risk in our sales costs, thus saving us the 0.03% expense of these perils.
9 Pre or post shipment exposure--we accept that Acord or similar insurance forms given by warehouses are like tariffs, meaning not conclusive, and in any case will not easily respond to concealed damage claims such as shortage, country damage, infestation, or contamination. Since we strive to reduce the adverse exposure to our OMC, our company policy requires evidence from warehouses of their insurance for theft, robbery and mysterious disappearance perils secured by "A" rated underwriters.
10 Inventory procedures for stock especially in overseas locations--the well established principle for claims arising from theft and/or mysterious disappearance is "You cannot lose what you don't have," meaning that my claim depends on the quality of my stock inventory before the theft. Because I understand this, our company reconciles actual stocks against received goods and shipments.
Add up your "Stress Test" scores:
10-17 = you are (or should be) ... an Insurance Company ... or ... the US Navy. Seemingly you have the exclusive world distributorship of your goods and can sell 100% ex-warehouse. If not, perhaps a call to your insurer is in order.
18-29 = your long-standing bank credit lines remain reasonably priced and your OMC broker has met your bankers. A normally cautious shipper, you regularly coordinate with your OMC broker to minimize logistics problems and risk.
30-40 = you are a larger shipper who actively uses a real time OMC claims analysis system to metric your logistic team and stop bad incidents from becoming loss trends. Along with thanks from your OMC, you receive "profit sharing premium returns" that help keep costs down.
41+ = you are trending towards an over reliance on insurance and disregard of risk. You would be safer to line up title, risk and payment functions so that your OMC may better and more economically focus on supporting good sales--not salvaging marginal sales.
Ted Tekerdres is the president of Rekerdres & Sons Insurance Agency, and can be reached via email at info@redsons.com
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