December 2005 | Commentary | Risks and Rewards

Liability Lessons Learned in 2005

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This year began with expectations that insurance rates would finally decline as markets recovered from the effects of Sept. 11. Over the past several years, insurers imposed strict underwriting disciplines to restore profitability to the market, which, in turn, attracted new capital. This brought about greater competition and with it, the prospect of softening premiums.

As expected, insurance rates dropped between 5 percent and 8 percent during the early part of 2005. But the effects of three major hurricanes in the United States brought about unexpected change. The combined losses from these hurricanes—estimated between $60 billion and $80 billion—caused premium reductions realized over the first half of the year to disappear by year's end.

Property rates are expected to rise in the coming year, as insurers pass the increased cost of reinsurance programs on to their customers. Experts predict those areas most prone to natural disasters will see the greatest property rate increases. While this may have a ripple effect on casualty rates, it is still too early to tell. Market watchers will be following this closely over the coming months.

The logistics industry continued its anti-terrorism efforts this year, addressing concerns about supply chain disruptions caused by terrorist acts.

But it was a natural disaster rather than a terrorist act that tested the industry's preparedness in 2005—Hurricane Katrina demonstrated how the supply chain remains vulnerable to significant service disruptions. Business continuity will continue to present challenges as companies plan for both natural and man-made disasters next year.

The U.S. Terrorism Risk Insurance Act, which serves as a backstop to insurers for claims payments arising from terrorist acts, is set to expire at the end of this year. As of press time, the Senate and the House are considering two different proposals to extend the Act for another two years. A decision is expected before the end of the year.

One-Stop Service

The logistics industry continued to broaden its mix of services this year, as it attempted to meet customers' expectations for fully integrated support. With outsourcing permeating virtually all functions from assembly to returns, many shippers view their service providers as a critical element in the delivery of their goods to end-users.

But with this expansion in services comes an increase in exposure, as shippers demand accountability without limitation or fault. A number of the questions raised by readers throughout the year highlighted the uncertainties they face in this era of "one-stop" service.

We received a question from one valuable goods handler, for example, who faced unlimited exposure to his customer for cargo losses, and, at the same time, faced liability limitations from his transportation providers. We examined a number of risk-transfer solutions that this mismatch in trading conditions lent itself to.

Another operator faced multiple claims arising from damage to a partially insured shipment of goods. This example underscored the need for clearly defined claims handling procedures, and a more thorough review of claims documentation.

Chassis and trailer leasing presented their own set of problems for readers. Operators face liabilities for accidents involving their units, even when they have no actual involvement in the transportation process. This unique situation requires a unique insurance solution. These scenarios highlight today's complicated business environment. Operators are increasingly turning to insurers for protection, and some are responding by combining policies intended to insure multiple services. One insurer developed a "logistics policy" covering virtually all risks operators face in the supply chain process.

A one-stop solution is just what this one-stop service industry needs—into 2006 and beyond.

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