EFFSAA TOT (Intro To Insurance) Thomas SIM 17072018 PDF

Risks Management
Introduction
to
insurance
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TOT Prog Addis Ababa/Ethiopia 18th–31st Jul 2018 (Thomas SIM)
Introduction
Introduction to Insurance
to Insurance
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• On completion of this module you should be able to:

– Recognize the inherent dangers in international trade and
the duties and responsibilities of the freight forwarder/MTO
– Appreciate the need for a risk management policy
– Appreciate the different types of insurance policies and
markets where these may be placed
– Describe the key principles that govern insurance policies
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I. What is Insurance ?
II. Who arranges the Insurance ?
III. What is Risk Management ?
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Insurance is essentially a contact
between two parties. The first party
is the :
assured, insured or policyholder
These terms are used interchangeably

and are all synonymous with the person who wishes to
transfer a risk. The second party is :
the insurance company, insurer or underwriter
Again these names are all used interchangeably and are all
synonymous with the party agreeing to take on the risk of the
assured in return for a premium…
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• Insurance is a contact between two parties.
• The First Party pays the Second Party in return for a
promise
• The promise requires the assured to have faith that
the insurer will honor it. Berkshire Hathaway, Omaha, Nebraska
The assured,
The insurance
insured or company, insurer or
policyholder underwriter
The policy
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Origins
• The origins of insurance can be traced back 5,000 years.

– 3000 BC – China merchants too to dividing up their goods in many ships
to avoid the damage a single loss may have.
– 2000 BC – Phoenician traders finance their shipping through loans from
lenders. Loans were paid back, with interest, after the safe arrival of the
goods. If goods and ship were lost in transit, nothing was paid back.
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Nomenclature
• Risk - the uncertainty of a financial loss.
• Peril - is the cause of loss or the hazard which may
increase the chance of loss.
• Probability - the chance of a number of losses out
of a given number of exposures.
• Loss - the unintentional decline in or
disappearance of value.
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What can be insured ?
All risks cannot be insured. The following must be
present:
– an insurable interest
– a financial value
– a large number of similar risks
– Losses must not be catastrophic
– Losses must not be “too small”
– Losses must be reasonably unexpected
– Losses must be accidental
– It must be consistent with public policy
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Primary Functions of Insurance
1. Certainty – defines costs and enables

planning
2. Protection – from suffering
3. Risk sharing – dilutes any impact
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Secondary Functions of Insurance
1. Loss prevention – greater awareness of perils
leads to lower occurrence
2. It provides capital – to business through
investment
3. It improves efficiency – by avoiding overly
protective measures
4. It helps economic progress – society is helped
by others to “pick up the pieces”
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Key Principles of Insurance

• Insurable interest
• Utmost good faith (uberrima fides)
• Indemnity
• Subrogation
• Sue & Labour
• Moral Hazard
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Insurable Interest
• One may only buy insurance in a marine venture if there is
an insurable interest i.e.
– if the person stands to benefit, or expects to benefit from the safe
arrival of the insured goods and will be adversely affected by any
damage or loss.
• Consequently, different persons may have an insurable

interest in the goods at any one time, e.g. an exporter, or
confirming house or bank which advances funds to the exporter under
a letter of credit.
• The assured must have an insurable 'interest' at the time

of the loss.
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Insurable Interest
• A legal interest in the value of the subject of
insurance, including any legal or financial
relationship.
• Insurable interest usually results from property
rights, contract rights, and potential legal liability.
• The assured must have an insurable 'interest' at
the time of the loss.
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Utmost good faith (uberrima fides)
• The assured must disclose to the insurer all
material circumstances of which he is aware of
or, ought to be reasonably aware of, which could
affect the risk he is transferring.
• A material circumstance is something that had
the insurer been aware of, at the time of
inception of the insurance policy, may have
affected his decision in either underwriting the
risk, deciding on the level of premium or, terms
applicable.
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Utmost good faith (uberrima fides)
• Failure to do so will result in a void contract giving
the insurer the legal right to refuse to compensate
the assured should a loss occur, irrespective of
whether the non-disclosure was intentional,
inadvertent or not directly related to the loss.
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• The contract of marine insurance is a Contract of
Indemnity, i.e. in the event of the assured experiencing
financial loss or having to incur certain expenses arising
from loss of, or damage to the goods,
caused by any of the perils stated in
the insurance contract, the insurer
undertakes to compensate the
assured for the financial loss he has
suffered.
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Indemnity
• This is opposed to other forms of insurance, such
as, building insurance where the underwriter would
undertake to build a new building to replace one
destroyed by fire.
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Indemnity
• The principle that the insured should not profit from a loss
or damage but should be returned (as near as possible) to
the same financial position that existed before the loss or
damage occurred.
• The insured cannot recover more than his or her actual

loss from the insurer.
• Exceptions:
– personal accident and life insurance policies where the
policy amount is paid on occurrence of accident or
death and the question of profit does not arise.
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• Subrogation happens
when any rights which
the assured may have
against third parties,
such as carriers, are
transferred to the
underwriter.
• Thus for cargo contaminated by saline water the cargo

insurers would compensate the assured and through
their right of subrogation pursue the carrier for
compensation of their loss.
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Subrogation
• The assured, however, may only recover from one

source, e.g. the insurer, in respect of loss or
damage.
• In case of total loss the insurer retains title to the

damaged good which he may dispose of as he
wishes.
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Sue & Labour
(Mesures conservatoires)
• The assured should act as if he was a prudent uninsured
person.
• If the owner of goods who just watched his goods being

destroyed would not be covered by his insurance as he
failed to ameliorate the loss.
• There are various costs incurred by a forwarder during the

process of investigating a claim, defending his interests
and mitigating his loss, e.g. legal and survey fees, storage
etc.
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Sue & Labour
• Expenses may be recoverable under Sue & Labor
even if the forwarder is not himself responsible.
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Sue & Labour
• The insured must protect damaged property from further

loss once a loss has occurred.
• He should act as if he was a prudent uninsured person.
• The expenses of mitigation will be borne by the insurer and

the insured "in proportion to their respective interests" in
the property. Thus, the insurer will pay the full "sue and
labor" costs if the amount of insurance is equal to or
greater than the value of the property.
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(le risque moral)
• is the risk arising from the nature and behaviour

of human beings connected with the subject
matter of the insurance e.g.:
– fraud - “staging” of a loss
– carelessness - not performing duties
– unreasonableness – in interpreting the policy
– trend of events – factors affecting the larger picture
such as economy of a nation.
• Moral hazards are different from physical hazards
e.g. packaging, loading conveyance etc.
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(le risque moral)
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Questions ?
tomsim@singnet.com.sg
Prepared & edited by Thomas Sim – July 2018
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III. What is Risk Management?
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Who Arranges Insurance ?
• Insurance can be arranged by the assured directly
with an insurance company.
• However, there are other markets available that

are not accessible to individuals because they
require specialist knowledge. Intermediaries are
therefore needed and it is the insurance broker
whose role it is to unite the assured and
underwriter.
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How Payments is Made to an Agent ?
• The Principal must pay the Agent in accordance with the
agreement
Principal Agent Third party
(Shipowner) (Port agent) (Local store)
• In insurance, the Agent of the Assured is paid by the Insurance

Company out of the premium.
Principal Agent Third party
(insured) (broker) (Insurer)
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World’s Largest Insurance
Brokers by value, 2015
Rank Company Revenue
1 Marsh & McLennan $12,912,000,000
2 Aon P.LC. $11,661,000,000
3 Willis Group Holdings P.LC. $8,124,000,000
4 Arthur J. Gallfaher & Co. $3,990,000,000
5 Jardine Lloyd Thompson $1,697,854,440
6 BB&T Insurance Holdings Inc. $1,676,025,014
7 Brown & Brown Inc. $1,656,951,014
8 Hub International Ltd. $1,170,477,000
9 Lockton Cos. LL.C. $1,328,569,000
10 Wells Fargo Insurance $1,316,335,000
Source: https://www.ajg.com/media/1699397/bi16012-arthurgallagher.pdf
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World’s Top Ten Insurance
Companies in 2015
(in billions of USD)
Rank Company Revenues Country Industry
1 Berkshire Hathaway $210,821 U.S. Property/casualty

2 AXA 129,250 France Life/health
3 Allianz 122,948 Germany Property/casualty
4 Japan Post Holdings 118,762 Japan Life/health

5 Ping An Insurance 110,308 China Life/health
6 Assicurazioni Generali 102,567 Italy Life/health
7 China Life Insurance 101,274 China Life/health
8 State Farm Insurance Cos. 75,697 U.S. Property/casualty

9 MetLife 69,951 U.S. Life/health
10 Munich Re 69,433 Germany Property/casualty
http://www.iii.org/publications/international-insurance-fact-book-2016/world-rankings
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The most costly insurance losses worldwide from
(in billion U.S. dollars)
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Questions ?
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Risk - (uncertainty) is still there
Peril - is still there
Probability - is still there
Loss - is mitigated
Risk Management ?
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• Having a good risk management policy makes

good business practice.
• By examining and evaluating risk a MTO is likely

to be more careful and prudent since appreciating
risk is one step closer to acting more cautious.
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Some Examples of Risks Management
• Any policy which looks at reducing accidents can
be termed risk management, including:
• Lean Logistics
– coined by Toyota to eliminate waste in production
processes.
• Six Sigma [6σ]

– coined by Motorola in the 1980s relates to reduction of
error variance in manufacturing.
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Managing the Reality…
• Insurance is often regarded as the most common
form of risk management but actually it is risk
transfer since the risk has not been managed.
• We shall look at the risks a MTO is exposed to
and the process of insurance in more detail.
‘Vacarious’
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Whenever goods are moved they are prone to
potential hazards…
• Understanding what happens when goods are
damaged, who is at fault and how to claim from the
responsible party enables the freight forwarder to
safeguard his and his client’s interests as well as
handle claims expediently and competently.
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Minimize Exposure to Risks by:
• Train staff so that they are conversant with the

standard trading conditions, bill of lading terms,
etc., and are able to handle claims and recoveries
efficiently and expeditiously.
• Ensure all documentation is correct, legible and

appropriate for the purpose.
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• Ensure the
subcontractors to
have adequate
liability insurance
cover to cover them
for their negligence.
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Minimize Exposure to Risks by:
• Make sure that the Standard Trading Conditions
under which he operates are understood and
accepted by his customers and his subcontractors
(e.g. ship-owners, warehousemen, road operators,
etc.).
e.g. BIFA, CIFFA, NSBS

and SLA STCs
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Introduction
to Insurance
Minimize exposure to risks by :
• Make adequate security arrangements against theft,

pilferage, fire, etc.
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Procedures capable of giving rise to
potential Claims
• Collection of goods by MTO / sub-contractor;
• Receipt of goods from the first carrier;
• Performance of formalities (customs, import or
export);
• Booking cargo, preparation and lodging of Bills of
Lading (B/Ls), call forward, retrieval of B/Ls,
distribution of documentation;
• Insuring cargo.
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Procedures capable of giving rise to claims
potential
• Neglecting to make
reservations and
safeguarding his
principal's interests;
• Neglecting to care for

and watch over the
goods between two
carriers;
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• Wrong or incomplete
writing of the B/Ls
• Damage incurred by
installations such as a
crane in the port due
to an incorrect
declaration of weight.
(IMO-SOLAS VGM !)
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• MSC Napoli’s - The
weight of 137 (20%) of
the containers stowed
on deck differed by
more than 3 tonnes
from their declared
weights. The largest
single difference was
20 tonnes.
• IMO-SOLAS VGM –
w.e.f. 01st July 2016
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Potential Claims
• Omission to take cargo insurance in spite of
instructions;
• Failure to exercise due diligence in the choice of

carriers, warehousemen and other agencies on
behalf of the customer;
• Failure to notify the consignee;
• Re-export of cargo without compliance with the

necessary formalities for drawback of duty, etc.;
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Potential Claims
• Delivery of cargo without taking the bill of lading
in exchange;
• Delivery of goods to the wrong

consignee/destination or contrary to instructions;
• Delivery of goods without

collecting cash from consignees;
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Introduction
to Insurance
Before buying insurance…

• Identify the potential risks that you are exposed
to.
• By examining and evaluating risk a MTO is likely
to be more careful and prudent since appreciating
risk is one step closer to acting more cautious.
• Having a good risk management policy makes
good business practice.
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Introduction
to Insurance
___________________________________
Introduction
to Insurance
Conclusion
• Understanding risk is the first step to controlling
risk.
• Controlling risk allows the MTO to better able cope
with the hazards in international trade, stay in
business and prosper.
• Training staff about these hazards helps them to
deliver a better service to the customer thus
retaining customers and attracting new ones.
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Introduction
to Insurance
Summary
• In this presentation we have looked at:
– Insurance principles and terms
– Insurance Brokers
– Risk management
– Some liabilities faces by the MTO
• In the next presentation will deal with insurance

markets.
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Questions ?
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Thomas Sim
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Introduction
to Insurance
Thomas SIM
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61

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Risks Management

• On completion of this module you should be able to:

These terms are used interchangeably

• The origins of insurance can be traced back 5,000 years.

Primary Functions of Insurance

1. Certainty – defines costs and enables

Key Principles of Insurance

• Consequently, different persons may have an insurable

• The assured must have an insurable 'interest' at the time

• The insured cannot recover more than his or her actual

• Thus for cargo contaminated by saline water the cargo

• The assured, however, may only recover from one

• In case of total loss the insurer retains title to the

• If the owner of goods who just watched his goods being

• There are various costs incurred by a forwarder during the

• The insured must protect damaged property from further

• He should act as if he was a prudent uninsured person.

• The expenses of mitigation will be borne by the insurer and

• is the risk arising from the nature and behaviour

(le risque moral)

• However, there are other markets available that

• In insurance, the Agent of the Assured is paid by the Insurance

1 Berkshire Hathaway $210,821 U.S. Property/casualty

4 Japan Post Holdings 118,762 Japan Life/health

7 China Life Insurance 101,274 China Life/health

8 State Farm Insurance Cos. 75,697 U.S. Property/casualty

• Having a good risk management policy makes

• By examining and evaluating risk a MTO is likely

• Six Sigma [6σ]

Minimize Exposure to Risks by:

• Train staff so that they are conversant with the

• Ensure all documentation is correct, legible and

e.g. BIFA, CIFFA, NSBS

• Make adequate security arrangements against theft,

• Neglecting to care for

• Failure to exercise due diligence in the choice of

• Failure to notify the consignee;

• Re-export of cargo without compliance with the

• Delivery of goods to the wrong

• Delivery of goods without

Before buying insurance…

• In the next presentation will deal with insurance

Prepared & edited by Thomas Sim – July 2017

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