The affection of tariffs on marine cargo insurance

I The reason for choosing this topic The first issue to adress here is “Why we choose this topic” ? And “Why is the much-discussed 232 and section 301 tariffs that are currently implemented or currently underview” -Duty rate are on the rise: These tariffs curently stands as follow: 25% on steel imports into the US and 10% on aluminum And then there are lists currently published under the section 301 tariffs with only one list currently being enforced as of July 6th Also in more recent news, a duty rate of 25% may be imposed on list instead of the originally proposed 10%  So as you can see it’s a very current news and there are still a lot of moving pieces but the truth of the matter is duties are on the rise and is going to affect many aspects of international trade beyond duty One aspect that has not really been really discussed much is how these higher duty rates may affect marine cargo insurance coverage -The primary way policy holders will be affected is in the valuation process for their policy So let’s take a quick step back and define valuation as it typically works Valuation is an estimation of the cargos worth which then informs the amount of coverage that the policy provides Historically, 1 duty is not written into the valuation although it can be written in as a specific clause on your policy The way duty is factored into a policy is typically through a 10% uplift The standard in the industry is for valuation to be calculated as a basis of CIF+10%, which stands for cost, insurance and freight This means we would take the CIF value of the goods and then add 10% uplifft This uplift is to cover incidentals that arise during the importings process including items like duty port fees and broker fees Since duty rates were typically less than 10% in the past, this 10% uplifft was more than enough to cover all the incidentals II Over view of marine insurance Definition of marine insurance Marine Insurance is a type of insurance that covers cargo losses or damage caused to ships, cargo vessels, terminals, and any transport in which goods are transferred or acquired between different points of origin and their final destination Types of risks in marine insurance Base on the causes − Act of god, vile weather, thunderstorm and lightening, tsunami, earthquake, − flood, volcanic eruption,etc Perils of the sea: Ship strike upon the rocks, ship sinking, ship collision, colliding with icebergor other objects 2 − Risks caused by political actions: War, SRCC (Strikes, Riots, Civil, − commotions) Risks causes by particular actions of people: Thieves, robbers Risks causes by other sources − Base on the insurance technique a) Insured common perils: The risks that are normally insured in original insurance clause 1) 2) 3) 4) 5) 6) Main risks Stranding Sinking Fire or explosion Collision Jettison Missing 1) 2) 3) 4) 5) 6) 7) b) − − c) Auxiliary risks Theft Leakage Breakage Dampness Heating Hooking Rusting Relative excluded Perils: Risks that are not included in standard insurance clauses War SRCC Absolutele Excluded Perils: Risks that are not insured in any − circumstances: Loss, damage or expense attributable to wilful misconduct of the assured Ordinary leakage, ordinary loss in weight or volume, or odinary wear and − tear of the subject – matter insured Loss, damage or expense cause by insufficiency or unsuitability of packing − or preparation of the subject – matter insured Loss, damage or expense caused by inherent vice or nature of the subject − matter insured 3 − Loss, damage or expense proximately caused by delay, even though the − delay be caused by a risk insured again Loss, damage or expense arising frokm insolvency or financial default of − the owners, managers, charters or operators of the vessel Loss, damage or expense arising from the use of any weapon of war employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter Types of losses and damage in marine insurance Total loss Actual total loss Actual total loss Means the whole lot of the Found in the case where the consignment has been lost or actual loss of the insured good is damaged or found valueless upon unavoidable, or the ship or arrival at the port of destination consignment has to ba abandone because the cost of the recovery would exceed the value of the ship and the consignment in sound condition upon the arrival of the port of destination Partial loss: Means that the loss or damage dine to the goods is only partial III − Particular average( Ton that rieng) :losses of each insured interest − individually due to acts of god or perils of the sea Insurer’s liability: Compensate for both of the losses and reasonable costs caused by particular average Marine cargo insurance In order to trade goods and other merchandise usually have to travel from one country to another We buy-in raw materials and components, 4 assemble or manufacture them into something else and then sell them overseas or to shops in our own High Streets This national and international movement of property gives rise to the need for a particular type of insurance, one that provides coverage throughout the duration of the transit, that offers protection from risks peculiar to transit and can be handed on from seller to buyer as the property itself changes hands That’s why the Marine cargo insurance is provided The features of Marine cargo insurance • Coverage for limited carrier liability The carriers, by law, are not responsible for many common causes of loss that occur in transit (for example, acts of God, general average, etc.) And, even if they are liable, carriers’ liability in the event of a loss is limited – either by contract in the bill of lading or by law In most cases, you will only recover cents on the dollar from the carrier • Cargo insurance is important in international trade Businesses need cargo insurance to reduce risk in importing and exporting Cargo insurance is covered under risk policy or floating policies • 80% of international cargo transportation is carried out by sea Again the overwhelming amount of sea transportation is handled via containers Any 5 voyage of cargo ship not only has a long distances and takes a few month to completed, but also has a lot of risks (ex: Fire, Lightning, Explosion, Riot, strikes, malicious damage, storm, etc…) The conditions of marine cargo insurance of UK a) ICC 1963 − − − − b) Free of particular average ( FPA) With particular average (WA) All risk (AR) War risk (WR) ICC 1982 ( ICC 2009 ) Change main conditions FPA => INSTITUTE CARGO CLAUSES C WA => INSTITUTE CARGO CLAUSES B AR => INSTITUTE CARGO CLAUSES A There has been some updating of the language used in the clauses In particular: - The terms ‘goods’ and ‘cargo’ have been replaced by ‘subject matter insured’ - The term ‘underwriters’ has been replaced by ‘insurers’ - The marginal side headings in the 1982 Clauses have been replaced by sub-headings 6 The Strikes and War Clauses have been amended in line with the A Clauses and we have only shown below the Risks Covered Clauses of each for ease of reference 3.The conditions of marine cargo insurance of Vietnam IV a) QTCB 1965 b) QTC 1990 c) QTC 2004 Tariffs affection on valuation As we have mentioned earlier in the first part, the duty rate were typically less the 10%, which is less than the uplift So in the past, this 10% uplift was abundant to cover all the unfortunate accidents How ever this is currently changing for a very large number of bussinesses as a result of the section 232 and the section 301 tariffs With duty rates increasing up to 25% on a variety of products, the typical 10% uplift may no longer be enough to cover a policyholders incurred duty and all of the other incidentals that can come up during a claims It is also important to understand that these tariffs will affect both businesses importing goods into the US and bussinesses exporting out to other countries A number of countries have begun to implement their own higher tariffs in retaliation(trả đũa) to section 232 and section 301 tariffs from 7 the US So if your marine cargo insurance policy for shipments being exported to one of these countries, your policy may be affected as well V Example of a claim adjustment To help clarify how this can affect a marine cargo insurance claim, let’s walk through an example of a claim for policy holders that is subject to a new 25% tariff that has an standard of 10% uplift on their policy Before we start this example, we need to define a term that will be used in this example claim The term is incurred duty,so duty is considered incurred when the legal obligation arise….EX Therefore, if you’re bringing a shipment of goods into the US, the duty would be considered incurred if you have already paid it, the goods have arrived at the airport and the goods have been released by Customs If you prepaid your duty before they arrive at the port and something happens to your shipments while they’re in transit, the duties are not considered incurred since the goods were never officially entered into the country In that case, the prepaid duty would have to be refunded by Customs and wouldn’t be eligible to be included in a claim Example situation of how these higher tariffs may affect a marine cargo insurance claim Slide 6:24; 8 In this example, we stuck two whole numbers for the sake of simplicity Let’s take an insurance policy holder that ships a CIF value of $100.000 is subject to the new 25% tariff, has a $1000 deductible and has no enhancement clauses or carrier compensation to take into account With an insurance policy written uder CIF+10 valuation, we would have the following potential coverage on a claim The total CIF value of $100000+10% uplift=$110000 This is the agreed value of the cargo Once you consider $1000 deductible That means the policy is able to pay out a total of $109.000 Slide 7:16 Now let’s consider that 25% duty rate In this claim we had a full loss of $100.000 of cost and freight With the duty rate of 25% the amount of incurred duty included in the claim is %25.000 That means the total loss amount is 125000 Now as we illustrated in the previoú slide, the total recoverable amount under the policy is 109.000 That means the insured is out 16,000 since the policy can’t cover any more than that But they had a 10% uplift so we didn’t include any port fees, broker fees or other incidentals that may built up So the difference between the loss amount and the total amount recoverable could potentialy be much larger -How can we prepare for this change? We can update our procedures in order to write policies as CIF+!0%+duty This change will enable the policies to be 9 cover those higher expenses The trade off of this is that it may result a slight increase in premium since the overall value your policy covering will also be increasing This is just a approach since every marine cargo insurance policy is different Slide 9:12 Let’s go back to our previous example and see the result under a policy written under CIF+!0%+duty We’re using the same number but now see that in additin to addig the 10% uplift, we’re also adding $25.000 since that would be the amount of duty paid on a $100.000 shipment at a duty rate of 25% So then after considering the $1000 deductible, the total the policy is able to pay out is $134.000 Slide 9:46 Now let’s see how that amount holds up on the same claim for full shipment loss and incurred duty at 25% The full loss is still $100000 in cost and freight with a duty rate of 25%, the amount of incurred duty isn’n included in the claim is $25.000 This means the total loss amount is $125.000 However, the total amount recoverable is $134.000, which we saw calculated in the previous slide There for in this situation, the full amount of loss would be recoverable with 10 10 room for incidentals like port fees and broker fees that we didn/t consider in the example 11 11 ... Clauses of each for ease of reference 3 .The conditions of marine cargo insurance of Vietnam IV a) QTCB 1965 b) QTC 1990 c) QTC 2004 Tariffs affection on valuation As we have mentioned earlier in the. .. would exceed the value of the ship and the consignment in sound condition upon the arrival of the port of destination Partial loss: Means that the loss or damage dine to the goods is only partial... incidentals II Over view of marine insurance Definition of marine insurance Marine Insurance is a type of insurance that covers cargo losses or damage caused to ships, cargo vessels, terminals,