Stock Throughput - More Than a Cargo Policy
Stock Throughput (STP) policies have been around for decades; however, during my recent trips to Latin America more questions on their coverage have been arising. In this blog, I discuss some of the issues to consider when underwriting STP products, as they are more than just a cargo policy with extended storage.
These policies cover an insured’s goods all the way through production and to the final destination. They cover different modes of transportation (ocean, air, inland) in addition to storage and periods in warehouses at each production stage, whether owned by the insured or by third parties.
STP’s popularity appears to be growing in today’s soft market environment and they are penetrating new regions. Easier administration, efficiency, a reduction in premium and the lack of gaps in coverage are often touted as advantages to the insured.
But these policies require a different underwriting approach to traditional cargo policies.
There is no standard wording for STP policies; clauses and the scope of coverage are negotiated individually, although a set of terms called Institute Cargo Clauses usually serve as the basis of a contract. Here are some crucial points for the policy wording:
- Inception or termination of coverage: Quite often there's an extension to the usual 60 days under the Institute Cargo Clauses until the interest of the insured ceases - and the extension can be pretty long. For example, in the food industry it can take anything from six months to years for cheese or wine to mature. (Read Stephen Byrne’s blog, “There’s No Use Crying Over Spilled Milk - But What About Spilled Wine?”)
- Valuation of goods: Definition of the state of the goods is needed, be it raw materials or finished goods.
- Definition of limits: In Marine policies, limits are usually determined according to the means of transportation and location, so it is important to ensure that the insured and insurer have the same understanding regarding what is meant by location. Ideally, a per-event limit should be agreed upon.
Because STP policies often involve different types of transportation, facilities and goods, the logistical chain can be more complex, thereby increasing the risk of being exposed to losses from mysterious disappearances and misappropriations.
Marine underwriters should talk to their Property colleagues regarding risk assessment and pricing for the storage facilities involved and develop something similar to the risk characteristics of a COPE review:
- Construction type and location: Combustible versus non-combustible, age, layout, recent risk surveys, etc.
- Occupancy: The type of processing and hazards involved, sole occupier versus shared premises, relationship of warehouse operator to insured, system of stocktaking, etc.
- Protection: Fire protection, physical security and protection from Cat perils
- Exposure: Type of stock being held, how it is stored or packaged, and the Cat exposure
Marine underwriters should also look at the loss trends as a result of natural catastrophes, as warehouse and storage losses account for the biggest claims. The Marine market picked up a fair amount of the losses in Hurricane Katrina in 2005, the 2010 Chile Earthquake, 2011 Thai Floods and Hurricane Sandy in 2012. And its share in the total losses has been increasing, so insurers need to be asking the following questions:
- Do I price adequately for NatCat exposure?
- Am I exposed to this risk and do I have a proper accumulation control?
- What is a realistic idea of my maximum exposure per location/per event?
- Are any unnamed (“unknown”) locations potentially included?
If the STP policy includes foreign fixed exposures, an underwriter should consider consulting his or her legal team regarding potential issues - for instance, admitted or non-admitted insurers, liability for the payment of insurance taxes and transfer of claims payments in some markets.
Generally, the pricing for STP products is based on annual turnover for simplification. When the sales volume drops, the premium also decreases. That’s why underwriters need to consider the effect of fluctuations in stock.
Finally, insurers need to ensure that the primary coverage is within the terms and conditions of the existing reinsurance treaty.
While I have tried to provide an overview of some of the issues insurers need to consider when looking at STP products, this blog doesn’t cover the whole complexity of such policies and the items above have not been presented in any particular order. A detailed risk analysis is required in each case, so feel free to reach out if you have any questions.