Transportation Risks and Captive Insurance Companies
The transportation and shipping industries can arguably be considered the life-blood of trade and the foundation for a global and connected business community. In fact, the integrity of the supply chain falls heavily on companies that do logistics well; leaving little margin for financial or scheduling error.
Under the “transportation” umbrella, you have the trucking sector moving goods domestically, replenishing big box retailers and small chains on a continuous, almost seamless schedule to meet consumer demand. You have the maritime and air transportation sectors, transporting raw materials to manufacturers and processors by sea and other interconnected waterways. And then there’s rail—a sector that continues to honor a rich tradition of reliable shipping of raw materials from coast to coast.
With such a robust and complex system, risks are inherent. Mitigating these risks becomes paramount, as losses could lead to costly outcomes, like business interruption and consequential revenue loss. Business owners might opt for commercial insurance coverages as a means to create a buffer for potential losses, whether predictable or unpredictable. But whether a company specializes in the transport of goods by truck, rail, ship, or other means commercial coverages may have gaps, compelling businesses to pay for their recovery out-of-pocket.
While many commercial market policies are shown to be comprehensive, insurance gaps remain a problem within the conventional markets and industries with inherent or unique risks are especially vulnerable.
Companies in the transportation industry face immense challenges, such as environmental risks, equipment breakdown, product contamination, and international risks, such as kidnap and ransom. Here, we will provide a more detailed sample of these risks, their ramifications, and information on how they can be offset with an alternative risk management plan that includes the formation of a captive insurance company.
Truckers have an important job requiring tenacity and resilience, as the physical demands made on them are high. Fatigue and the hourly requirements put on most drivers can lead to business-related risks, such as high turnover. Truckers who do remain on the job face risks such as material handling, whereby workers can be injured during the loading and unloading of goods. Medical management can also lead to problems, as those injured on the job may not be in close proximity to a medical facility if they are on the road. Motor vehicle accidents are a common risk. Above all, medical cost inflation tops the list of concerns in the trucking industry, affecting annual revenue numbers.
Other risks include:
- Rising fuel costs
- Acts of God
- War on Civil Commotion
- Theft due to infidelity of carrier's employee
- Water Damage
- Theft from unattended vehicles
- Physical Damage (Collision, Comprehensive and Specified Perils)
In a report released by Control Risks, an independent, global risk consultancy, there were 163 maritime related incidents in 2014, including 72 armed robberies; 43 thefts; nine hijacks, two of which involved tankers along the Amazon River; and three kidnaps. The World Shipping Council website states that the, “issue of piracy against merchant vessels poses a significant threat to world shipping.” Companies that have routes along the Gulf of Guinea/West Africa are vulnerable, as there were 48 incidents in the area in 2013, accounting for 18 percent of all attacks worldwide.
In 2014, a loss in the number of ships was down year-over-year, but a myriad of other risk exposures are still cause for concern in 2015:
- Maritime Activism, Leading to Business Interruption
- Weather Delays
- Port and Anchorage Crimes Involving Theft or Robbery
- Loss or Damage to Cargo/Merchandise
- Environmental Risks
- Cyber Attacks
- Human Trafficking, Piracy
- War/Upheaval Risks
The International Tanker Owners Pollution Federation (ITOPF) reports that there has been a decline in oil-spill related incidents decade-over-decade. But environmental risks still remain due to equipment failures, the accidental rupture of transporting vessels, or seepage from above-ground storage tanks.
Certain environmental consequences are a direct result of risk exposures from oil spills. Chemical toxicity to fish and sea-life, ecological changes, such as the loss of key organisms and indirect effects such as loss of habitat through clean-up efforts can occur. Businesses in the fishing or mariculture industries would have to mitigate losses due to diminished stock and business interruption
Vessel size and industry practices also pose risks. According to Allianz Global Corporate & Specialty, the largest container vessel on record set sail in 2013 at more than 400 meters long—and the trend for building mega ships is set to continue. AGCS estimates capacity grows by around 30 percent every four to five years. The larger vessels pose unprecedented risks and challenges in terms of operating safety and salvage efforts. 75 large ships were lost worldwide in 2014, while cargo and fishing vessels accounted for over 50% of those losses. There is a $1bn+ loss projection in 2015 for these larger vessels. Allianz reports that maximum exposure will not necessarily be limited to vessel and cargo value but could also include environmental, social or business interruption backlash.
The use of liquefied natural gas to power ships is expected to dramatically increase by 2020. There are safety concerns, however, as the industry will see the rise of ports that have not previously handled LNG providing bunkering stations on dock (Source: Allianz).
Companies that ship goods by rail face a number of different risks—but those that ship hazardous materials such as Bakken crude oil, are especially vulnerable. According to Energy Trends Insider, most of the U.S.’s transportation system is based on the shipping of oil and related raw materials. Although oil is typically transported by pipelines, transporting oil by rail is becoming a popular alternative because of its relatively low shipping cost. As demonstrated by a national news story about a train that was carrying Bakken crude from North Dakota’s shale oil fields derailed and caught fire, shipping by rail has proven to be more dangerous than shipping by pipeline. In 2014, 141 spills occurred along US railways — an all-time annual high.
The U.S. Federal Railroad Association has provided general criteria for risk exposures in the railroad shipping industry.
- Collision, derailment, or passenger train incident resulting in at least one fatality or serious injury to railroad passengers or crew members
- Any railroad related accident resulting in death to an on-duty railroad employee including an employee of a contractor to a railroad, regardless of craft
- Highway-rail grade crossing
- Train damages
- Property Damage
- Fire, explosion, or release of a regulated hazardous material, especially if it exposed a community to these hazards or the threat of such exposure
- Any accident/incident involving a train transporting nuclear materials
- Runaway equipment, with or without locomotives
- Equipment failure
Forming a captive insurance company allows a business to cover risks through tailored policies. Non-standard risks may not be addressed with conventional coverages—this is why an alternative risk management plan is essential to businesses that have retained exposures.
Business owners with closely-held middle market companies that are covered by captive insurance under IRC 831(b) can take advantage of ancillary benefits, including secured loans, tax-deductible premiums, and dividends during favorable loss conditions.
Call Capstone Associated at WEB_TEL to learn more.