Container Shipping

A Sea Change in Risk

Consolidation and related coverage issues have marine risk managers and underwriters scrambling.
By: | March 3, 2017 • 6 min read

It all seemed to happen in a heartbeat: A struggling industry went from bad to worse as one of its largest members filed for bankruptcy. Panic set in among Hanjin Shipping Co.’s customers over goods stranded at sea and litigation lawyers began lining global ports to pick up the pieces.

Suddenly, the risks posed to container shipping by overcapacity, low profitability, and volatile or inadequate pricing crystalized. What, asked other ocean shippers, did this mean for us?

Jim Blaeser pulled no punches when answering that question. In a study in February of last year, his New York employer AlixPartners warned that piecemeal cost-cutting, vessel-idling or slow-steaming in maritime container shipping would do little to curb overcapacity and stem falling profitability and precarious cash flow.

Jim Blaeser, vice president, AlixPartners

In fact, said the company VP, things would likely only get worse unless industry embraced a major alternative: consolidation.

Was AlixPartners’ prediction borne out? Well partly, said Blaeser. “The first three quarters were dismal as we called out; the fourth quarter when results are published in full by the companies should be considerably better. But I think the jury is out on whether carriers will be able to ride that wave into 2017.”

Blaeser said the idea that higher rates sustained into the Chinese New Year will chase the industry’s blues away were “wishful thinking.”

At the same time, Blaeser said, consolidation will place more and different demands on risk managers.

As fewer operators like Maersk and MSC control more capacity, “you’ll need to have a much stronger global reach for corporate control and command to ensure that your risks are understood and that they’re appropriately mitigated.”

By definition, the focus as a risk manager shifts “from your own backyard to a global field of play,” he said.

Consolidate, Communicate … Convert?

Where that field of play looms particularly large is information.

Advertisement




“Ocean freight information is just terrible across the board,” said Blaeser. That stems in part from merger integration of companies with “three, four, five systems handling different pieces of information,” such as for truck, terminal and vessel operations.

“I would argue that, as consolidation takes root and there are fewer carriers, inherently information has to get better,” Blaeser said. That may happen as rates improve and companies spend more on effective software information management tools.

Rick Roberts, director of risk management at Connecticut’s Ensign-Bickford Industries (EBI), is sufficiently alarmed by this and other news to have begun reviewing his policies and risk management strategies.

But it’s not just the risk posed by overcapacity, it’s the risk of consolidation itself.

EBI transports hazardous military goods to Europe and pet food to South America. Insufficient information and possible changes in global routes as companies merge their respective customer bases, for example, give him pause.

“I see we’re going to have some issues where routes are changing and how long it could take for our products to get places. Maybe it used to take 10 days to two weeks and now maybe it takes a month.”

For his part, Ali Rizvi, senior vice president at Marsh in Houston, said the three biggest challenges shippers face are fuel, crew and ship management. Consolidation obviously allows merged companies to use crew more efficiently and renegotiate bunker fuels, while economies of scale present opportunities for more efficient operations overall.

Ali Rizvi, senior vice president, Marsh

“But does it solve the problem of overcapacity? We don’t think so,” said Rizvi.

What may help is for the number of relatively newer ships that are scrapped each year to continue or even increase. Another crucial step will be to effectively manage both the skill sets and “culture capital” among combined crew and ship management that can be disturbed or disappear outright when companies merge.

“If you’re merging two shipping companies you want to make sure that their respective HR groups have a synergy and understand each other, put together one team that understands the needs of each of their vessels, their routes, their customers and the ports they call in,” he said.

Rizvi said some companies might consider another option: conversion from cargo to other lines of business. Shipyards, for example, said Rizvi, can’t build cruise ships quickly enough to meet demand. Very different from cargo, of course, but if it makes economic sense, why not?

Another opportunity is conversion to LNG, which is expected to thrive over the next several years with rising demand in clean energy resources.

Bigger Ships, More Complex Cargo

But the issue for Joe Sheridan is what happens if more companies like Hanjin go under, specifically claims being filed for warehouse forwarding charges to pay for discharge of cargo at dockside, temporary warehousing and a replacement vessel to get cargo to its original destination.

“That’s where the claims are really going to come into play,” said the marine specialist at Lockton cargo and logistics. How insurance policies are written will be critical to how well container shippers fare going forward, he said.

Some underwriters, for example, attach sublimits to liabilities for a single occurrence. A bigger issue, said Rizvi and Sheridan, is the stipulation in some policies that each bill of lading be insured separately, in which case multiple deductibles would apply in exigent circumstances.

Continued reliance on megaships with their massive cargo loads and numerous clients poses an obvious challenge here, said Sheridan.

“If you go out and put a $10 million limit on one cargo account and a $20 million limit on another, you don’t know how many cargo accounts you have exposure to on one vessel because these ships are so big. There’s no way they can determine that.”

Bottom line, there’s an array of marine cargo insurance policies out there written along a broad spectrum of terms and conditions and it will be up to individual underwriters to determine how  language changes or stays the same going forward.

Some underwriters and clients weren’t really hit very hard after Hanjin went under while others were, said Sheridan. But changes are definitely afoot.

“They’re asking, ‘Is this something that could happen again?’ I’ve been in this business for over 20 years and I’ve never seen anything happen of this scale and magnitude. Our argument is that shippers should take a hard look at these policies before these things happen.”

Still at Sea Over Low Demand

Blaeser was happy to see consolidation continue apace since his company’s report a year ago, notably the joint announcement that Mitsui O.S.K. Lines, Nippon Yusen and Kawasaki Kisen Kaisha are merging their container shipping businesses this July to begin operations in April 2018.

Advertisement




Overall, the industry will enjoy stable business from higher, compensatory freight rates as fewer hands control the capacity side, said Blaeser, while “the benefits to the manufacturers and retailers that rely on their services will be decreased volatility and more reliability in terms of services.”

“But with consolidation we’re still not out of the woods,” Blaeser added. “If fewer hands don’t manage the global fleet in a tighter manner, then those benefits won’t happen.”

Non-market forces, too, “have weighed on the market to the detriment of the ocean carrier business,” said Blaeser. Governments, in particular Asian governments, have backed companies unable to make it on their own — neglecting one crucial economic factor: global demand.

“If governments, be they American or European or wherever, reverse track on their trading policies then that will inevitably hit demand ferociously,” Blaeser said. “Where demand might be threatened, the industry absolutely has to take it seriously.” &

David Godkin is a freelance magazine writer based in Toronto. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Absence Management

Establishing Balance With Volunteers

It’s good business to allow job-leave for volunteer emergency responders, whether or not state laws apply.
By: | January 10, 2018 • 7 min read

If 2017 had a moniker, it might be “the year of the natural disasters,” thanks to a phenomenal array of catastrophic or severe events— hurricanes, tornadoes, wildfires, ice storms and floods.

Advertisement




Combined with smaller-scale fires and other emergencies, these incidents tax the resources of local and state emergency services, often prompting the need to call volunteer emergency responders into action.

But as lean as most organizations are already running, volunteer activities can sometimes cause friction between employees and employers. Handling conflicts the wrong way can potentially lead to legal headaches, harm employee morale and batter a company’s reputation.

State by State Variations

Most employers are aware of the various federal and state leave laws protecting their employees, including family and medical leave, pregnancy leave and military leave. But leave laws that protect the livelihoods of volunteer emergency responders are more likely to fly under the radar of some HR managers and risk managers.

Such laws don’t exist in every state, but more than 20 states do have some type of law in place to protect volunteers including emergency responders, firefighters, disaster workers, medical responders, ambulance drivers or peace officers.

Marti Cardi, vice president of Product Compliance for Matrix Absence Management

The laws vary broadly. Nearly all specify that such leave be unpaid, and that employees disclose their volunteer status to employers and provide documentation for each leave. But there is a spectrum of variations in terms of what may trigger an eligible leave. Some, for instance, apply for any emergency that prompts a call from the volunteer’s affiliated responder group. Others may require a government declaration of emergency for the law to be triggered.

While many of the laws do not explicitly require employers to let employees leave work when called to an emergency during a shift, most specify that an employee may be late or even miss work entirely without facing termination or any other adverse employment action.

Some states mandate a maximum number of unpaid leave days that a volunteer can claim. But others may place more significant burdens on employers. In California, for instance, employers with 50 or more employees are required to grant up to 14 days of unpaid leave for training activities in addition to any leave taken to respond to emergency events. For multistate employers, keeping on top of what obligations may apply in each circumstance can be a challenge.

Significant Risks

Large or mid-sized employers may rely on absence management providers to keep them in compliance. For smaller employers though, it may be as simple as looking up a state’s law via Google to find out what’s required. However, checking in with the state department of labor or the company’s attorney may be the best way to get the correct facts.

“I would caution that just because you don’t find something [on the internet], it doesn’t mean it’s not there,” said absence management and employment law attorney Marti Cardi, vice president of Product Compliance for Matrix Absence Management.

For example, Cardi said, an obscure Texas law provides job-protected leave for volunteer ham radio operators called into service during an emergency.

Cardi said employers should task HR to investigate the laws in each state the company operates in, and to ensure that supervisors are educated about the existence of these laws.

“If a supervisor is told by one of his or her employees, ‘Sorry I’m not coming in today … I’ve been called to volunteer firefighter duty for the [nearby region] fire,’” she said, you want to be sure that the supervisor knows not to take action against the employee, and to contact HR for guidance.

“Training supervisors to be aware of this kind of absence is really important.”

Advertisement




An employer that does terminate a protected volunteer for responding to an emergency may be ordered to pay back wages and reinstate the employee. In some cases, the employee may also be able to sue for wrongful termination.

And of course, “you don’t want to be the company in the headlines that is getting sued because you fired the volunteer firefighter,” she added.

If an employer bars a volunteer from responding, the worst-case scenario may be a third-party claim. Failure to comply with the law could give rise to a claim along the lines of “‘If you had complied with your statutory obligation to give Jane Doe time to respond, my loved one would not have died,’” explained Philadelphia-based Jonathan Segal, partner at law firm Duane Morris and managing principal of the Duane Morris Institute.

“That’s the claim I think is the largest in terms of legal risk.”

Even if no one dies or is seriously injured, he added, “there could still be significant reputational risk if an individual were to go to the media and say, ‘Look, I got called by the fire department and I wasn’t allowed to go.’”

The Right Thing to Do

What employers should be thinking about, Segal said, is that whether or not you have a legal obligation to provide job-protected leave for volunteer responders, “there’s still the question of what are the consequences if you don’t?”

Employee morale should be factored in, he said. The last thing any company wants is for employees to perceive it as insensitive to their interests or the interests of the community at large.

“Sometimes employers need to go beyond the law, and this is one of those times,” — Jonathan Segal, partner, Duane Morris; managing principal, Duane Morris Institute

“How is this going to resonate with my employees, with my workforce, how are people going to see this? These are all relevant factors to consider,” he said.

There’s an argument to be made for employers to look at the bigger picture when it comes to any volunteer responders on their payroll, said Segal.

“Sometimes employers need to go beyond the law, and this is one of those times,” he said. “Think about the case where’s there’s not a specific state law [for emergency responders] and you say to a volunteer, ‘No, you can’t leave to deal with this fire’ and then people die. You as an employer have potentially played a role, indirectly, because you didn’t allow the first responder or responders to go,” he said.

The bottom line is that “it’s the right thing to do, even if it’s not required by law,” agreed Cardi.

“I feel that companies should have a policy that they’re not going to discipline or discharge someone for absences due to this kind of civic service, subject to verification of course.”

Clear Policy

While most employers do strive to be good corporate citizens, it goes without question that employers need to guard their own interests. It’s not especially likely that volunteer responders will try to take advantage of the unpaid leave allowed them, but of course, it could happen.

That’s why it’s important to have policies that are aligned with state laws. Those policies could include:

  • Notifying the company of any volunteer affiliations either upon hire or as soon they are activated as volunteers.
  • Requiring that employees notify a supervisor as soon as possible if called to an emergency (state requirements vary).
  • Requiring documentation after the event from the head of the entity supervising the volunteer’s activities.

If at some point it becomes excessive – someone has responded to emergencies five times in nine weeks, then it’s time to examine the specifics of the law and have a discussion with the employee about what’s reasonable, said Segal. It may also be time to ask specifics about whether the person is volunteering each time, or are they being called.

Advertisement




In some cases, the discussion may need to be about finding a middle ground, especially if an employee has taken on an excessively demanding volunteer role.

“We encourage volunteers to pick the style that best fits their schedule,” said Greta Gustafson, a representative of the American Red Cross. “Disaster volunteers can elect to respond to disasters locally, nationally, or even virtually, and each assignment varies in length — from responding overnight to a home fire in your community to deploying across the country for several weeks following a hurricane.

“The Red Cross encourages all volunteers to talk with their employers to determine their availability and to communicate this with their local Red Cross chapter.”

Segal suggests approaching it as an interactive dialogue — borrowing from the ADA. “Employers may need to open a discussion along the lines of ‘I need you here this week because this week we have a deliverable on Friday and you’re critical to that client deliverable,’” he said, but also identify when the employee’s absence would be less critical.

No doubt there will be tough calls. An employer may have its hands full just trying to meet basic customer needs and need all hands on deck.

“That may be a situation where you say, ‘First let me check the law,’” said Segal. If there’s a leave law that applies, “then I’m going to need to comply with it. If there’s not, then you may need to balance competing interests and say, ‘We need you here.’” &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]