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Developments in the Liner Industry

Jagan - February 27, 2018 - 1 comment

  1. Some of the recent developments in the Liner industry are as follows:
    1. Block chain: Originally developed for the virtual currency Bitcoin (which has of late, been getting a bit of bad press), Blockchain1 uses distributed ledger technology and are appearing in a variety of commercial applications including shipping and trade. The technology is primarily used to verify transactions by way of an indelible record that cannot be changed. In this way, the records can be verified by the all parties involved in the Blockchain instead of a single centralised authority. Various Shipping companies such as Maersk, PIL and ZIM are actively involved in harnessing Blockchain technologies.
    2. Trade Finance: Maersk Line has started offering Trade Finance to their customers in some trade lanes. One of the requirements for a customer to avail of trade finance is that they would have to perforce ship the cargo using Maersk Line i.e. Trade Finance will not be provided as a “stand-alone” product but can be provided if the freight is booked with Maersk Line.
    3. Cargo Insurance: CMA-CGM has developed a new cargo insurance solution for its customers with the USP being on prompt settlement of cargo claims. Again, this product is available only for freight booked through CMA-CGM and not as a stand-alone product.
  2. Block Chain:
    1. Although electronic information flows have been available in the Shipping Industry for last few decades (EDI, Electronic Bills of Lading, E Booking, etc), the vast majority of transactions are still by way of physical documents. It has been estimated by Maersk that the use of Blockchain in the container liner industry would result in savings of approximately of USD 300 per container. Additionally, it may prevent outages arising out of IT security issues given that the data will be safely and securely recorded in a way that cannot be tampered with (i.e. it cannot be changed or undone).
    2. Various Shipping Lines like Maersk, PIL and Zim are presently involved in harnessing Blockchain. Additionally, Blockchain technology can be used both in Trade Finance and Insurance (Cargo, Hull & Liability). This technology can assist in better understanding the trade movements, risks and exposures. However, there are concerns on whether this information can be kept anonymised and confidential.
    3. The other advantage of Blockchain is the reduction in fraud in the world trade given the visibility of the transactions. This has been well commented by Mr Baldev Bhinder in an article “The key to reducing fraud in world trade”2  published on 27th Feb 2018 in the Singapore Business Times.
  3. Trade Finance: Banks have traditionally been involved in providing finance to the participants in International Trade. However, of late, we have been seeing other financial institutions / hedge funds becoming involved and providing finance to the trade. Funding from a Shipping Line would be a natural development given that they have visibility of the cargo right from shipment till delivery (as long as the cargo is shipped with them). The Shipping Line would be able to maintain better control on the cargo should something untoward occur with the transaction as they would retain physical control of the cargo till such time they receive payment. Accordingly, a Shipping Line may wish to consider funding this activity by themselves (which appears to be the model followed by Maersk) or by partnering with Banks / Financial Institutions to provide finance.
  4. Cargo Insurance: While most of the Freight Forwarders / NVOCC’s offer cargo insurance to their clients in addition to the freight services, they would be offering this service as agents for their clients i.e. they would obtain cargo insurance coverage from Cargo Insurers. If unfortunately, a loss arises during the voyage, while they (Freight Forwarders / NVOCC’s) may assist their customers, the claim would have to be pursued directly with Cargo Insurers. The difference in relation to the CMA-CGM product appears to be that they (CMA-CGM) would be involved in dealing with the claim, although the cargo insurers, Genarali Group, are a separate entity. Some of the advantages of taking insurance from a Liner operator involved in handling cargo claims would be as follows:
    1. Change in approach: The traditional approach by Carriers in dealing with claims pursued by cargo interests has generally been adversarial in nature. As the Carrier will now be involved in the settlement of Cargo Claims, the claims handling would necessarily need to become co-operative. Co-operative claims handling could result in the joint engagement (for both the Cargo insurers and the Carriers liability insurers) of surveyors and adjusters  to investigate and adjust the loss. Should the investigation reveal that the loss was due to the Carrier’s fault, subject to the defences available (exclusions, limitation, contributory negligence, etc), the claim would be borne by the Carrier’s liability insurers. The advantage of this process would be that costs of investigation could be shared between both the Carriers liability insurers and Cargo insurers either proportionately, say on the basis of the claim borne by each insurer or on a “joint user basis” i.e. 50/50 (Carriers liability insurers and Cargo insurers). Additionally, there would be no costs incurred for recovery action by the subrogated cargo insurers against the carrier’s liability insurers given that they are now working in tandem instead of working against each other.
    2. Opportunity loss: The downside of co-operative claims handling may be the loss of opportunity which was earlier available to the Carrier’s and their Liability Insurers to negotiate cargo claims keeping in mind the evidence at hand and the costs of pursuit (thereby seeking a discount in the settlement amounts). However, we submit, that the benefits arising from co-operative claims handling would outweigh the potential loss of  opportunity for the Carrier’s and their insurers given that there would be a reduction in pursuit costs (including legal costs) which would have been incurred in defending large claims. On the other hand, if the loss is either excluded under the contract of carriage or arises out of events for which a carrier has no liability, no costs would be incurred in defending / denying the claim given that this would have been established by the adjuster engaged jointly by both the cargo and liability insurers. In this case, the loss would be borne by the cargo insurers subject to the terms of cargo insurance policy.
    3. Cargo premium advantage: The other advantage is the possible reduction in cargo premiums due to the loss sharing between the Carrier’s liability insurers and the cargo insurers (at least for the losses for which the Carriers may be liable up to the limitation amount). This would result in either more competitive premiums or a higher profit margin to the cargo insurers.
  5. It is submitted that the new services (Blockchain, Trade Finance or Cargo Insurance) are meant to fuel additional growth to the liner companies by way of additional freight bookings or use of  these additional services. Given that the additional services are provided to existing freight customers, this will result in a reduction of acquisition costs vis-a-vis the traditional model.
  6. Conclusion:
    1. Given the spurt of technological advancements, it is still early to comment on what would work and what would not. It would depend on the level of technological sophistication of the various players in the supply chain, ease of access and connectivity in the various countries where participants in International Trade are sited.
    2. Additional service offerings by the Freight Industry are generally meant to complement the existing services in order to provide a competitive advantage vis-à-vis competition and at the same time seek additonal income.
    3. Other participants in the freight industry would have to consider whether they would also wish to also provide these additional services to maintain their competitive advantage or instead continue to provide a frill free freight service.

1Ms Zelda Anthony, Head of Blockchain for ASEAN at IBM had recently given a presentation on Making Blockchain Real for Shipping at the Singapore Branch of the Institute of Chartered Shipbrokers and which can be viewed by clicking the hyperlink.

2The article “ The key to reducing fraud in world trade” by Mr Baldev Bhinder was published in the Singapore Business Times on 27th Feb 2018.

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1 comment

  1. Ramana Murthy

    Quite interesting and informative. Thank you very much

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