E-Commerce & Marine insurance

‘E-commerce proposal’ — The words send a chill down the spines of Indian cargo insurers. Some of them have burnt their books badly writing transit insurance of e-commerce businesses, while others, seeing the experience of the big boys shy away from such proposals. Must add a caveat here. Though the loss ratios tend to be adverse on the basis of the number and value of claims reported, insurers do find ways and means to reject a large number of claims citing deficiency in documentation or citing/interpreting some obscure policy condition. Let us examine if e-commerce business is really bad from a marine cargo insurer’s standpoint.

The entire e-commerce landscape cannot be painted with the same brush. Underwriters must look at what the specific proposal is. Essentially e-commerce platforms work at two levels :

1. It serves as an online market-place, where end-customers place their orders and the suppliers ship the ordered items to the customers. Responsibility for pick-up, delivery and transit insurance may be with the the e-commerce site owner.
2. Here, the e-commerce platform owner is a vendor too, who procures goods from multiple sources in large quantities, stores them at warehouses and then delivers to end-users against orders.

The transits involved in case of  (1) are strictly B2C and could comprise  deliveries to remote locations and also use of non-professional or unlicensed couriers in some cases. As regards (2), it can be broken up into two parts. One, where the e-commerce company sources materials in large quantities. This is essentially B2B and the risks associated with these transits are broadly the same as applicable to any other transit involving the same type of goods. Underwriters need not panic and refuse to insure e-commerce companies offering this segment for transit insurance. Two, is the same as detailed under (1),with all the attendant risks.

The main reasons which can be attributed to the phenomenal number of losses, running into thousands and the adverse claim ratios faced by underwriters can be classified as under:

• The sheer number of transits involved with multiple movements taking place before the product reaches the end-user leading to handling losses, thefts, etc
• Use of multiple delivery channels in the ‘last mile’, not all of whom are trained and in many cases proper background checks have not been conducted on them.
• Not all suppliers’ background checks are adequately done and some of them do compromise on quality/quantity of products or packing, leading to damages/losses.
• Delayed intimations demanded by e-commerce companies and allowed by insurers due to ‘Trial period’ given to customers or the time taken by couriers to investigate and submit a COF ( Certificate of Facts), at  times leads to aggravation of claim or pushes it into a grey area, giving a handle to the insurers to negotiate.
• A small percentage of customers (end-users) do lodge fraudulent claims like replacing the original parts or passing off damages/breakages in their custody as transit losses and seeking refunds.
• Return transits and delays in disposing off/destroying damaged items leads to considerable aggravation of losses. It must be noted that surveys/loss assessments are usually carried out at the warehouse after the damaged goods are returned.
• While all the above reasons contribute to losses, the one BIG factor in e-commerce insurance programs going bad is the astronomical rate of scale-up in volumes. This is accompanied by a more than proportionate increase in the number of transits. When the loss ratio under a policy goes bad, premium rates do get increased considerably but the number of transits go up disproportionately. While most large e-commerce players do have sound practices overall and the Incident Ratio i.e. Number of transits in which losses are reported/ Total number of transits remains fairly constant, the disproportionate increase in the total number of transits, leads to a situation where the premium increase gets nullified or rendered ineffective. When the product-mix changes often ( and this does happen, with high-end products garnering a larger share, the average size of a claim also gets pushed up.

The Table below explains this concept. The illustrative 3 year data of an e-commerce company ( B2C) shows the rapid scale-up in GMV ( Gross Merchandise Value), increase in the number of transits, increase in premium rate every year and the loss ratios. For the sake of simplicity, the Incident Ratio and average claim size are considered constant over the 3-year period, while in reality they too may change.

It may be noted that premium rates cannot be increased beyond a point when self-insurance is looked upon as an option by the assured. In case of e-commerce, since most of the transits are small in size, a very large deductible is also not possible/not acceptable to the assured, as most of their claims would fall below the deductible and again self-insurance is thought of. Differential deductibles for different types of products can be looked at for some time, but again this will fail sooner than later.

Transit losses for e-commerce companies are a reality– both in terms of regularity, values and the number of incidents, which run into thousands. Then there is always the normal risk of one or two large losses arising out of accumulations in warehouses in the ordinary course of transit, hijack of fully loaded trucks, etc. The question which one may ask about the regular losses is , why not the e-commerce companies treat these as normal losses and build it into their unit sale prices. Almost all the e-commerce companies, in a bid to increase their valuation often resort to selling goods at below their cost price……..so where is the scope for building in normal losses here? Why do some insurers write this sort of business despite the involvement of a massive mechanism for servicing claims? The huge premiums which can be used for generating investment income is tempting and as stated in the beginning of this post, there are always ways and means to decline claims, pointing to some deficiencies/inadequacies.

Is there a possibility that both insurer and assured have a ‘win-win’ situation? The answer is No. These are predictable losses which are bound to happen. If there is nothing unforeseen about them, are they insurable at all? Not for long.