IB Talk

Narrator: Welcome to IB Talk, the leading podcast for the insurance industry across the United States, brought to you by insurance business.

Narrator 2: This episode is presented in partnership with Falvey Insurance Group. In the latest episode of IBA Talk, Jack Falvey, chief operating officer at Falvey Insurance Group, joins us to discuss the intricacies of the supply chain, how insurance factors into it, and how a problem at any point of the supply chain has potential ripple effects.

Bethan: I'm Bethan Moorcraft, senior editor at Insurance Business. And in this episode, I'm joined by Jack Falvey, chief operating officer of Falvey Insurance Group. We're going to discuss e-commerce, the intricacies of the global supply chain, the huge impact of the COVID 19 pandemic, and how insurance factors into this gargantuan global industry. Jack, welcome to IBA talk.

Jack: Thank you very much for having me.

Bethan: So, Jack, e-commerce accounts for trillions of dollars and consumer spending, meaning more packages than ever are traveling via container ship, air or over land. How have you seen this industry grow and evolve in recent years?

Jack: It's a great question. What we've noticed is that there's been a massive decentralization of the procurement side of goods around the world, and therefore you see an expansion in the products that are offered, how goods are getting delivered to people, how they're being marketed. And so it allows for a lot more growth in terms of the small shippers or the drop shippers. I'm sure people here. I made $100,000 this year sending packages online without having any inventory. What it's definitely done is it's taken away a lot of the inventory that has traditionally been in brick and mortar stores and that inventory and really transformed it to a real online e commerce dominated world. And what we start to see here is that because of this decentralization, in terms of just the supply chain, there are a lot more less sophisticated logistics personnel managing the supply chain. So as we do run into issues that we'll talk about later, they're kind of just constantly pulling out the supply chain through traditional channels rather than some of the other techniques that mitigate problems going on. But certainly, I think we are here where this will stay in kind of this decentralized model going forward.

Bethan: Mm hmm. It's interesting, because this is one that we all live through as consumers. But from the insurance side of things, have you witnessed or experienced kind of any similar changes or growth in cargo and marine insurance?

Jack: So the cargo and marine insurance globally we had back in 2015 started losing money as a marketplace for a few years and rates were going down a lot. The hurricanes of Harvey, Irma and Maria really put a spotlight on the marketplace as lots of large losses were coming into the space. So it drove a major review of rating adequacy. And so rates across the industry grew dramatically over the last few years as we hit kind of the e commerce segment, though, a unique thing is happening where a lot of the risk that would have been placed into the traditional insurance market left it because a lot of these smaller shippers aren't buying necessarily the big robust or the cargo policies and they're relying more on the limited liability of some of the carriers. So you've seen a lot of the risk shift onto the logistics suppliers away from the traditional cargo marketplace. So with the rates growing, the cargo marine market has remained relatively stable. In terms of a premium standpoint. It grows consistently with growth GDP, but a lot of risk has been lowered into the logistics chain, which is starting to be pushed backwards into the cargo market.

Bethan: Mm hmm. That's really interesting. Now, we've all seen the headlines, but I have to ask, how was the e-commerce industry impacted by the COVID 19 pandemic over the last few years?

Jack: I mean, definitely it has skyrocketed demand with people not leaving their homes and not going out to purchase things in the stores. Simple things down to even getting your groceries, a transition to an e commerce model. And so I think nowadays people are pretty much relying on shop online. First, I'll go out and get something in a brick and mortar if I need it right now. And that's a complete kind of change that we've seen. But the pandemic really drove it home that people that weren't used to using that e-commerce marketplace are now fully accustomed to it now. What that's done, though, is it's put a lot more of a demand onto the supply chain, whereas goods were sourced out locally for storage, they've been very centrally stored to to meet the demand of the supply chain. As that demand grew almost the arteries or the waterways to move those goods back out is still finite and it's struggled to be able to kind of meet the demand that grew so quickly from March of 2020 to April of 2020, just that one month, a complete demand shift occurred.

Bethan: So this complete demand shift, as you described it, it caused some stress in the supply chain. There have been people use the term supply chain bottlenecks, disruption, delays. Jack, what are the insurance implications of these things and where have you seen insured losses throughout the pandemic?

Jack: Yeah, absolutely. And so I think the first big thing that occurs with these bottlenecks is accumulation. And from the insurance side, basically what we mean is that we have a lot more goods sitting at one place and there's that saying that cargo at rest is cargo at risk from theft, from fire, from spoilage. And therefore, what we really start to notice is that we have a lot more goods sitting still trying to move through that supply chain. So you've seen tornado losses that have ripped through buildings that are fuller than usual. We've had more spoilage because, again, goods are packaged for an intended journey. And when that gets extended, maybe they need to be refrigerated. Those things aren't happening. And one of the other big things that we've seen that have kind of exacerbated this bottleneck issue is that because of these delays that have been going on, everyone is switching their supply chain strategy from just in time, which was the big buzzword ten years ago, maybe even a bit before that to now just in case. And so we're having companies buy more goods to try and get it in place in storage ahead of time. But with everybody else doing this, at the same time, you're putting even more packages and more goods through the supply chain, again, exacerbating that issue that we're seeing.

Jack: So you are seeing a lot of fire spoilage, water damage claims, but also what's happening. And a lot of reports are coming out. What this is, is a lot of theft is increasing just as we're recording this podcast about an hour before, I was told by our loss prevention team that there was just an armed robbery of a little or less than truckload truck up in Nashville. You're starting to see a lot more of the return of the cargo theft, gangs and cartels to the United States, as places such as the mid-Atlantic, Louisville, Dallas are seeing major hotspots of cargo theft because these criminal organizations know that these trucks are packed full with high value goods. So these are all some of the things that we're seeing because there's so much value in volume of goods moving through the supply chain. You're seeing that theft as a major item. But while it's in storage sitting there, we are seeing fire weather damage just being large in terms of the total loss amounts.

Bethan: Yeah, I'm sure it's a whole different world out there at the moment. Jack, when thinking about supply chain disruption, I think it's easy to be distracted by global issues. They're the ones that make the headlines. So things like border closures at the moment, China's zero COVID policy. But closer to home, last mile delivery of these goods is just as important. Can you walk me through the typical steps that a package takes and where you've seen potentially an increase in disruption in recent years?

Jack: Yeah. So I'm going to go back to kind of the impact of, let's say, the Shanghai Zero COVID policy and how it trickles down to that last mile. So let's say you have an overseas manufacturer that is sourcing those goods. They're delivering the goods to the port to get shipped over. So it's packaged in the warehouse. It's put on a kind of a first mile rather than last mile to an aggregator. That aggregator then is bringing it to the ports for export. And what's happening is because the vessels, these large container vessels, are trying to come in to, let's say the port of Shanghai is the example, and they're not allowed to enter. They're going to skip that port, which means that there isn't going to be another vessel, let's say, for 14 days. That vessel that shows up might only have 50% of the space available for that port when it arrives. So only 50% of the goods get on to that as well. So that by the time these container vessels are reaching the ports, let's say here in the United States, they are fully loaded with goods that need to be offloaded at the ports, which is part of the reason for the port backlog, where normally, let's say a vessel was at berth for three days unloading.

Jack: Now you see it up to seven days to unload all the goods that are going into that. You're seeing now with that massive swell of goods coming in, the rail network used to help get it inland. There's a driver shortage. I think we'll talk about a little bit further down. But what's happening is now, as these goods are getting to those local last mile spots that you're seeing, there still is such a volume of goods that need to be delivered that tough to find drivers that we are having. You're seeing a lot more goods delivered At the same time, you're seeing a lot more rough handling of those goods as. The drivers are doing their best, but just trying to get through the large volume. And of course with the large volume of packages being left out on that last mile, sometimes from a consumer standpoint, a lot more increase in those porch pirate theft losses that are occurring. So it all starts to kind of build together like a snowball going down a hill that all ends up in that last mile scenario where you have high volume trying to get through these last minute or these last miles, that kind of this is a growing industry to try and solve that.

Bethan: Mm hmm. Just a lot of exposure in that last mile.

Jack: Lot of exposure.

Bethan: Yeah. So, I mean, Jack, so far we've talked a lot about the COVID 19 pandemic. It's hard not to with this topic, but, you know, are there any other factors, big factors causing challenges in the cargo and in the marine industry?

Jack: Absolutely. And I think one of the things just talking about the supply chain, the COVID 19 pandemic, I don't think really caused a lot of these issues, but it put a lot of spotlight onto these issues and kind of kick started it where now everyone's seeing some of the issues that people knew were going on the whole time. There has always been a massive driver shortage here in the United States for trucking that we still are trying to handle. Therefore, we're trying to bring in as many truckers as we can to drive the goods across the country, but they're less experienced than before. Or maybe the the vetting isn't as severe or detailed as it was prior. And so now you're having some more truck driving accidents. You're seeing the rates of the trucking industry up so high that you have fleet operators really pushing the drivers to their limits a bit, causing some more accidents as well. And because we've shifted from this just in time model to this, just in case there is a warehouse shortage throughout the United States where there just isn't enough space to store everything that's kind of coming through. This backlog is everyone's still waiting. People still have demand. They're still ordering things. So it's kind of this unending wave that's coming in. And all of this really kind of highlights us infrastructure that is kind of been aging and falling apart or not up with the best technology such as ports, where in the United States ports are owned by municipalities, not by companies. And therefore sometimes the investment in innovation isn't really made and therefore now we are decades behind, maybe some of the other more automated ports. And you have union and labor talks that go back and forth that slow that down a bit as well. And then again, this all gets exacerbated by these ultra large container ships that are that are bringing more and more goods in. So there's a whole fundamental issue with the supply chain that needs to kind of evolve. And as much as people might like to hope that it will be done in a few months, we're probably about 2 to 3 years out between before the supply chain settles down again, because it's not just what we'll get all these goods through. The purchasing behavior has changed dramatically, and the e commerce domination of kind of how goods are procured is really changing the way that goods are moved around the world. So what we're dealing with a lot in the cargo and inland marine spaces, we've got more exposure now that is sitting at certain locations. So therefore the clients and the companies need to buy more insurance to cover the value of goods that they have. But there isn't enough capacity necessarily in the market at a very cheap rate to accommodate that additional insurance needed to cover this quick shift in the supply chain, but normally would have taken a decade seems to have taken place in just a year. And so with all of that, you're seeing that clients are really struggling to find capacity at a reasonable price and therefore you are seeing rates still very high for people to deal with that because there is all these issues with the underlying infrastructure and there are still losses that are coming through on the industry as well. So all of this is kind of combining that. It's just going to take a lot of time for everything to kind of adjust and grow into itself. And that's kind of where we see it right now from the cargo standpoint.

Bethan: Mm hmm. That's interesting. And such a systemic issue, kind of. We've been looking at this through the lens of cargo and marine insurance. But but what are the ripple effects of kind of this massive supply chain disruption or change?

Jack: It's, I think, the perfect example to look at this is when you look at cars right now, if you're going to get a car, there's shortages. They're tough to find. And it all starts because there might have been, let's say, a fire or an issue at a semiconductor place or a major semiconductor factory, let's say, out in Asia got shut down due to COVID for a few months, slowing down the creation of those semiconductors. Well, now you've put those semiconductors that they're making into a log jam supply chain that's now taking longer and longer for those semiconductors to get assembled into sub-components. Now, you take those sub-components and put them back into that delayed supply chain, and it's taking longer and longer to get to them to assembly. And so you start to see this ongoing ripple effect that the globalization of the supply chain, it's kind of weaknesses and exposures are really exacerbated in situations like this, which what used to take people would use the example. You could order a set of golf clubs from Asia and you could get it in four weeks. Now you can get it in four months. And that's because all of these sub component parts now are also moving around the world and therefore everything's being exacerbated again and again.

Bethan: Mm hmm. I mean, based on everything we've discussed so far, I think it's fair to say the global risk landscape for e-commerce looks very different today than it did five years ago. Do you think the cargo and marine industry is set fair for the future, or are there bumpy roads, rough waters or cloudy skies ahead?

Jack: I think that the word that some of our executives use the most is that it is fragile. And so you have just looking at the cargo insurance industry making a slight profit right now. But we have been able to avoid major large loss events. And so with an upcoming hurricane season or one of those ultra large container vessels going down, there are some scenarios that will again cause major, major issues for the industry as a whole. So when we look towards the future, we would say it's fragile, it is improving, it is focusing on the exposures that it needs to focus on. It's starting to look at rate adequacy. But while all of this is being done, the underlying network and infrastructure of how goods in the supply chain has worked for the last ten years is dramatically and quickly changing right before our eyes, even down to the the geographical spread, whether it's large amounts of people leaving California to go down to Texas and moving to different places, you see centers for certain businesses changing. And those exposures change the way underwriting is done. So there's a lot happening right now in the cargo space. And again, the entire economy that it's fragile going ahead. It's not necessarily great looking ahead, but we're not in a disaster. There's a lot of skilled people in the industry that are aware of what's going on now, is trying to communicate with the companies that are involved in it to make sure they understand the risk and do the best they can to mitigate down the road, whether it's lane selection or where they're getting their goods from to how well they're building their warehousing to the vendors that they're choosing. So it really needs to be a collaborative approach going forward, I think for it to work out in a fair scenario for all parties involved.

Bethan: Mm hmm. Well, all I can say is it sounds like it must be an interesting sector to work in at the moment. So, I mean, Jack, thank you very much for sharing your insights with us today. Lots of very useful takeaways for our listeners. So I really appreciate you joining us on IBA talk.

Jack: Great. Thank you very much.

Bethan: Thanks also to our listeners for tuning in. I'm Bethan Moorcraft, senior editor at Insurance Business. Make sure you check out the rest of our IB talk podcasts, IBTV episodes and daily news at www.insurancebusinessmag.com/us.

Narrator 2: Thank you for listening to this episode of IBA talk. For more from Jack and the team at Falvey Insurance Group visit them at falveyinsurancegroup.com that's falveyinsurancegroup.com for more. Thank you for listening to IB talk. For the latest episodes, be sure to follow us on SoundCloud, Stitcher and Apple Podcasts.