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Insurance and the cold chain

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By Benjamin Brits

Protection of perishable products as well as related assets has become increasingly important as global trade continues to reach double-digit increases year on year, and demand for foods and medicine grows.

This article, as the first in a three-part series, aims to highlight aspects around insurance cover in protecting perishables, including elements such as assets, goods in transit, shipping, storage and specialist applications or components. In future articles we will continue with risk mitigation products such as fire-resistant materials and suppression systems – fire being of particular concern for insurers in this sector, and then products such as monitoring and telematics and their influence in insurance, in the third of the series.

No matter what operation or business model you are involved in to supply goods or services to the cold chain – from a global enterprise to a small family business – having insurance, and the correct insurance with adequate cover, offers a level of protection against varying scenarios of financial loss, business interruption or even possibly total business failure.

Also read: Insurance and the cold chain: Fire risk – Part2

With the cost to build cold facilities, processing facilities, the investment in assets such as plant equipment or transport, and the actual value of any product being very significant today, protection and management of risk has become a major part of business given that such a facility could be valued into hundreds of millions of rands, and even a truckload of a particular product could fetch millions on an international level with many unknowns in between source and consumer.

It is important to firstly be aware of the fact that managing supply chain risk can be quite complicated, primarily because risk factors and potential events or incidents themselves can be complex. Today we are also seeing a significant change in the dynamics around production, timing, storage length and distribution of perishables. Emphasis has further been put onto the entire cold chain and its expansion to reduce food waste (that in some countries still reaches as much as 50% according to the World Health Organisation), and distribution of various key pharmaceutical products.

Fire risk is one particular element that insurance companies are hesitant around. Image credit: LoggaWiggler | Pixabay
Fire risk is one particular element that insurance companies are hesitant around. Image credit: LoggaWiggler | Pixabay

Consumers are too becoming more health, socially, and environmentally conscious, and for this reason businesses supporting foods and beverages around the world are also having to evolve their models to meet these new needs and trends, because in the cold chain there is not a ‘one size fits all’ solution that can be applied.

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Insurance has historically been seen as a crucial component of the supply chains and has in fact been around for many centuries already. Some data indicates that the first policy was issued in the early 1300s. Other data suggests that the more modern-day structure became widely applied in the mid-1600s. Not surprising is that marine insurance is documented to have been the first branch of supply chain cover and was taken up primarily by countries that dominated global routes well into the 1900s, before evolving again in the mid to late 1900s.

Insurance is, for the most part, directly related to the risk and likelihood any business, process or condition in the supply chain would, or could be exposed to. However, insurance is often seen as ‘the solution’ when it is merely only a part of the solution. Being a complex matter in itself lies the challenge for businesses in selecting the correct cover as well as the right partners (insurer and business).

An important element that applies to the insurance industry as a whole with regard to the cold chain is that when it is inevitable that a loss will occur through a product deteriorating, perishing, or changing in nature deeming it spoilt will occur, a business cannot rely on insurance. A simple example would be a tub of ice cream driven from one point to another with no provision for cooling or freezing – it is inevitable to melt and so insurance cannot cover the product. However, if during that same trip in a refrigerated truck there is a breakdown or accident and as a result of the incident the ice cream melts, this was not an outcome of decision but rather a matter of external factors, and therefore insurance against the probability of incidents such as that occurring is put in place.

Particular environments and the product type itself are also important factors because one cannot deal with everything in the cold chain in exactly the same way. Fruit, vegetables, flowers, herbs, red meat, poultry, or seafood all need to be handled differently, or meet particular criteria to prolong perishing.

Insurance is therefore a form of risk mitigation where ‘the insured’ transfers the risk to the insurer. Transferring the risk to insurance is not possible without risk management.

Also read: Insurance and the cold chain: Fire risk – Part2

Risk mitigation is made up of four key components:

  • Avoidance – block the risk completely
  • Limit the risk – for example, install a fire-resistant wall or sprinklers in all facilities
  • Accept the risk – take a higher excess or accept that certain risk cannot be avoided – like sprinklers in cold chambers
  • Transfer the risk – to the insurer, the carrier, or the transporter etc.

Optimum risk management will adopt an integrated solution using all four risk mitigation components.

Risk factors are vast

Although the best point of advice is always to seek the know-how of professionals, a couple of considerations for insurance and incidents are highlighted here as a means to open up on the scopes where risk may exist and need to be managed, mitigated, or eliminated in a business.

From the time even before a product leaves the producer, up until it reaches its end destination, identifying and managing critical elements need to be met. Often the complexities of the insurance world or risk management are not well understood, and what factors play a direct and indirect role in an outcome. Just looking at all the available options of cover could already get anyone in a state of confusion!

Businesses can of course reduce their exposure to various risks through simple analysis steps such as identifying potential weaknesses. Investing in the right technology such as online and cloud-based solutions could decrease risk exposure. Other steps could include identifying and setting up relationships with potential alternate suppliers and vendors. Through each of these examples, contingencies for potential failures or disruptions of business as usual can form part of a holistic business continuity plan.

The additional benefit in reducing potential exposure to risk is that your insurance cost could be significantly lower. Insurers generally conduct thorough investigations of all processes before concluding on any policy, and diligence in protecting your business through these sorts of actions also plays a part in the outcome, and so doesn’t go unnoticed. It could be demonstrated through a business that consistently shows that they look after their facility by regular servicing and cleaning routines versus a business where this type of action is not undertaken or important.

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With the growing digital world, many companies are also fast increasing their adoption of various solution and expanding supply chain structures to gain or maintain their market share. There is also new risk while facing challenges from changed and severe weather events, increasing regulations, and more recently even cyber-attacks that we have seen on the increase.

Implementing risk management practices that exceed industry standards may be critical for many companies supporting the food and beverage sector, especially in today’s economic environment where wasted funds though neglect could mean the break of a business. Insurance professionals will therefore assist businesses from manufacturers and processors to distributors, wholesalers, retail, and restaurants, to anticipate the risks they may face, understand the impacts, and implement comprehensive plans to mitigate them.

Companies in this sector must now also keep pace with developing health and environmental demands such as allergy-consciousness and socially responsible processing, manufacturing, and distribution channels. Cultural sensitivity and inclusivity have also become crucial to brand strategies and policies that form a part of the scope of overall management. Risk in the cold chain therefore encompasses management and protection of not only assets or products but brands, people internally, as well as customers if for example an incident of contamination occurs.

With many insurance options and types of cover, businesses have the choice to select solutions that fit their risk strategy. Image credit: Arek Socha | Pixabay
With many insurance options and types of cover, businesses have the choice to select solutions that fit their risk strategy. Image credit: Arek Socha | Pixabay

Consumer preferences and demand cycles have also shifted to a constantly evolving state that grows more sophisticated as it develops. As a result, food and beverage wholesalers and distributors are now utilising more complex, global supply chains that are open to other risks not necessarily relevant in local trading conditions, such as differing natural hazards and temperatures, shipping accidents or delays, worker strikes in ports or the logistics field, disease outbreaks, and so on.

For many new and existing businesses, investing in various advanced technology has shown to improve production processes and at the same time, the processors and manufacturers’ using this technology responsibilities’ have changed extending to sourcing, climate impacts and even labelling – all of which include elements of risks. These and many other factors are fast becoming major influences in consumer purchasing decisions, and thus how risks need to be approached. The cold chain sector will continue to be open to anticipate emerging trends while the race is already on to meet those changing demand cycles.

Insurance considerations

As we have mentioned, insurance is only a portion of a risk strategy and emphasis needs to be added to this according to several industry role players. Other examples that form part of the direct strategy for risk management may include things like contracts, control methodology, reporting structures, logging, set temperature fluctuation limits and data management to ensure that those in charge are always prepared with accurate and factual details in order to make the best decisions if incidents occur. Insurance then essentially plays the role of a safety net only when all options and contracts have been exhausted.

Quality and preserving quality of any perishable product, requires the entire supply chain to be on the same page. While some processes and controls would be considered best practices, many mandatory protocols already exist such as the international standard required for exports that need to be adhered to. Businesses in this function would be required to further meet certain accreditations and parameters of supply in order to maintain cover. The factor of storage time is also highlighted now as risks would vary depending on short or long stay in a cold store or controlled atmosphere environment depending on where in the demand cycle a particular product is. Here the product ‘perishability’ would also become a contributor to evaluation. This aspect would also be influenced by factors such as delays at ports resulting in product rejection.

Having accurate and factual data (through various technology) on hand enables decisions to be executed on the best possible course to save the shipment and retain at least some of its value. An example here would be a shipment of fruit sitting in a SA port and there are delays and complications with the reefer container temperature control. The exporter would evaluate the situation and perhaps know that the delays will compromise the quality of the fruit even if the temperature issues were fixed by the time it reaches its destination. The best outcome in this regard could be to re-import the container, have it re-inspected, and sent out to the local market should the quality still be acceptable.

Another significant factor in a risk management strategy is the understanding of a product’s maximum shelf life. Grapes, for example, have a shelf life of about 55 days from when they are picked. Citrus has a shelf life of approximately 77 days

Marine insurance is the oldest documented branch in supply chain cover. Image credit: Dendoktoor | Pixabay
Marine insurance is the oldest documented branch in supply chain cover. Image credit: Dendoktoor | Pixabay

from when it’s picked. Some pharmaceutical products such as certain vaccines or medication only have a few days of shelf life. This context is also important to consider when looking at insurance cover and related parameters. These scenarios are also all subject to optimum cold chain management –  shelf life is preserved through the cold chain.

There are then several types of insurance policies available to businesses in the cold chain. Even before a product enters the supply chain, crop insurance is available to protect the owner’s investment in the field while it’s growing. Along the supply chain there are a number of insurance options. These include asset insurance, various cold storage facilities being long stay or short stay, goods in transit, and export goods have marine insurance options. This is however not an exhaustive list of what policies could cover. All the available insurance types, as with many business tools, also come with different levels of cover suitable to the policy holder.

Different options also give the insured a means to select which elements of insurance best fit their business model. An example here is a farmer whose business model is set up, so they only require crop insurance, product, and asset insurance for their onsite facilities as product and liability shifts to the other players in the supply chain once it has changed hands leaving their facilities. Another option would be that the farmer insures their product for the entire time until reaching the retailer. Here through contracts the producer and buyers will establish their trading and liability parameters. So, in technical insurance terms a business could implement total loss cover, all risk cover, or nominated risk cover – all with high, medium, and low cover ranges that is directly related to the overall business strategy. A simple example is having cover for every possible risk or only cover in the case that a container is lost at sea or a refrigerated truck burns with your product in it.

Insurance factors today also require taking into account not only what technology brings to the table such as monitoring and tracking (which is also widely considered essential), it also has developed to look further to a holistic view that includes where produce comes from, environmental factors, grower or supplies reputation, re-occurring incidents or quality trends, the state of transporters fleets, and so on. Business owners need to take all these factors into account when considering their own risk exposure. It makes logical sense that in terms of maintaining quality, the continual use of a refrigerated transport provider who pays little attention to maintenance of temperatures in their fleet would increase risk exposure for the product. Technology such as logging further enables transparency to identify where a problem lies in the supply chain, and therefore accountability.

Another important aspect with fresh produce is that it is a living product – the moment you harvest it, it starts to deteriorate and literally the only way that you can maintain or prolong its condition is through a continuous cold chain. Where a broken link occurs, that’s where things really fall apart, as decay is accelerated, and this is a critical aspect as we have mentioned already that all fresh produce has a maximum shelf life. Days and even hours where conditions are not ideal can reduce shelf life dramatically resulting in losses, and therefore claims.

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Tracking technology also enables handlers to prioritise shipments that may have been compromised in some way to adjust or fast track getting a particular container through the system to ensure the product can still be used at the destination or give the particular container a shot at being saved. In the normal course of transportation or shipping only certain parties are contractually allowed to make changes to any set points should any challenges or failures occur en route and so if issues arise, having the option to speed up processing is another method of management.

From a different angle, there is also a big difference in products that need to be cooled versus frozen. There is generally a fundamental difference between how the type of product moves along the cold chain. Markets for fresh and frozen products alike are substantial while some products must be frozen, and kept frozen, and others need to be ensured that they do not freeze because this will deem them a rejected product by the end user. Through the process from the source, if a product has been frozen, thawing to any degree could deteriorate its quality, and create possible safety concerns that open a different door for insurance requirements such as claims against parties resulting from various health related issues.

Retailers dealing in perishable goods will therefore often set up particular contracts that lay down certain qualitative issues, for example whether the product needs to be washed, how they need to be packaged and what temperature ranges or conditions they see as acceptable as part of their risk management.

In the cold chain, fresh produce has many points of exposure where spoilage or deterioration can occur when not managed correctly. Image credit: Wolfgang Brauner | Pixabay
In the cold chain, fresh produce has many points of exposure where spoilage or deterioration can occur when not managed correctly. Image credit: Wolfgang Brauner | Pixabay

Insurance to suit and claims

Another common thread from participants is the importance that all role players, and particularly the insurance service providers, have an extensive knowledge of the cold chain and factors that influence required actions, consequences, and outcomes. The processes of the cold chain are not that of insuring widgets, electronics or furniture for example that do not have critical timelines for arrival, so if for example major delays in these types of goods being shipped – such as seen earlier this year with the Suez Canal route blockage, do not result in the products being rejected or spoilt.

Selecting the insurance to suit a business need is also very highly dependent on internal technical product understanding and management protocols. Claims typically arise from situations where the insured had absolutely no control whatsoever and so where no amount of knowledge of protocols could have avoided the loss or damage. Claims will also arise depending on the level of cover of the insured. As an example, losing a container at sea is not something that happens very often, so perhaps a claim would arise every few years while cover through all risk insurance could produce a claim for something as simple as temperature deviation and a product being determined no longer viable for sale in the target market range.

Claims would further be related directly to voluntary excess ranges and protocols such as self-assessments and inspections throughout the supply chain. Also depending on the businesses risk management strategy evaluations can be made to determine if the product has endured sufficient deterioration for a claim to be put in. If, for example, a power outage occurred at a cold store for two hours, the likelihood of any product loss would be low, however if that same scenario happened over three or five days, consequences would likely arise.

Also read: Insurance and the cold chain: Fire risk – Part2

To note, although various insurances provide cover for specific incidents, the state-owned company SASRIA is the only provider in South Africa that issues cover against business disruptions caused by riots, strikes, public disorder, civil commotion, and terrorism attack, with options of cover up to one billion rand in addition to their standard limit of R500 million per company or group.

One of the bigger challenges in the cold chain methodology and ranked high in the claims department is mechanical failure of the refrigeration equipment. When breakdowns occur the controlled environment experiences changes that are most often undesirable that also may cause premature ripening or over-ripening of the product leading to loss or rejection of shipments. Also, certain failures result in molecular structure changes of fresh produce such as when a product that is not supposed to freeze gets frozen – this too will result in rejection of goods and in certain products a total loss because the product cannot be used anymore.

Road collisions and incidents are also high up on the list as they happen relatively frequently making transit exposure a very active sector of insurance. Not only are accidents frequent due to driver behaviour or fatigue, damage to trucks and refrigeration systems/mechanical units occur due to possible bad road conditions. The continual impact of bumps or poor surfaces does have an effect over time.

No matter what incident occurs leading to a claim, record of all aspects will need to be presented as proof for any claim to be processed.

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Insurance and risk evaluation is further something that takes place annually where paperwork and documents are prepared months in advance of renewal as periods of lapsed insurance policies may have serious implications to a business through for example being excluded from the supply chain as it does not fit the risk profile of other participants. Here businesses need to complete for example updated risk reports, updated fire reports, and updated asset reports.

Process management in a business subsequently plays a part in how insurance companies see risk in their clients. Regular internal inspections across the board could be carried out, various evidence can be gathered throughout the process and quick resolution of challenges or failures, all impact the portfolio from an insurance perspective.

What insurance companies consider

Insurance companies will evaluate a businesses’ overall risk profile by many of the points already mentioned in this article and provide guidelines as to where they see improvements in processes or methodology to greatly reduce potential risks, and to provide both the insured and insurer better conditions that will not only reduce premiums for the client but offer reasonable measures be taken to provide a level of security for the insurer by eliminating certain factors. For example, plant component failure alarms. These evaluations are typically completed by professional expert assessors.

The worst risk issues derive from a series of the same or similar events. This tells the insurer something is wrong in the risk management or processes. Perhaps maintenance is not correct or something fundamental is wrong with a cold store structure. This could also be aspects in a processing plant when the wrong products regularly land up together or as simple as a lack of knowledge by facility managers or owners. These elements too either create confidence in a business or put the risk level on a higher degree.

There are several processes and procedures in business that also require human participation, that according to various sources, very often create the problems that lead to failures. This is a particular risk area where the more intense the business model is in terms of human activity the greater risk is perceived.

Insurance providers expect businesses to do something about what then know and can control through various actions. If you know that you’ve got a maintenance problem or regular breakdowns on refrigeration equipment, the expectation is to get a technician on board that will fix any issues and fix them quickly, not to delay. They expect you to have fixed fire protection systems where required and implement immediate measures to handle personnel safety should this be a requirement.

The whole supply chain part of the cold chain not only needs to worry about asset and produce protection, but additional related risks extended from personnel, digital aspects and even ensuring the correct business partners that could affect risk exposure. Image credit: Marcin Jozwiak | Unsplash
The whole supply chain part of the cold chain not only needs to worry about asset and produce protection, but additional related risks extended from personnel, digital aspects and even ensuring the correct business partners that could affect risk exposure. Image credit: Marcin Jozwiak | Unsplash

Another important highlight in terms of insurance considerations is the compliance to South African building regulations while this is most often required for all facilities, standard building regulations are designed for occupant safety and not necessarily for plant or asset protection which is where insurance companies’ main concerns lie. Also as commonly known throughout the industry, retrofitting is far more costly that inclusion in a new facility build and so thinking ahead when participating in the supply chain is a good suggestion as you would not like to fork out an additional few million rand to install a fire system that would be a typical requirement of an insurer issuing a policy to a cold storage facility.

In conclusion, the best advice to offer over insurance is to get quality advice from industry professionals who have knowledge of the conditions, impacts and consequences related to the cold chain and even risk management of a particular product as each has different conditions. There is always a premium that is appropriate. Anything is insurable at a price, even a price that may be too hot to accept.

Also read: Insurance and the cold chain: Fire risk – Part2

Article Sources:

  1. Capespan Group
  2. Lockton South Africa
  3. Marsh Insurance Brokers

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