Quarterly Review Winter 2023
By Dafna Izenberg | 15-minute read
In this issue we’re investigating how insurance companies are innovating to protect our global food supply chains from a variety of threats.
A group effort to get grain out of Ukraine
Chris McGill was leaving his box at Lloyd’s one day last May when he broached an idea that would go on to save the world a whole lot of grief. “Wouldn’t it be cool if we designed an insurance product to get grain out of Ukraine?” he said to one of his colleagues. McGill, who is head of marine cargo and underwriting innovation at Ascot Group—a Lloyd’s insurer—had been thinking about the grain that was languishing in blockaded Ukrainian ports on account of the Russian invasion. Before the war, Ukraine supplied 45 million tonnes of grain to the global market annually, and its absence from the food supply chain had been driving food prices up significantly. McGill saw a great opportunity for insurers to help find a solution to this quandary. It would prove to be an endeavour that required both creativity and collaboration. McGill had experience with this type of project as active underwriter for Syndicate 1796, a public-private partnership that anchors the Global Health Facility Initiative, announced by Lloyd’s and Denver, Colorado-based Parsyl in December 2020, which made billions of dollars in insurance available for the distribution of COVID-19 vaccines and other critical health supplies.
Before the war, Ukraine supplied 45 million tonnes of grain to the global market annually, and its absence from the food supply chain had been driving food prices up significantly.
Ascot partnered with the brokerage firm Marsh—with Ascot leading the facility, and Marsh arranging following capacity—and called up 20 other insurance companies to see if they were interested in participating. “We felt there should be a market response,” says McGill. “We wanted to get as many insurers as possible involved because it was an increased risk profile and we thought we should do this at rates that were competitive but not exorbitant.” If they priced the product too high, says McGill, this would add to the inflation in the cost of food.
Getting so many underwriters to agree on pricing in such a high-risk situation was just one of the unique challenges involved in creating the Ukraine grain facility. Another was the matter of when to come on risk. Pre-war policies typically covered the grain inland, McGill explains, including storage at the port. But inland coverage was seen as too high a risk in this case, given the volatility of the situation: shipments might be delayed by events on the ground and the food products could rot or even be a casualty of bombing. Ultimately, it was decided that the wartime facility would only insure grain upon it being loaded onto a vessel, because “as soon as loading is completed, that vessel will be getting out of there,” says McGill. “They’re not going to hang around.”
In fact, they’d already been hanging around for quite a while—some of the vessels that would eventually take grain out of Ukraine had been sitting idle in ports for as long as eight months. Normally a marine hull insurance policy requires a reactivation survey to make sure a vessel is seaworthy, and it would certainly have been prudent to inspect the boats in question after their lengthy hiatus. But this did not seem a realistic requirement, McGill explains, given the absence of qualified staff on the ground, and so the reactivation survey was waived from the policy. The hope, says McGill, is that crews would ensure a given vessel was safe before taking it out. Still, there were unique factors to consider. For example, if a ship’s engine became disabled at sea and the vessel had to proceed under self-propulsion, there was the possibility that it might drift into an area excluded from the safe corridor—including into a minefield. “This is why it was such a heightened risk,” says McGill.
The product was dormant—and kept fairly hush-hush—for a few months. As McGill had realized from the outset, transporting the grain would not be an insurable risk unless the warring parties agreed to allow it safe passage. “You wouldn't have crew members willing to venture out into the Black Sea without some kind of safety agreement,” says McGill. But he and his team rightly assumed that some solution would be found, as the stockpiles of food products mounted, prices kept rising and people went hungry.
Finally, on July 22, 2002, Russia and Ukraine signed the Black Sea Grain Initiative. Facilitated by Turkey and the United Nations, the pact provided safe passage for commercial food products out of three Black Sea ports—Odessa, Chernomorsk and Yuzhny, all in Ukrainian control. Ukrainian pilot boats would accompany the vessels carrying the grain through the Black Sea, which Ukraine had laid with sea mines, to the Bosphorus Strait along a specified “corridor.”
A week later, Ascot announced the product. And almost immediately, “we started seeing multiple shipments on a daily basis,” McGill says. In its early weeks, the facility insured about 40 per cent of exports leaving Ukraine. As it proved successful—the clients were happy with the pricing, says McGill, and the grain moved without incident—a market was created, with other insurers offering competitive products. McGill welcomed the competition. “In the spirit of what we’re doing, it’s great,” he says. “It’s what you need.”
Any insurance broker can access the facility, says McGill, which covers up to $50 million worth of cargo. McGill oversees every declaration, does its compliance and binds it to the rest of the market. “It’s a one-stop shop for a broker, which for a war policy is quite rare,” he says. Normally, he explains, everyone has to handle their own declarations and compliance agreements, but the goal with this facility was to make the process as streamlined as possible. McGill says there is more and more interest from brokers as existing policies start to fall apart, with reinsurers bowing out of providing cover to such war products. A great thing about the wartime grain facility, says McGill, is that it doesn’t require reinsurance—with coverage spread among so many insurers, the risk each one carries is relatively small.
If a ship’s engine became disabled at sea and the vessel had to proceed under self-propulsion, there was the possibility that it might drift into an area excluded from the safe corridor—including into a minefield.
Another novel and exciting aspect of the Ukraine grain facility is the incorporation of geolocating data. Normally, McGill explains, cargo insurers don’t know which vessel their cargo is travelling on. “I may have hundreds of thousands of cargo vessels sailing around the globe, but no idea how much is sitting in off Los Angeles port, off Vancouver or wherever,” he says. But with this facility, the vessels have to be named in the compliance questionnaires so McGill can confirm that the boat in question is legitimate and also that it has the right amount of cargo loaded (remember, it’s at this moment, of loading, that the policy came into force).
With this information in hand, McGill’s team approached a technology company called Insurwave, which has expertise in mapping the location of vessels in transit (often for the marine hull industry, which insures the boats themselves), about tracking the ships carrying grain out of Ukraine and Insurwave agreed to provide this service for free, says McGill. “For the first time ever, I’m able to see every vessel that I have, where it is in the Black Sea and the lat-longs for the safe corridor,” he says. “And then I can watch out for accumulations. So if I’ve got more than five vessels, for example, waiting to clear the Bosphorus, they can give me the total value of cargo I’ve got sitting there, so in the event of a strategic attack or something, I can actually figure out what my exposure would be on a live basis.” He can also see—and be reassured by—the tugboats strategically positioned around the corridor, which would be able to assist in a situation where a boat lost power and help keep the vessel out of dangerous waters.
In late October of last year, Russia withdrew from the Black Sea treaty and the grain facility was put on pause. McGill’s group announced that it would honour any quotes already given, but further quoting was on hold. Behind the scenes, the team was discussing contingent plans in the event that the safe corridor was not reinstated—specifically, what rate would be reasonable to charge in the absence of a commitment from Russia to not attack commercial vessels. But then Russia came back to the table and the corridor was back on its feet. Ascot immediately resumed issuing quotes. At the end of December of 2022, Ascot announced that the facility would continue in the new year with no rate increases.
But the facility may indeed change in 2023. Lloyds has been talking to Ascot about the possibility of covering shipments of Russian fertilizer, another major global export. “Again, that will need a UN safe corridor,” says McGill. “What are the safe Russian ports? How is it going to be protected?” These are some of the questions that will need to be addressed. But the infrastructure is there and the facility’s effectiveness has that insurers are prepared to band together and share risk so as to help solve global problems. Plus, providing coverage to Russia could make things a bit safer for everyone. “Because then,” says McGill, “Putin couldn’t moan that he wasn’t getting the same deal.”
The global food supply chain in 2023: Challenges and opportunities
When the Ever Forward container ship ran aground in Chesapeake Bay last spring, Asian Pacific Seafood faced a possible loss of $340,000 worth of pasteurized crab. The vessel was stuck for more than a month and the journey wound up taking roughly double the time expected—103 days, compared to between 45 and 60. The crab meat was at risk of spoiling if exposed to a high enough temperature for a long enough period of time.
Fortunately, Asian Pacific had proof that the meat had been kept sufficiently cold throughout its voyage. The seafood importer had an insurance policy from Parsyl—a Denver-based company that specializes in cold-storage cargo and makes innovative use of technology. Parsyl provided Asian Pacific with a device that travelled with the shipment and constantly monitored the temperature it was exposed to. When the Ever Forward finally docked in Baltimore, the data was downloaded and satisfied both the customer and the FDA that the product was safe for consumption. No food was wasted and no claim was made. “As we understand it, all the other perishable containers that were on that vessel had no way of making that data available when they were unloaded,” says Gavin Spencer, chief insurance officer at Parsyl. “So most of those goods were destroyed because of the unavailability of data to prove that they were okay to carry on within the supply chain.”
The vulnerability of the supply chain… came into sharp relief during the pandemic.
This product illustrates one of the ways insurance companies are adapting to the new realities of the global food supply chain, which is the topic of “From farm to fork,” released by Lloyd’s on its Futureset platform in late 2022. Lloyd’s launched Futureset during the second year of the COVID-19 pandemic as a forum for exploring ways to better protect customers from some of the world’s most complicated and challenging risks. One of these is the vulnerability of the supply chain, which came into sharp relief during the pandemic. The Futureset report notes that the global population is expected to reach 10 billion by 2050, and this growth—along with continued growth in consumer demand—will require a 70 per cent increase in food production. In order to make and distribute enough food to feed the world, the entire supply chain—from farm to fork—will have to find ways to be more resilient to risk.
The Futureset report includes results from a survey of 250 risk leaders in food and drink businesses. They described some of the key supply chain challenges they expect to confront in the next couple of years, including shortage of shipping containers and drivers, panic buying and stockpiling, regulation changes and other shortages such as of packaging and raw material. They also talked about the growth of just-in-time business models, which puts a great deal of pressure on the supply chain to move more food products more frequently and more quickly.
When asked about the biggest risk factors facing the supply chain, the risk leaders surveyed identified environmental risk, climate change, severe weather and cost and availability of inputs as the greatest external threats. In one-to-one interviews, they spoke in greater detail about seven main risk areas: labour availability; economic pressures; climate change and sustainability; political and geopolitical risk; operational technology; demand changes; and transport.
In terms of insurers helping clients build resilience to these risks, two key themes identified in the “farm to fork” report are the opportunity presented by parametric products and the importance of data. The Parsyl product Asian Pacific purchased is a good example of both. For starters, it laid out specific parameters, based on what is known about food storage and spoilage, which would determine whether or not a claim would be paid. And it provided a device for collecting the data that would determine whether the parameters triggering a claim had been exceeded. Spencer differentiates between parametric insurance and parametric triggers. The former pays out a claim automatically based on data, as Parsyl did for its client Niceland Seafood, an Icelandic company, for example. When data collected via Parsyl sensors indicated that a plane delay meant cod being shipped from Reykjavik to Los Angeles had been sitting too long on a hot tarmac and could not be used, the money was transferred to Niceland within hours. A parametric-triggered facility, by contrast, is one in which claims are determined parametrically, but not necessarily paid automatically. Spencer sees this as a more likely adaptation by insurers, as it is not always feasible to have large sums available for immediate transfer in the event of a claim.
With parametric-triggered claims, there is no need to assess loss once the client has made a claim; rather, the loss has essentially already been defined. “The insurance is focused on an event that can generate a loss,” says Gabriel Gross, who founded Meteo Protect, an insurance underwriting company that in 2020 was acquired by the brokerage Cooper Gay, where Gross is now director of the Parametric Insurance Solutions Division. “That implies that you have a lot of precision in explaining what the event is.”
A policy based on such specific metrics is particularly useful in a world experiencing unforeseen weather events which put the food supply chain at significant risk. The first step in striking a policy that protects against a drought or hurricane is defining what constitutes such an event, Gross explains. “So in the contract, we’re going to write exactly what we call a hurricane—it has to be within a certain geographic area, within a certain timeframe. It has to have a certain level of density, which is determined by category or by wind speed. All the parameters are written in the contract.”
When asked about the biggest risk factors facing the supply chain, the risk leaders surveyed identified environmental risk, climate change, severe weather and cost and availability of inputs as the greatest external threats.
Focused as they often are on specific events or seasons, parametric policies can be quite time-limited. The shortest policy Gross’s group sold was to a company that was throwing a big beach party during the Cannes Film Festival, which wanted coverage in case of rain. “This policy was for seven hours,” says Gross. Fortunately, the rain held off that night.
Often, the client helps determine the parameters in a contract. Gross’s company is working with solar farms in Latin America, which are involved in designing their own policies. The clients, for example, decide how solar radiation is measured and weigh in on their deductibles and what the maximum payout should be. Gross’s team then calculates the risk and gives the client a price. “It’s a very collaborative process,” he says. It means that the insurers have to do some homework, so that they too understand photovoltaic energy and solar radiation. This is an investment, Gross points out, because once insurers have this expertise they are in a position to work with many other clients on related policies.
The data used in parametric policies can also help clients build resilience and avoid risk. The charts generated by Parsyl showing temperature exposure throughout a shipment, for example, have given Niceland Seafood insights into specific points of vulnerability. Even if these don’t ultimately render the product unusable, they do allow the company to make more informed decisions about which routes and carriers to use.
What data does that is so valuable for insurance, says Spencer, is provide greater visibility. “Instead of knowing that the ship left on Friday and arrived on Monday, you can now look at that entire chain between Monday and Friday,” he says. In other words, whereas insurers have traditionally underwritten risk based on the availability of anecdotal information, they are now increasingly able to underwrite based on facts, which means they can design better policies and more confidently offer greater coverage. For example, while delay insurance has seldom been offered in cargo policies, the availability of data is making this more feasible. “You can start to look at ports and terminals and routes—and all this information is publicly available—and you can start to quantify, especially on seasonality, how long vessels take to navigate waterways, whether they’re going to arrive on time, what that port congestion might look like,” says Spencer. “We ourselves have been able to offer delay products to our customers. So now, if there was another Suez Canal blockage, a client could actually have coverage for what type of delay.”
Another way data technology is offering solutions and creating opportunity for insurers of the global supply chain is around the issue of misrepresentation of goods, which has long plagued cargo insurance as it can become a massive liability—Spencer points to examples of containers with misdeclared fertilizer in them exploding in ports or at sea. Now, new technologies that use scanners and soundwaves to confirm what containers hold are limiting insurers’ exposure to catastrophic losses and leading to more robust coverage for clients.
Technology allows for nimbler products and more dynamic pricing, Spencer explains, and makes insurance both more affordable and more sustainable. “The insurance industry has always been reactive, evolving more quickly when there are claims,” he says. “I believe data can change that, and we can become much more proactive, using information to elicit future products and avoid major pitfalls.”