Insurance for goods-in-transit March 5, 2008Posted by Ramnath Rangaswamy in Blogroll, Business, Emerging Markets, India, Indian Economy, Logistics, Supply Chain.
I read an article that said that the government was working with transporters, consignors and insurance companies to fix the maximum value of insurance claim per kg of goods transported. This does not make sense.
The value of goods carried by a truck can vary from a lakh of rupees for food grains, raw materials to tens of lakhs for cell phones, computer parts etc.
A company, manufacturer, producer or distributor enters into a transport contract with a transport company,( or a logistics company as most transport companies now fashionably call them selves). The contract between the manufacturer, producer or distributor and the transport company specifies the terms of carriage. Specifically, it mentions who is responsible for damage and loss of goods in transit. Usually, the transport company who has signed the contract is responsible for the goods once it is loaded on his truck.
The transport company usually takes out an insurance policy to safeguard itself against loss of the goods due to an accident, loss, pilferage etc. The premium is fixed depending on the average value of a truckload of goods, accident record of the company, it’s reputation and area of operation ( Bihar, UP would be more dangerous than West or South India).
Or the manufacturer, producer or distributor can insure their goods-in-transit against and accident or hijack. However, in the FMCG company I worked for, we found the annual premium on an insurance policy for goods-in-transit, much higher than the value of the goods lost in an accident or hijack [ mathematically, probability of an accident/hijack x value of goods in a truck < insurance premium] . So we stopped insuring our goods-in-transit.
The truck industry in India is fragmented. Most lorries are owned by single truck owners. Trucks owned by fleet owners are minuscule. The insurance industry should allow the truck owner to take out an insurance for a single trip and insure the value of the goods depending on the LR value [ LR is a lorry receipt, like a bill of lading]. This is similar to insuring household goods during a shifting of residence. The insurance value depends on the value of household goods declared by the house-owner.
The lorry industry is fragmented. Hence, it is very difficult to get any data like accident record of the truck owner, safety record of the driver etc. The industry is notorious for pilferage and loss, especially in open trucks and less than truck load consignments. Also, the insurance industry is not very ‘clean’. Policies could be backdated so that it seems the insurance policy is taken before the accident or mishap. Because of these inefficiencies, insurance companies would be vary of entering this business.
Fixing a maximum rate per kg for insurance compensation is hardly a solution. Let the market forces act and fix the price, or in this case, fix the insurance premiums. Fixing maximum value of insurance is going back to the license raj. There are smarter ways to solve the issue that the government is trying to solve.