What options do exporters and importers have to manage risk?

Answer 1

The three options are risk retention, risk transfer, or a mixed approach.

The first option is to simply to retain the risk. If the importer retains the risk that is essentially a strategy of self-insurance. Retaining the risk is essentially like insuring your own car. The risk retention strategy can make sense for very large exporters and importers that can absorb occasional losses, ship low value goods or goods that are not susceptible to damage, or have extensive experience and extreme confidence in their carriers. Keep in mind that insurance companies essentially predict risk and then add a premium to cover their costs, and their profits. If a company can self insure than they should be able to do so at a lower cost.

Risk transfer means that a company shifts its risk to an insurance company through the purchase of a cargo insurance policy. The company essentially determines that the guaranteed cost of the policy is more acceptable than the possibility of some catastrophic loss. There are a wide variety of policies available to the customer to cover both freight loss and General Average liability in ocean shipping. Insurance can be obtained through carriers, freight forwarders, or directly from an insurance company.

The mixed approach is a combination of self-insurance and risk transfer to an insurance company. The mixed approach is essentially the same as having a deductible. The policy cost is decreased in proportion to the amount of the deductible.

The company manager should spend some time understand the risks associated with the movement of cargo and determining which risk management option is most appropriate.