Importance of insurance in sea-borne trade

In our ocular vision, we see import and export made on C&F (Clearing & Forwarding), CIF (Cost, Insurance and Freight) or FOB (Free On Board) basis, that are the core methods of sea-borne trade. The shipping industry is solely responsible for the sea-borne trade. The three elements of shipping industry are ship, seafarers and cargo. Risk is involved in all the three elements. The problems are obviated or mitigated through insurance coverage. In olden days there was no insurance company. However, the ship owners, operators, charterers and seafarers did realize the importance of risk in sailing.
A PNI Club (better known as ship owners' protection and indemnity club) was established in late 18th century in Devon, England. It was a club of ship owners for mutual benefits against risk arising from various elements connected with shipping industry: e.g. PNI insurance coverage: (a) Personal injuries, illness, and death claims from crew, passengers etc. (b) Stoways and their repatriation arrangement, (c) Cargo claims for damage or loss, (d) Liabilities due to pollution, (e) Damage fixed to floating objects; (f) Liability under approved towage contracts (g) Removal of wreck; (h) Salvage operation, (i) Civil liabilities due to pollution or oil spill and (j) Other fines. Ship owners themselves contributed to the club. The PNI Club had got the legal coverage and affiliation with the authority concerned. Hence, the PNI Club is regarded as dependable to the merchants and clients around the world. With the passage of time, its membership had increased and the PNI Club shifted first to the west coast of England and finally in London. The Club has 6,133 members and 28,227 vessels.
Our bulk trade of commodities, both export and import, were in tatters and faced a hostile situation arising from shutdown of Chittagong port owing to vessels, barges and hazardous particles being sub-merged in the Karnaphuli river during the war of independence. It took at least two years to clear the debris from the riverbed and for removal of silting from the ships' channel. An impasse of two years took a heavy toll on the economy of the newly independent country. Ships intended for carrying import and export cargoes used outer anchorage at the Bay of Bengal during the period and thereafter too. Some of the shipping lines even bypassed calling at Chittagong port although surcharge was levied and high rate of insurance coverage were imposed; draining out precious foreign exchange of the country.
Purging apart imports by TCB and other sector corporations, raw jute and jute goods featured most important for our foreign exchange earning. In the case of raw jute, once the EPC was registered with Bangladesh Bank, importers were then advised to send the ship(s) either to Chittagong or to Mongla port on the term of FOB. In the process Jute Export Corporation would ensure if the ship(s) were a member of the PNI Club and got its name enlisted in the Movement Registers of the Loyds of London. Failing to fulfil these conditions export on FOB was fraught with the danger of jute cargo being lost in the wilderness. Here lies importance and imperativeness of PNI Club and the Loyd's of London (of which we will discuss after a while).
Whilst the export of jute goods was mostly done on C&F basis, insurance coverage is arranged by importers. Similar to raw jute, MEP of jute goods is required to be approved by and recorded in the register of the Bangladesh Bank. In the process, it was incumbent upon the Bangladesh Jute Mills Corporation to be sure whether the Letters of Credit (LCs) were confirmed by the world renowned Bank. In some cases, particularly African countries, LCs were required to be confirmed by one of the 5 Prime Banks of the UK e.g. Barclay, Midland, NatWest, Lloyds and the Royal Bank of Scotland. If these requirements were ignored, BJMC would have plunged itself into a big hassle to recover money from some of these countries.
The Trade Officer based in London was a vital source and played an important role in obviating the adverse situation in the early period of Bangladesh. In this short space, various problems and hazards cannot be discussed in detail.
Bulk import of crude oil, de-gummed soyabean, palm oil, wheat, etc occupied a large-scale insurance coverage by Bangladesh herself through the Sadharan Bima Corporation. Besides, SBC also provides insurance coverage in various sectors; for instance, industrial enterprises, aviation, etc. Obviously SBC does not have a large capital or assets to take the liability of unforeseen losses of load of high risk volume at insurance coverage. And they go for insurance of the stakes it has taken in the international market, mostly Lloyd's of London and elsewhere e.g. Switzerland (Zurich) and Germany (Munich). Actual undertaking/reinsurance business contracts are routed through legally established Brokerage Houses.
Lloyd's of London was established as early as 1688 and originally involved in the marine insurance of seafarers. In those days mariners mostly would throng Edward Lloyd's Coffee Shop and involved themselves in deals relating to marine insurance. Edward died in 1713 but his name remained immortal. Lloyds of London is now a towering corporate body in the world of reinsurance undertakers; it is no longer involved in traditional insurance business. Originally it made its fortune from the prime source of insurance coverage for colonial slave trade, a huge source of income until slave trade was outlawed in 1776. Its present day net value/asset runs into several billions in terms of British Pound Sterling. It suffered great losses - and rebounded - in the San Francisco great fire and earth quake in 1911 and the destruction of World Trade Centre in 2001.
In the overall context, insurance and reinsurance process is quite intricate and vast. The Lloyd's of London and the PNI Club are the great source of learning in this faculty as also for the faculty of Actuary.

The writer is an ex-Commercial Sectary, Bangladesh High Commission, London who can be reached at e-mail : [email protected]