SEMINARS ON THE CONTAINER REVOLUTION

November 6, 1967

V. AN INSURANCE EXPERT LOOKS AT THE CONTAINER REVOLUTION

(By Carl E. McDowell, Executive Vice President, American Institute of Marine Underwriters)

Mr. BLUM. Mr. Schmeltzer is tied up with negotiations, but he will be here later. He asked me to substitute for him.

Our guest this evening is Mr. Carl E. McDowell, representing the insurance industry; and he will deliver a talk on "An Insurance Man Takes a Look at Containerization."

Mr. McDowell is presently the Executive Vice President of the American Institute of Marine Underwriters. His long career has covered, after receiving his bachelor and master's degrees from Stanford University, several years on the faculty of that school-the graduate school of business-as an associate professor of international trade and transportation. He is co-author of the book "Ocean Transportation," has served as adviser and consultant to several Government agencies and the United Nations, and participated in many seminars and different studies on containerization.

I had the good fortune of meeting Mr. McDowell personally last year, when I was on a seminar in New York sponsored by the Commerce & Industry Association on "What Is a Package, or How To Ship Containers Overseas Under The Hague Rules." The issue is presently in the courts.

Mr. McDowell also has assisted underwriters and shippers in establishing the National Cargo Bureau, and served as Executive Vice President of the Bureau from 1952 to 1955.

At the end of World War II, Mr. McDowell was deputy to the assistant to the War Shipping Administrator. That pretty much sums up, I think, a distinguished career. I'm sure that we'll all profit from

his statements.

Mr. MCDOWELL. Thank you, Mr. Blum.

It isn't very popular to make any remarks that sound critical of containerization. Aggressive promoters of containerization often appear to be practicing the ancient admonition of "See no evil. Hear no evil. Speak no evil."

To some extent, they are in the same position as the airplane pilot who took off on a transatlantic flight and when he was airborne he came on the intercom to say to the passengers that he had some bad news and some good news for them. "The bad news is that my radio is out, my direction finder is out, and I haven't the slightest idea where we are; but the good news is we're ahead of schedule.'

Now, the function of marine insurance requires the underwriter to appraise and evaluate things critically. For a modest premium, perhaps one-fifteenth to one twenty-fifth of the CIF plus 10 percent value of the merchandise, he offers to make the cargo owner whole for full insured value if the cargo is lost or totally damaged.

Naturally then, it is prudent for him to examine the nature of the risks he is offering to insure.

Now, my remarks are directed to four items. No. 1, marine underwriters agree that the unit-load principle offers significant potential advantages for ocean transport of goods.

No. 2, as long as business economics are based on the profit system, income must exceed costs and expenses if a business operation is to continue. The economics of insurance are such that losses must be offset by premium income. If losses are not reduced, rates of premium cannot be reduced.

No. 3, the loss experience from transport of containered goods indicates types of preventable losses that need to be corrected and avoided if rates of premium are to be less than for conventional break-bulk carriage.

No. 4. marine underwriting has and will continue to adapt itself to the needs of users and carriers of containers. Marine insurance contemplated the pipeline concept of "intercontinental, intermodal transport of containered goods" long before anyone conceived such a sophisticated, erudite phrase.

Marine insurance was founded centuries ago to insure port-to-port transport of goods against the perils of the sea, fortuitous losses. In this century, coverage under a marine policy was extended inland to point of origin of the goods and to final destination.

This is known to us as warehouse-to-warehouse coverage, providing continuous door-to-door protection to the buyer of insurance.

Furthermore, almost all cargo insurance today-in this country, at least is provided under what we call "open cargo policies.'

Now, such a policy or a contract covers the shipper on any shipment originating at any point of origin, moving via any route to any destination, as provided by the broad terms of the policy. It's strictly an umbrella policy.

As authorized by the policy, the shipper himself makes out the insurance certificates, calculates the premium, and eventually informs the underwriter of his exposure. The basic policy will include dollar limits of amount of insurance both as to the total amount, the total for any one ship, the total under deck, and the total on deck.

And these are elementary facts of marine insurance but I stress them because marine insurance is completely in tune with door-to-door unitized transport.

Now, where the policyholder's loss experience proves that containers benefit him, his rate of premium will reflect such benefits.

Now, I'd be very happy to send to anybody a very basic, easy-tounderstand booklet about cargo insurance. We developed this at the request of the Department of Commerce and the export expansion program, and we call it "An Exporter's Guide to Cargo Insurance."

Actually, it can be made to apply to importers, too, but we're talking about export expansion so we'll call it "An Exporter's Guide." It's free of charge.

Now, three developments in world transport have complicated marine underwriting.

They are, first, the extension inland of marine insurance under the warehouse-to-warehouse clause that I just mentioned. This involved underwriting in other than the fortuitous losses of ocean transport. Underwriters began to experience preventable losses, many of them closely related to the human factor, including pilferage, for example. Second, the development of cardboard cartons significantly increased the damage and loss experience on goods and transport. There is a relentless, continuing battle between adequate and inadequate export packaging. The shipper or consignee wishes to reduce the weight of his shipment and also the cost of the packaging.

Third, the disease of pilferage which is spread by inadequate packaging has been rampant since World War II. Somewhere between 17 and 22 percent of losses paid under cargo policies are for pilferage. Surely, marine underwriters are completely in agreement with the purposes and the potential advantages of unitized transport. The potential reduction of pilferage and of damage in transit is a major consideration. But to use the promise of lower insurance cost as a promotional gimmick for selling containers and container transport is a falsification of the principle of insurance. Insurance is not a loss leader. The principle of insurance is to spread the risk and to make the losers whole so that they will continue in business. Unless unitized transport functions with the efficiency and effectiveness that it promises, the underwriter has no choice but to emphasize that containerization tends to concentrate the risk and to increase the cost of making the losers whole.

The unitization of goods is concentration of small units into larger units. From the viewpoint of concentration of risk, it is one thing to drop a 200-pound box off a slingload into the hold of a ship. It is something else to drop a 25-ton, 40-foot container into the hold. A good many separate boxes insured under as many policies can be dropped before you reach the sum total of losses in the one container covered by one insurer for one insured.

It is one thing to pilfer a carton of whisky; it is something else to hijack an entire containerload of whisky. It is one thing to have water damage to 10 packages of cigarettes; it is something else to have a total loss through water damage to a whole container of cigarettes. It is one thing to lose 10, 20, 30 containers overboard at sea when none of that cargo would have been lost had it been stowed break-bulk below decks. In other words, marine underwriters are experiencing new risks and the problem of greater concentration of risks and values.

Is the container lessening preventable losses? The answer is yes and no. The answer is very likely to be yes when the container moves door to door without being opened and goods moved about.

When the container is in good order and condition, is of seaworthy construction, is safely handled en route, and is suitable to the characteristics of the cargo to be carried; when the goods are sufficiently packaged for container movement; when the goods are securely stowed in the container; and when the bill of lading accurately discloses the nature, weight, and value of the goods-now, that's a good many "ifs." Let's pause for a few minutes and let's look at some slides. We might call them, facetiously, the before and after look of things.

The "before" illustrates damage to break-bulk shipments because of inadequate packaging, rough handling, overexposure to the elements, and so forth.

The "after" may raise some doubts as to whether containerization has merely shifted the problem from one pocket to the other and in doing so has magnified the size of the specific loss incurred.

Now, here is an obvious case of cartons out in the open that were carried and damaged in the hold of the ship because of inadequate packaging. They're further exposed to the elements for an indefinite period, which adds to the damage, adds to the problem of pilferage. (Slide.)

This is merely another instance, a whole warehouse. You can pick out places where this same situation occurs.

Here is an obvious case of inadequate packaging, cartons that have been damaged. It's probably just a total loss. (Slide.)

Look at that for amount of exposure to risk.

Here's paper. The ends are damaged. This is stuff that's just been thrown out from these cartons. (Slide.) Another case of just total abuse of goods in transit. (Slide.) Much the same. From California, I think. (Slide.) I'm sure that those are California. (Slide.)

Now, this is burlap bagging that has rotted away; and we have a lot of problems with burlap bags, particularly secondhand ones. (Slide.) Now we talk about palletization, and some people think that this is a complete answer to avoiding damage. But, again, if you don't have adequate packaging, this is the sort of problem that you can get into. (Slide.) More difficulties with palletization. (Slide.)

Now, here's a warehouse completely full of goods that have been salvaged from damaged cartons that are for sale, that are salvage value. (Slide.)

Now we move into the modern age, the "after." This is a deckload of containers. They've experienced heavy weather, and this is the way they looked when they came into port.

I'm very happy that the name of the shipowner and the name of the maker of the containers is not visible. (Slide.) North Atlantic.

Here's the contents of a container that has not been properly shored up, and this is what will happen in transit if you don't do a proper job of stowage in the container; and if you get some damage to an electronic machine in something like this, you've got a claim of anywhere from $40,000 to $100,000 on your hands.

These are all amateur photographs and these slides also happen to be amateur. (Slide.)

Now, this was a container. Here's somebody standing inside of it. Now, these are not the same containers. These are different containers, different terminals. But this is another container, a total loss. (Slide.) Another container-just a total wreck. About $2,500-$3,000 just for the container, let alone the contents. (Slide.) Roof off, sides caved in, doors off. (Slide.)

Now, again, it doesn't show up as clearly as it did in the other room; does it?

VOICE. No; it's not very clear.

Mr. MCDOWELL. But it shows how the sides have just been rolled back. (Slide.) Sometimes it's a little frightening to an underwriter.

Mr. SCHMELTZER. DO you have any stories on that like on that last one?

Mr. McDOWELL. No. On this particular one, this one was carrying drums of a powdered chemical; and you can see that the doors apparently were completely broken off by the shifting of the cargo on the inside. And I think from the rest of these you'll see some more of the damage. And there is practically an 80-percent loss of the contents and the total loss of the container itself. (Slide.) These are some of the drums after they came out. Here's the top of the container, just stripped back as though you had taken a can opener and rolled it back.

These are all the tops broken off and the contents strewed over the container.

Mr. SCHMELTZER. Is that heavy-weather damage?

Mr. McDOWELL. Heavy-weather damage, but largely due to the fact that they were not stowed properly. They were stowed loose. They began to shift. (Slide.)

This is a typical one of the drums on the inside that had leaked the contents out, and you see the floor of the container there. The whole inside of the container was like this.

Thank you very much.

(End of slide presentation.)

Mr. MCDOWELL. Now, this sort of thing raises, as I say, an area of new risks, new problems. And before going on, I'd like to just take a little time to read from some of the records of a surveying office that has gotten rather deeply into this matter of surveying containers.

This is a survey of one 20-foot container carrying 536 cartons of palm kernel oil. The surveyor was able to determine that the trucking company, on instructions from the importer, was to deliver only sound containers to the customer-a chocolate company-which, we understand, is standard practice. Apparently the driver, when taking delivery of the container, noted something wrong, opened the container in the pier area, and found the entire bottom tier-81 packages out of 536-to be in a heavily softened and crushed condition.

Well, they went on and separated the good from the bad, but the outcome of this whole thing was that the cartons themselves inside the container were clearly marked: "Keep cool. Stow away from boilers." But there was no such marking on the container itself. How could the ship operator have known that he would have to stow these things to keep cool and stow away from boilers?

Shippers have a heavy responsibility to issue these instructions. Anyway, it appeared that these were stowed in the lower part of No. 3 hold and over deep tanks which were heated during the voyage to in excess of 90°.

Here is another illustration:

We noted that there was a void space of approximately the width of a skid in the front section of the container. We further noted that there was a void space in the middle of the container between the two tiers of approximately 18 inches to 20 inches. There was no shoring in the middle of the containers or between the void space in the front of the container on the right side.

We have recommended to the importer that they instruct their shippers and/or suppliers when using containers that the skids be well chocked in order to prevent shifting during transit. Since a clean receipt was made at time of delivery, the steamship company would not participate in the above survey.