Insuring the future of logistics

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Logistics firms are increasingly taking on more responsibility for the goods they transport. The Hartford unpacks the implications of this trend and how the industry can balance risk and reward

THE GLOBAL logistics sector witnessed an unprecedented surge during the COVID-19 pandemic, driven by the rapid shift in consumer behavior and the urgent need for efficient transportation. Between 2020 and 2022, logistics companies experienced revenue growth of as much as 20–50 percent amid soaring demand for transportation and delivery services. However, as global supply chains stabilized and freight rates declined, logistics firms’ revenues have normalized, prompting them to explore new strategies to sustain growth. One way they are reframing their value propositions is by taking on increased liability for freight and contract logistics. While this move allows logistics companies to capture more revenue, it also introduces significant risks.

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“We’re seeing a trend where logistics companies are becoming insurance providers themselves”

Karla Scott, The Hartford

According to Karla Scott, global logistics practice leader at The Hartford, it’s also a notable divergence from the industry’s past strategies. “Traditionally, logistics companies minimized their liability, arranging transportation but not taking on any more loss or damage than legally required,” Scott told Insurance Business. “But now, they’re offering to assume full responsibility for goods to attract major clients.” This shift means logistics companies must handle increased liability, which can complicate insurance coverage. However, some insurers may refuse to cover this expanded risk, requiring logistics firms to balance meeting client needs and managing their own exposures.

Taking on more liability for transported goods marks a shift in the global logistics industry, which is seeing providers evolving to offer more than just transportation services. “We’re seeing a trend where logistics companies are becoming insurance providers themselves,” said Scott. “They offer insurance products directly to their clients, such as shippers’ interest insurance.” Scott traced this evolution to rapid growth in the logistics

sector due to an influx of capital and more sophisticated technology. “There was heavy investment from private equity and different investors into logistics companies,” she said. “Technology started to move along pretty quickly, and, finally, people realized that the logistics industry was ripe for this kind of investment.” This modernization set the stage for a significant shift, which would soon be accelerated by global events. When the COVID-19 pandemic unfolded, it also precipitated a global supply chain crisis. With fewer ships and trucks available and a surge in demand due to increased consumer spending on goods, shipping rates skyrocketed.

“Pre-pandemic, a container from Shanghai to Long Beach cost about $5,000. During the pandemic, that shot up to $25,000,” Scott recalled. However, this boom came with its own set of challenges. Demand for transport and freight rates normalized as the pandemic wound down, and logistics firms were soon confronted with a harsh reality. “Demand for goods shrunk as people started spending on vacations and other activities rather than just ordering from Amazon,” Scott continued. “The bar was set much higher, and maintaining [revenue growth] was not sustainable.”

While the pandemic boom was driven by extraordinary circumstances, maintaining growth in the current environment is now the industry’s biggest challenge. By increasing their liability limits, logistics firms offer shippers a compelling value proposition: reduced risk and potentially lower insurance costs. This offering appeals to businesses looking to streamline operations and minimize overheads in a still-recovering economy. Taking on more liability means raising financial and reputational risks, which means logistics firms must

carefully assess and manage their exposures through a combination of robust risk management and comprehensive insurance coverage to protect against potential losses. “If a shipment valued at $15 million goes missing, that’s a massive loss for a logistics company without adequate insurance,” Scott said. “Without insurance, they can’t take on high-value contracts. Insurance is a crucial tool for them to operate and grow their business.” Additionally, logistics companies must invest in technology and processes that enhance the safety and security of their operations, said Scott. Advanced tracking systems, real-time data analytics, and predictive maintenance are some of the tools logistics firms are leveraging to mitigate risks.

Adapting to a new normal?

Balancing risk and reward

Published August 12, 2024

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“Logistics has become much more sophisticated; insurance solutions for logistic companies need to keep pace”

Karla Scott, The Hartford

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From adapting to new financial realities to expanding into insurance services, logistics firms are reshaping their strategies to thrive in a competitive market. Brokers and carriers must also adapt to offer these companies customized insurance coverage and risk management advice. “Logistics has become much more sophisticated; insurance solutions for logistics companies need to keep pace,” Scott said. “Brokers and insurers need to understand the logistics business deeply to offer appropriate coverage. “Beyond basic coverage, there are specialized products like errors and omissions insurance, which covers mistakes in documentation that could lead to losses. Insurance also needs to address the specific risks associated with transporting and warehousing goods.” For its part, The Hartford strives to work with the logistics companies to understand their contractual obligations and ensure they have the insurance coverage in place if they take on more risk. The company’s global reach, specialized knowledge, and dedicated claims expertise help it stand out in the market. “At Hartford, we also handle global logistics companies needing local policies in multiple countries,” said Scott, who is currently working on a program requiring 160 local policies worldwide. “The Hartford ensures compliance across all territories, leveraging our global network to meet these complex needs efficiently.”

How is insurance evolving?

Automation and robotics

Artificial intelligence (AI) and machine learning (ML)

Blockchain

Internet of things (IoT)

Augmented (AR) and virtual reality (VR)

Autonomous vehicles and drones

Digital twins

Technology trends transforming logistics

Source: ING Research based on Oxford Economics

2018

2020

2021

2022

Forecast

2023

2024

2019

-20%

-15%

-10%

-5%

10%

Global logistics sector growth slowing