Cargo insurance: Brief Summary of Offerings by Insurance Firms

Cargo insurance is the protection of freight from physical damage or theft; in other words, it is preserving the value of goods during transportation. In this age of globalization, companies rely on insurance firms to mitigate some of the risks that emerge during long, across state shipments.

Armenian insurance market, being still young, but a rapidly expanding sector offers cargo insurance packages, whose users are generally corporate entities. Main coverage elements include fire, explosion, natural disasters, wreckage, collision, damages during loading and unloading the goods, etc. Additionally, most insurance providers in Armenia are relatively flexible; hence, there is plenty of negotiation room to meet the client’s demands.

Foreign trade of Armenia

Armenia, being a post-soviet state, struggled after gaining its independence in 1990. Absence of strong ties to countries, other than Soviet republics, halted the country’s progress. Fortunately, the country was able to pull through the difficulties and establish trade relationships by integrating into the world economy. Currently, the government vigorously encourages foreign direct investments and liberalizes its trade regimes. Having WTO’s Most Favored Nation (MWF) title, Armenia was among countries with the lowest average tariffs applied. Moreover, the country steadily expands its exposure to free trade zones: EAEU membership, CEPA agreement, GSPs, etc. However, some of the unions, like EAEU, have required changes in the country’s customs system, which resulted in significantly increased tariffs.

There are two major limitations that the country faces in trade: no direct access to the sea and closed borders. Armenia, being a landlocked state, significantly falls behind as a participant in international trade due to land transportation being by far much more expensive than the sea one. The other factor is having almost non-existent diplomatic relations with 2 of its 4 neighboring countries, while being in a state of passive war with one of them.

Given the complicated geopolitical situation surrounding Armenia, the main port used for shipments is in Poti, Georgia. Being a hot point, stability in Poti’s port is detrimental for Armenia’s foreign trade. Another obstacle is the Lars road leading to Poti, that oftentimes becomes inaccessible due to weather, especially in winters.

For the past decade and more, Armenia had a negative trade balance: meaning its imports exceeded the exports. Despite the country’s best efforts to reverse this phenomenon by initiating stimulating projects and manipulating monetary policy, the imports have risen in parallel with the exports. Even so, in the last 3 years, a considerable decrease in the trade balance is seen, which can be attributed to a significant increase in imported vehicles due to the grace period of changing the customs system to be in sync with EAEU. The composition of Armenia’s foreign trade is presented below, in a billion drams. 

Provided Armenia’s membership to EAEU, most of its major trade partners are CIS countries. Yet, it is worth mentioning that Armenia also managed to diversify its alliances, forming strong relationships with EU countries, Switzerland, China, US and more. Both exports and imports have relatively the same destinations and sources, with minor variances in specific product categories.

Current role of insurance market in cargo transportation

Currently, the Armenian insurance market has 6 acting companies: Rosgosstrakh-Armenia, Nairi Insurance, Sil Insurance, Ingo Armenia, Armenia Insurance and Reso Insurance, all of which offer cargo insurance packages. As it can be concluded from the chart below, the market is not equally shared among its participants and there are definite leaders.

To better capture the state of cargo insurance in Armenia, it is necessary to identify the percentage of insured freight in total imports and exports. According to crude approximations, when the average insurance rate is set at 0.2%, only 14.3% of the absolute sum of imports and exports was insured for the past 4 years by Armenian insurance firms. However, as the buyer is usually the one to get insurance for its orders, logically exports will be insured by the former’s residing country. Therefore, the 14.3% is attributable to only imports, and if generally Armenia’s exports are 50% of its imports, an extra of 7.2% should be added to the initial figure. In other words, around 78.5% or the thumping majority of goods crossing the Armenian border are exposed to the risk of destruction and complete loss of value with no preventative measures to serve as some sort of security blanket for them.

Despite the prices of cargo insurance in Armenia being distinctly low, which in its turn is a result of price dumping by some of the firms that the market has not yet recovered from, Armenian companies seem to refrain from insuring their shipments. When speculating upon the reasons behind this phenomenon, 2 things come to mind. Firstly, it is about the mentality of Armenian nation: constantly distancing the events with low probability and ignoring them. The other reason can be the approach insurance firms indeed undertook, which is offering cargo insurance packages to large entities with considerable portfolio’s and frequent shipments, while rejecting the ones by small, medium enterprises. Though this policy may appear discriminatory, but it is fully justifiable from the viewpoint of insurance firms, as bigger companies have specialization in the area and are much more meticulous in organizing their processes, hence are less risky. 

Possible future synergy

Synthesizing all the information provided and taking into account the possible risks Armenia, as a business environment, imposes, cargo insurance is deemed to be, perhaps, the most sensible solution to safeguard intact bottom line. Meaning, to moderate the potential threats regarding the failure of the freight to arrive safely and hedge the probability of the entire shipment being lost, a certain form of insurance is an absolute must. However, given the Armenians’ way of doing business and shelving the discussed risks, a more systematic solution is required. Presumably, to further develop, the market needs some sort of mandatory cargo insurance provision, like CMTPL. While the latter was aimed to solve a major social issue, the former’s rationale would be setting up safeguards for businesses, especially for small, medium enterprises. The initiative could be based solely on lobbying by the government or some other form of mediation, which is outside of the scope of this article.   

However, when taking a step further to ascertain the scenario when 100% of trade is insured, a logical incongruence rises: given the CBA regulations on insurance firms equity relation to the contractual liability it undertakes, it is apparent that current acting companies, in their full capacity, will not be able to satisfy the hypothetical demand. Therefore, a substantial change in market dynamics is to be expected. Having said that, most of the Armenian insurance companies have strong partnership relations with top reinsurance firms in the world; hence the gap in supply and demand of cargo insurance dictated by equity ratio limitations is dissolved by ceding some of the risks to the mentioned partners.

  • About the author

    Underwriting Assistant, Ingo Armenia ICJSC
    Master of Science in Economics (AUA), Bachelor of Arts in Business (AUA)
    Experience in Insurance – since 2020