Robert Redford's new movie “All is Lost” serves a subtle reminder to the overseas shipping industry of the perils their business may face. After Redford's sailboat collides with a giant shipping container floating in the ocean, he finds himself in an intense man-against-the-sea drama.

While the shipping container may only play a minor role in the film for the average moviegoer, for those who export their goods overseas it is a stark reminder that shipping products is a risky business that requires taking prudent precautions up front. This is particularly true for small businesses that have fewer resources to withstand a catastrophic loss, whether from the dangers of ocean travel or the uncertainties of dealing with foreign partners in trade.

The risks are no surprise to veteran ocean marine insurance agents, brokers and underwriters. What may catch them unaware, however, is the fast-growing number of small businesses that are entering the export world. Providing expert guidance to these shipping novices is an opportunity to provide valuable service and strengthen relationships with small business customers.

By the Numbers

Shipping products to other countries was once a commercial opportunity tackled only by large conglomerates and big businesses with plenty of staffing resources and legal counsel available to handle the complexities. Thanks to new technology, today any company that has a website can end up with overseas customers.

A 2013 survey by the National Small Business Association puts a spotlight on the growth of exporting by small businesses. Based on responses from more than 500 companies (95% with fewer than 100 employees and less than $25 million in annual revenue), the results show both the economic importance of exporting activity by small businesses and the challenges they face. Among other things, the survey showed:

Small businesses account for 98% of all U.S. exporters and 33% of the value of all U.S. exports.
Today, two-thirds of small businesses have sold goods outside the U.S., compared to just over half when the survey was last taken in 2010.
When asked about barriers to entering the export market, 46% of those who are not current exporters say they “don't know much about it and not sure where to start,” and 26% worry about whether they will get paid. Even among those who are currently exporting goods, 29% find it “confusing and difficult.”

Despite the challenges, small businesses are expected to continue to embrace exporting as a means of revenue growth. The survey found that from 2005 to 2009, those who exported goods saw a 37% increase in their revenues, while those who did not enter the overseas market saw a 7% decline in sales. The lucrative potential of overseas sales undoubtedly will continue to draw small businesses into a world of globalized trade and shipping.

A Key Pain Point for Small Shippers

Once small businesses make an overseas sale, there are plenty of details to work out. But one of the biggest stumbling blocks that may not be on their radar is the need to have complete clarity around the terms of sale. The misunderstandings that can arise over these terms, particularly when companies are not used to the “foreign language” of overseas shipping, are responsible for many of the claim disputes that involve exports.

The terms of sale are vitally important because they articulate who is responsible for what and at which time; specifically, who will insure the goods, and when title changes hands from the seller to the buyer. Many small businesses that are used to domestic trade may think these issues are routine. When a company orders components from a supplier within the U.S., the delivery of the components completes the transaction—and up until that point, the supplier is responsible for their condition.

However, that is not necessarily the case for overseas transactions, where these responsibilities must be clearly spelled out so all parties are in agreement with the deal that has been struck. The International Chamber of Commerce has standardized international commercial terms through a set of trade definitions called Incoterms. Among the most common terms that small businesses may run into are:

EXW – Ex Works. Title and risk of loss pass from the seller to the buyer at the place of shipment. This puts the buyer in charge early in the process, so the buyer provides insurance.
FOB – Free on Board. The seller must load and clear goods for export as instructed by the buyer. Title and risk of loss pass from the seller to the buyer when the shipment passes the ship's rail. Here also the buyer provides insurance, but only after the goods are loaded.
CIF – Cost, Insurance and Freight. The seller is responsible for the arrangements, export clearance and cost of shipping to the port of destination. However, the seller's risk and responsibility for the cargo end when the goods are placed on board. Despite risk passing to the buyer, under these terms the seller provides insurance. Since sellers sometimes keep the coverage to a minimum, buyers may wish to purchase additional coverage.

Small businesses would be wise to check with their insurance agents to determine the strategy that makes the most sense for them. While it may sound attractive to have the buyer be responsible for insurance costs and damages from the moment a product leaves the seller's hands, the end result may be a strain on customer relations if something happens and the buyer is unable to resolve a claim quickly. By keeping control, the seller can make sure there is adequate insurance and that coverage is with an insurance company that will work swiftly to resolve claims.

The Right Fit for Small Businesses

When it comes to getting insurance, it is not only the question of the right coverage but also the best way to arrange it. Small businesses can require their buyers to purchase insurance (EXW and FOB), or they can choose one of two other methods: 1) work with their local insurance agent, or 2) use a freight forwarder.

A freight forwarder allows small businesses to take advantage of external expertise they may not possess. Much like using a travel agent to plan overseas vacations, a competent freight forwarder knows all of the ins and outs of packaging and shipping goods, and exporting to countries with different legal requirements. As an added service, many freight forwarders can also arrange ocean cargo insurance coverage for individual shipments.

Using a freight forwarder to provide the ocean cargo insurance especially makes sense if a small business is just entering the export world, or ships overseas so infrequently that the added cost of tapping into their expertise makes economic sense. But once a company grows its export business into a regular occurrence, it is often more economical to work with a local agent to arrange coverage year-round rather than on a shipment-by-shipment basis.

In addition, choosing an insurer with a strong background in ocean marine coverage provides the best safety net for small businesses. Insurance companies have different levels of experience and provide different levels of service. A large, sophisticated exporter may have its own resources to rely on for shipping expertise, but a small business can benefit greatly by selecting an insurer that offers dedicated claims handling, specialized risk control services and other consulting resources.

Globalization has offered a world of opportunity to businesses of all sizes, but it has also introduced complexity at a level that many small companies are not accustomed to managing. Insurance experts can ease the path for small businesses and earn their loyalty by delivering superior service when it comes to managing the risks of exporting goods.

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