Spotlight: The Stock Throughput Policy
Stock throughput (STP) policies are designed for companies that import, distribute, or export merchandise. The policy provides cover for all moveable goods (inventory) that are the subject of the insured’s trade, including raw materials, semi-finished, and finished products. The goods are covered at all times whether in transit, undergoing process (although damage caused by the manufacturing process is excluded), or in storage at owned or third party premises.
Purchasing a separate stock throughput policy rather than basic transit coverage in a property “all risk” insurance policy can provide seamless coverage of goods and more control of inventory risks throughout the entire supply chain, from the supplier or point of origin through the goods’ final destination.
Traditionally, freight forwarders would handle the insurance for transporting the insured’s goods across the sea while local insurers would underwrite transit insurance within the country’s borders and provide coverage while the insured’s goods were in storage. However, one of the highest risks associated with cargo actually occurs between these two sections—when the cargo is being loaded, offloaded, or moved from storage to transit. This loss scenario typically results in an argument amongst insurers as to which carrier is responsible at the moment the merchandise is damaged or stolen. This often stalls or complicates claims payments.
The transfer of materials and goods through supply chains has never been more fragile. Global outsourcing, economic impairments, government regulations, and bills-of-material with countless suppliers compound the volatility of supply chains. Thus, companies should make every effort to command control of the goods in transit to and from their operations. The flexibility provided to the insureds via STP policies can assist them in managing their insurance premium expense by allowing insureds to choose between different distribution channels. This flexibility is the key driver for creating a strong, cost effective supply chain model. Options for distribution channels include:
- full container loads;
- special handling services;
- less than container loads and multi-country consolidation programs;
- sea/air and air/sea;
- sea to air conversions; and
- export and import distribution centers.
By using this flexibility of choice the insured can control the volume of shipments and loss experience. This can lead to controlling more of the supply chain and increasing purchasing volume, potentially resulting in a better rate on the premium.
What is a Stock Throughput Policy?
An STP is a marine policy that insures a company’s inventory and the flow of goods from the source of production to its final destination, whether at a place of storage or a retail store. An STP policy has three components;
- ocean cargo insurance;
- inland transit; and
STP policies integrate transportation, inventory storage, material handling, and packaging as they are designed to cover the repositioning of:
- raw materials;
- works in progress; and
- finished goods.
The focus is on global infrastructure and local presence from beginning to end. Coverage terms typically include all goods in transit globally as well as all stock/inventory (works in progress and finished goods). Such goods are covered at the insured’s location(s) as well as its subcontractors, consolidators, and warehouse locations. The policies typically include coverage at manufacturing locations, often subject to a process clause, which provides the insured with coverage for loss or damage occurring during the manufacturing process. However, it does not provide coverage for any errors in processing the insured’s raw materials into finished products.
The use of STP policies has grown recently, as the marine carriers remain soft in their pricing versus property “all risk” carriers, whose rates are currently transitioning upward. Considering a STP allows for the removal of the inventory from a property policy; in many cases, this may subject the inventory to a lower rate, thus saving premium dollars. Further, separate aggregates for CAT coverages can be achieved for the property versus the STP, boosting available CAT cover.
Insureds in industry sectors that have significant inventory and/or transit exposures may want to consider purchasing STP policies. Clients in the retail, wholesale, food and beverage arenas have historically benefited the most from STPs. In the changing market landscape, this is a program alternative worth investigating.