The G-20 Prescription for a strong Financial System-Part I

This article is a first in a series of articles on the decisions taken by the G-20 leaders, meeting on 2nd April in London, to strengthen the financial system, both within their countries, as well as the international institutions, engaged in development work.

Key areas of reform: The key areas of reform of the financial system, from the G-20 point of view, relate to the proper regulation and supervision of the system.   To ensure transparency and accountability in the various policies and activities of the system.   To promote integrity in the operation of the system.  

And to enhance international cooperation in this area to avoid the spillover of the after effects of the policies and actions of one country on the others.

In order to accomplish the goals that they have set for themselves, the G-20 resolved to push through reforms, to improve the functioning of the financial system.   These reforms relate to the following areas.

Setting up of Financial Stability Board:  The present Financial Stability Forum, set up in 1999, to promote international financial stability through information exchange, and international co-operation in financial supervision and surveillance, would be upgraded, and mandated to play a greater role, and take on more responsibility to bring about financial stability, in its new avatar as the Financial Stability Board.   The job of the FSB would be to:

1.  Identify and examine the shortcomings and weaknesses of the financial system and to take corrective action to set right the same.
2. To initiate joint action of all the authorities responsible for maintaining financial stability by co-ordinating their activities, and to avoid any slip-ups that might lead to grave situations.
3. To keep track of market developments and advise regulatory authorities of the effects of such developments, so that they could initiate corrective action in time.
4. To come up with a code of best practices and to monitor its adherence by the players to ensure a level playing field, and to avoid complaints, and a free-for-all situation.
5. To work along with international standard setting bodies, towards a favorable outcome in regard to the stated priorities.   Further, to review the progress in achieving these goals.
6. To come up with guidelines for the setting up of and activities to be undertaken by supervisory colleges.   These are organizations, where regulators from different countries come together, to discuss how best to oversee individual institutions.
7. To identify systemically important cross-border firms, whose activities can have repercussions across borders, affecting the economic well-being of people across countries.   To monitor the activities of such firms from the regulatory and supervisory angle.
8. To manage any cross-border crisis, especially those arising out of the activities of the cross-border firms.   To provide necessary support to contingency planning aimed at dealing with such crises, as and when they occur.
9. To constantly monitor and assess the risk to the economic and financial system, on account of the various market developments, in association with the International Monetary Fund, and to report the same to the concerned authorities, like the G-20 Finance Ministers and Central Bank Governors.

The G-20 also agreed to open up the Financial Services Board to peer reviews to ensure compliance  of its mandate.   The key to financial stability being adherence to sound and internationally acceptable standards and practices.   Ensuring opennes and transparency in the operations of the Financial Services Board was also a committment made by the G-20, to achieve the goal of strengthening the financial system. 

                                                                                           To be concluded

 

The G-20 Response To The Global Economic Crisis-Part VI

This is the sixth and concluding article on the outcome of the Meeting of the G-20 Heads of State, in London, on the 2nd of April, to discuss the effects of the global economic crisis, and a suitable response to it.

Building an inclusive, green, and sustainable recovery:

The G-20 conceded an important point, that less developed countries have been lamenting about, for a long time-that the economic policies of the rich and the industrialized countries ignore the concerns of the poorer countries.

The G-20 recognized the fact that the current economic crisis has a more damaging effect on the poorest countries, that are practically defenceless, in dealing with the contagion of economic recession hitting them forcefully.

In order to meet these challenges, the G-20 resolved to do the following:

1. To fulfill their committments under various international conventions to fund activities related to promotion of trade, debt relief, etc.
2. To channel funds to the tune of USD 50.00 billion to low income, and developing countries, for the purpose of social protection, to increase trade, and safeguard development.   It is expected that by providing social protection under appropriate schemes, the problems of social unrest, violence, etc., can be contained.
3. To deploy necessary resources to the poorest countries to address the problems of food security and social crises.   Social security is a live and vital issue in several parts of the world that needs to be addressed, as it is a basic requirement.   Further, it is observed that several other efforts like educational initiatives, etc., recieve a setback on account of the food security issue.
4. To utilize the proceeds of the sale of the IMF gold, and surpluses in income to put together a concessional and flexible finance scheme of about USD 6.00 billion, to aid the poorest countries in their developmental efforts.   The IMF has been advised to place before the G-20, a viable and practical proposal in this regard.
5. To rejig programs of international aid and development, to make them more flexible and easier to access by the intended beneficiary countries.   The IMF and the World Bank have been advised to actively engage in this work.
6. To seek the active cooperation of the United Nations Organization, to establish a mechanism to monitor the effects of the economic crisis on the poorest of the countries, that are indeed more vulnerable to its impact.
7. The G-20 laid special emphasis on the human dimension of the current crisis, especially the impact on the poorest and most vulnerable sections of society.
8. Education and training, and job creation would be among the basic tasks to be undertaken to tackle the problems of economic deprivation.   In the long run, such investments would have a salutory effect in combating economic and social crises, especially in the poorer countries that are prone to such problems.   Involving multilateral and international agencies in this task would bring more competence and transparency to the job.
9. The G-20 committed itself to “building a resilient, sustainable, and green recovery”, through judicious utilization of funds meant for fiscal stimulus programs.
10. To move towards a cleaner and greener future, by promoting appropriate technologies that are innovative and environment-friendly.   To work in partnership with international institutions to establish sustainable economies.
11. The G-20 reaffirmed its committment to play a positive role in facing up to the problems of climate change, and its attendent consequences.

Finally, the G-20 committed itself to the realization of the various proposals and promises into tangible results.   It would pursue the various issues with sincerity and determination to take them to their logical conclusion.   A result-oriented approach would be undertaken to convert words into actions.

                                                                                                             Concluded

The G-20 Response To The Global Economic Crisis-Part V

This is the fifth in a series of articles on the outcome of the G-20 Meeting held in London, on the 2nd of April to deliberate on the effects of the global economic crisis, and the appropriate response to it.

Promoting Global Trade and Investments and Rejecting Protectionism:

The G-20 expressed its concern at the declining trend in international trade and investments, that is bound to have serious repercussions for the world at large.   This fall in international trade and investment, accompanied with increasing protectionist sentiment, including in the United States, where the “Buy American” slogan is gaining currency.   Coupled with this, the falling demand for goods and services is only making things worse.  

The G-20 resolved to give a filip to world trade and investment, to ensure that global growth is on track once again.   One important admission on part of the G-20 was the mistakes committed by them in the past, and the resolve not to repeat them.

In order to achieve the objective of defeating protectionism, and promoting world trade and investment, the G-20 resolved to take all the necessary steps like:

1. Refraining from putting up new barriers to trade in goods and services, and investment, to ensure free movement of the same.
2. Not to place any new restrictions on exports.
3. Not to go against the WTO recommended measures in relation to exports promotion.
4. Further, to rectify any such mistakes made in the past.
5. To streamline domestic economic policies in such a way as to reduce their negative impact on international trade and investments.   To avoid falling back on negative measures like protectionist policies which would only beget similar response from the other countries.
6. To ensure flow of capital, especially to developing countries, and rejecting measures that might stem the free flow of capital worldwide.   Ensuring free movement of capital between countries is a priority for the G-20 now.
7. To give the WTO a greater role to play in monitoring and reporting the adherence, or lack of it, of countries to their committment for a free and fair world trade and investment regime.  
8. To involve other international bodies concerned with international trade, investment, and development in this process.   To promote more transparency and accountability in dealing with economic issues including trade and investment.
9. To take all possible steps to stimulate and boost trade and investment, throughout the world ,which alone can keep the wheels of economic development running.
10. To provide new funding in the order of USD 250.00 billion to promote trade finance through agencies engaged in promoting export credit and investment, and also through the MDBs(Multilateral Development Banks).
11. To empower regulatory agencies in member countries to use their discretion in providing capital requirements for trade finance.
12. The Doha Development Round concerned with lowering trade barriers around the world to give a filip to global trade to be speeded up.   Presently the talks are stalled on account of differences between members on the issue of agriculture, industrial tarrifs, non tarrif barriers, services and trade remedies.
13. In general, the G-20 would do everything in its power to boost world trade and investment.   Through practical actions like allocation of funds.   Through proper monitoring and reporting of these activities, throughout the world.   And through prompt measures to rectify any mistakes made along the way.
14. The G-20 resolved to pay adequate attention to the above issues, not only through various economic fora, but also garner the necessary political will to push legislation in member countries that was consistent with the goals set forth at the 2nd April meeting.

Protectionist tendencies are already visible in various countries, including the United States, that threatens to dampen the political will necessary to stimulate growth and development.   Of special concern is the rising demand to keep exports going, but cutting down on imports-to ensure the survival of local industry.   This, in turn, has a domino effect, with other countries following suit, thereby making a mockery of the very concept of free trade.

The G-20 resolved to seriously address all these issues, and to come up with a credible and transparent response to it.

                                                                                              To be concluded

The G-20 Response To The Global Economic Crisis-Part IV

This is the fourth in a series of articles on the deliberations and decisions of the G-20 Heads of State Summit Meeting at London, on the 2nd of April this year.

In this article, we examine the third step of the plan of action initiated by the G-20 to contain the current economic crisis.

Strengthening International Financial Institutions:

The thrust of the action plan of the G-20 is to fortify the international financial institutions, especially the International Monetary Fund, to enable them to play a positive role in supporting emerging economies to keep up with their growth rates, and not be weighed down by the burden of the current economic crisis.

The most important aspect of supporting the emerging economies, is to keep the flow of foreign capital flowing into them.   This would help them in the process of capital infusion in their banking sector.   It would also  help them invest more funds in infrastructure that would, in turn, contribute to capacity building.   It would  provide funds for trade finance that would boost cross-border trade.   Also to provide balance of payment support, so that a skewed BOP position does not disturb the fiscal and economic balance of the country.   Further to provide relief in the form of “debt rollover” and to help counter cyclical spending.   Last, but not the least, to contribute to social support.

In order to achieve the above goals, the G-20 has decided to fund the IMF in the order of USD 250.00 billion.   In future, this funding would be dovetailed into a “new arrangement to borrow”, with additional funding upto USD 500.00 billion.   If necessary, market borrowing would also be resorted to.

Apart from the IMF, Multilateral Development Banks (MBDs) wold also be used as a vehicle to channel financial support to needy countries, especially the poor ones, to the tune of at least USD 100.00 billion.

The G-20 places much store in the ability of the IMF to address the problems faced by countries in regard to their balance of payment financing needs.   In this connection, the new Flexible Credit Line (FCL) of the IMF is considered the right medium of financial assistance to countries with BOP problems.   Of particular concern is the withdrawal of external capital flows to the Banking and corporate sectors.

The G-20 agreed to infuse USD 250.00 billion into the world economy through the mechanism of the Special Drawing Rights (SDRs), with a view to increase global liquidity.   Further, ratification of the Fourth Amendment relating to the special one time allocation of SDRs would be expedited.

The G-20 committed itself to the overhauling and streamlining of the international financial institutions to enable them to operate in sync with the current global realities, and to respond to emerging challenges with necessary competence.   Increasing the credibility of these institutions, and giving more scope for the aspirations of the poorest countries are among the priorities of the G-20.

The above goals are sought to be achieved by the G-20 through the following measures.

1. To implement the package of IMF quota and voice reforms.
2. The IMF Governors to be given more powers  to provide strategic direction to the Fund, and increasing its accountability.
3. To put in place, a merit based selection process for senior level positions in International Financial Institutions.
4. To seek proposals from the IMF and the World Bank for various reforms to be undertaken to improve the functioning of the International Financial Institutions.

Apart from the above measures, the G-20 proposed to promote an inclusive system of development that worked on the principle of consensus on major issues relating to economic development.

The idea behind this is to ensure sustainable economic activity that encompasses the entire global community, in a federal sort of arrangement, that is fair and equitable to all.

                                                                                               To be concluded

 

 

 

The G-20 Response To The Global Economic Crisis-Part III

This is the third in a series of articles on the G-20 Summit Meeting held at London, on the 2nd of April, to address the global economic crisis, and to come up with suitable steps to combat it.

In this article we examine the second point of the plan of action adopted at the London Summit of the G-20 Heads of State.

Repairing the Financial System to Restore Lending:

1)  The G-20 acknowledged the fact that “major failures in the financial sector and in the financial regulation and supervision were fundamental causes of the crisis”.   Overhauling the financial system to restore public confidence in it is a priority of the G-20, that would be taken up with all earnestness.

Having projected the Western financial regulatory system as superior and a model for others, for decades, the G-20 took a U-turn to commit itself to build a more robust regulatory regime that was in sync with the rest of the world, and one that would contribute to an enduring global growth to take care of the interests of all concerned.

2)  The G-20 members committed themselves to strengthen their domestic financial regulatory systems.   And also to contribute to the creation of a global financial system that would uphold the highest international standards expected of it.   This is sought to be achieved through regular cooperation between countries on this issue.   Emphasis is placed on the supervisory and regulatory aspects to promote the concept of corporate governance that brings in its wake, more accountability and transparency. 

3)  A key concern of the G-20 meet was the area of risk management in a moral context, in that it sought to discourage excessive risk taking (as seen, for example, in the derivatives trade), and delved into the issue of businesses relying on inappropriately risky sources of financing.   The economic crisis has convinced the western powers that excessive risk may be related to excessive greed, and this potent combination has the potential of burning the markets down.

Other issues dealt with by the G-20  in this context were consumer protection with regulators and supervisors expected to protect consumers, and investors against unscrupulous practices.   They (the regulators and supervisors) are also expected to play an important part in enforcing market discipline;   to come up with ways to avoid the adverse impact of one country’s policies on the other;  to reduce the scope for regulatory arbitrage that can arise on account of inconsistencies between various systems.

In order to achieve the goal of strengthening the financial system, the G-20 agreed to set up a new Financial Stability Board (FSB),  by upgrading the present Financial Stability Forum.   The FSB, in partnership with the IMF, is expected to alert its members of probable macro economic and financial risks to their systems, and how to tackle them.  

The following is the brief given to the FSB by the G-20:

1. To overhaul the regulatory systems of the member countries to enable them to take care of the “macro-prudential risks”.
2. To micro manage regulation and supervision to include all the important financial institutions, instruments, markets, and even important hedge funds.
3. To uphold the FSF’s diktat on pay and compensation in the corporate world.   And to support sustainable compensations schemes as against the controversial ones that are in vogue on Wall Street, where Government funds for bail-out of Banks were utilized for payment of staff bonuses.
4. To strengthen the capital base of the Banks.
5. To initiate action against tax havens and such other non-cooperative jurisdictions, that do not subscribe to a globally consistent financial disciplinary regime.   The G-20 even declared that “the era of Banking secrecy is over!”   The G-20 even agreed to impose sanctions against non-cooperative jurisdictions.
6. To establish a single set of “high quality global accounting standards” that would align accounting practices in various parts of the world, and make it more amenable to consistent application and common end result.
7. To regulate the activities of the credit rating agencies, and to ensure their upgradation to meet the international code of good practices.   In particular, attention be paid to the prevention of conflicts of interest.

The Finance Ministers of the G-20 member states have been instructed to ensure implementation of the above decisions, in cooperation with the concerned agencies, and to take stock of the progress made in this regard in the next meeting of the Finance Ministers in Scotland in November of this year.

                                                                                                 To be concluded

The G-20 Response To The Global Economic Crisis-Part II

This is the second in a series of articles on the G20 meeting held at London, on the 2nd of April, to come up with a response to the current economic crisis gripping large parts of the world.

In this article, we examine the first point of action agreed upon, at the London Summit of the G-20:

Restoring Confidence, Growth and Jobs: 

1)  Expectedly, the G-20 Heads of State were concerned with loss of jobs and the resulting social tensions, etc., and committed themselves to an exceptional and sustained fiscal expansion to the tune of USD 5.00 trillion, that would result in a 4% raise in output.   Further, it would either save or create millions of jobs preventing the possibility, for the first time in decades, of large masses of people, especially young ones, looking for jobs, in the West.

Another notable feature of the G-20 committment was the movement towards a green recovery, that is, a recovery that was non-abrasive of the environment, and the use of appropriate technologies, etc.

2)  Deployment of the full complement of monetary policy instuments, especially at the macro level, was another feature of the G-20 plan of action.   Central Banks in most of the major economies of the world have drastically cut interest rates to boost demand and facilitate expansion.

3)  Putting the financial system, especially the Banking industry on its feet, and get it running, is among the major priorities of the G-20.   The twin objectives of this measure is to boost lending within the borders, and facilitating cross-border inflows of investment. 

The methodology to achieve this, is to pump in more liquidity in the market, increase the capital base of the Banks and other financial institutions, and set up a mechnism to absorb and nurse toxic assets accumulated by the Banks, under their various credit and investment portfolios.

4)  The G-20 agreed upon a fiscal and monetary stimulus package running into USD 5.00 trillion, the largest such program in several decades, often compared to the U.S. Marshal Plan.   International financial institutions like the International Monetary Fund, and the World Bank are expected to play an important role in implementing the stimulus package, and following up on it to ensure end results, in conformity with the G-20 intent.

The IMF has been given the responsibility of monitoring the effects of the G-20 decisions, and to assess the same, and also to advise the group suitably about what further actions were required to bring about the desired changes at the ground level.

5)  The G-20 has taken a long term view of the fiscal growth and price stability to promote and sustain the growth of the financial sector, and to restore global demand for goods and services.

The G-20 has a two-fold objective;  one, to contain and stamp out the recession fast engulfing the whole world;  and two, to ensure that such adverse developments do not catch the world by surprise in future.   The idea is to implement a series of steps to address both the short-term, as well as long-term problems and prospects of the global economy.

6)  In what is definitely good news for the poorer countries of the world, often at the receiving end of the policies and actions of their Western counterparts, the G-20 pledged to be more responsible and considerate of the concerns of the non G-20 countries.  

The G-20 further committed to maintaining currency rate stability and avoid “competitive devaluation”.   Promoting a sound international monetary system in the light of lessons learnt from the current crisis is another important decision taken by the G-20.

Apart from the above, the G-20 agreed to open up their economic and financial sectors for independent surveillance by the IMF, especially in relation to the impact of their policies on other countries.

                                                                                                     To be concluded

The G-20 Response To The Global Economic Crisis-Part I

This article is the first in a series of articles on the outcome of the Summit Meet of the G-20 Heads of States, held in London, on the 2nd of April, 2009.

Introduction:  The G-20, or the Group of Twenty, is a forum of Finance Ministers and Central Bank Governors of member countries, established in the year 1999, to bring together “systemically important industrialized and developing economies” to discuss key issues in the golbal economy.   It seeks to promote a frank and constructive discussion between the industrialized and emerging economies, on key issues related to the global economic stability.   The member countries of this group are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, the United Kingdom, and the United States of America.

Outcome of the 2nd April Meet:  In the wake of the economic downturn that has engulfed a good part of the world, especially the western part, the G-20 Heads of State met on the 2nd of April this year, to take stock of the situation, and to come up with a response to the debilitating effects of the recession underway.

The G-20 Heads of States put their heads together to come up with a joint action plan, that they believe, is the right answer to the problem of the present global economic crisis.   Though, at this point of time, it is not clear as to who would play what role in the action plan, and who would contribute how much to the global economic revival kitty. 

One of the most striking results to emerge from the meeting, was the recognition of  the need for joint and concerted efforts, on part of the entire global community, to fight the contagion of the economic crisis.   It reflects, in a way, the helplessness of the Western Governments, especially the United States, in fighting the global crisis on their own.

While the G-20 leaders have spoken of the need for inclusive growth, encompassing the poorest countries of the world, they have stuck to their pet theme of “open world economy based on market principles”, albeit, with effective regulation and strong global institutions. 

The G-20 leaders have emphasized on the point of shared growth and prosperity.   The need for spreading the goodies around!   The need for the developed world, the developing world, and the undeveloped world to grow and prosper together, which means removing the disparities in growth and development between different geographical areas of the world.   Also the prospects and problems of the future generations are sought to be addressed, to ensure fair and equitable growth and development.

In order to address the problems of the current global economic crisis, the G-20 pledged to take several steps to overcome the problems.   Among them are:

1)  To restore confidence in the world economy, as also in the individual national economies.   To ensure growth and to save and create jobs and to protect the livelihood of the people.

2)  To repair the financial system, including Banking, that has been knocked out of shape, and unable to effectively engage in the basic banking activity of lending.

3)  To strengthen the financial regulatory systems that have been largely discredited, for not performing their jobs well, and to restore public confidence in them.

4)  To fund and reform international financial institutions like the International Monetary Fund and the World Bank, such that they develop the capacity to perform their jobs more competently, and play a more effective role in preventing recurrence of the economic crisis, now being witnessed.

5)  To promote global trade and investment for a more equitable regime of growth and development, and to reject protectionism that can act as a barrier to trade and investment.

6)  To build a inclusive, green, and sustainable recovery.   This alludes to  a plan of recovery that encompasses all parts of the world, leaving no part neglected, and to promote technologies and systems that are non-abrasive to the environment.

By adhering to the above agenda for sustainable development,( which will be discussed in more detail future articles), the G-20 countries hope to come out of the current crisis in one piece, and to ensure that no such economic scares occur in future.

Commercial Paper

Introduction:  Every business needs money to run.   The nature of expenses incurred by the business, decides the type of financing required by it.   As an example, payroll expenditure, common to all businesses, is a recurring expenditure, required every fortnight, or monthly, to remunerate the workforce.   On the other hand, funds required to buy an office building for the business is required, once in probably several decades.   Whereas the former is a short term expenditure requiring short term financing, the latter is a long term one, requiring correspondingly long term financing.

There are various sources of financing available to a firm, depending on its needs, as also its eligibility to source such finance.   Banks and Financial Institutions are, of course, the major and most widely accessed source of funds.  

But there are situations, when a firm is either not in a position to access Bank funds on account of various constraints, or it is in such a strong position as to raise funds on more favorable terms by taking the unconventional route of issuing Commercial Paper.

Commercial Paper (CP):  Commercial Paper is a unsecured, short-term, debt instrument, in the form of a usance promisory note, issued at a discount to face value, to meet short term financing requirements.

Rules regarding the issue and conduct of the Commercial Paper business differ from country to country.   However, some of the common features of the CP is that it is unsecured.   It is a short-term debt instrument, not over one year in maturity.   It is issued at a discount on its face value, i.e., its maturity value is equal to its face value.   Higher the creditworthiness of the issuer, lower the discount allowed.  

It is meant to raise funds to meet the short term expenses of the firm, like those related to payroll, inventories and the like.   It is not meant to be invested in long term asset like land, buildings, plant and machinery etc.   However, some firms do use the funds from CP for long term requirements, which is called “bridge-financing”, as a stop gap arrangement to long term financing.

Who can issue:  From the definition of Commercial Paper, as given above, it may be inferred that only highly rated companies and financial institutions can issue CP, as it is unsecured.   The investors can only depend upon the creditworthiness of the issuer, and have no other support, like collaterals, to fall back on, in case of the issuer’s default.  

Normally, two types of firms may issue CP.   One, a firm that does not find the traditional financing methods convinient and or economical.   Second, a firm, that, by virtue of its financial standing, and rating, is able to command the most favorable terms for its borrowings.   Such firms, instead of approaching financiers, issue their own debt instruments, in the form of CP, as and when required.

However, it is also observed that firms, not enjoying the best ratings are also in the fray with this product (CP), with the help of a tie-up with their better rated peers.

Benefits of CP to the issuer: 

1)  In many countries, rules regarding the issue and conduct of the Commercial Paper business are quite liberal, and do not attract the normally comprehensive set of regulations, applicable to other debt instruments, like bonds.

2)  The cost of funds obtained through the CP route is generally less than that from the Banking sector.

3)  The issuers, being top rated, and with good standing, do not have to provide any collateral to the investors.

4)  The issuers have the freedom to fix the discount on the face value of the CP, depending on their creditworthiness.

5)  Issuers can avoid brokers and dealers, by going directly to the investors, and saving on administrative and other costs.

6)  Issuers have the option to “roll over” their debt, i.e. issue fresh CP to pay off the maturing one.

Summary:  To sum up, Commercial Paper is a niche financing option available to certain types of firms, with apparently more pluses than minuses for the issuers.

Marine Insurance in International Trade-Part VI

In this concluding article on Marine Insurance, we take a look at the remaining Institute Cargo Clauses, that deal with the extent of insurance coverage offered.

Institute Cargo Clauses B:  Compared to the clauses A, clauses B is more restrictive in its coverage.   As a matter of fact, it occupies the middle ground between clauses A and C, being the least and the most restrictive, respectively.

Clauses B offers coverage for:

1)  Fire and Explosion:  Loss or damage suffered by the cargo on account of fire and explosions  are insurable and eligible for claims under this clause.

2)  Sinking etc:  Loss or damage to the cargo resulting from the sinking, grounding, capsizing, etc., of the vessel is covered under this clause.

3)  Collision, etc:  Collision of the ship with another, or other objects, other than water, resultig in loss or damage to the cargo is covered under clauses B policy.

4)  Discharge Loss: The risk of cargo being discharged at a port of distress is eligible for coverage.

5)  Other losses:  Loss or damage to the cargo in transit abroad any land conveyance or transport is eligible to be covered for the risks associated therewith.

6)  Washing Overboard:  Loss or damage on account of cargo getting washed overboard is eligible for coverage.

7)  Water Seepage:  Entry of water into the vessel, etc., thereby causing loss or damage to the cargo, is covered under the clauses B.

8)  Loading/Unloading:  Loss or damage caused in the process of loading and unloading of the cargo is covered under this clauses B.

9)  General Average Sacrifice:  Loss or damage suffered by the insured on account of application of the rule of General Average Sacrifice, in relation to the value of the cargo saved, is also covered under the clauses B policy.

10)  Jettison:  The loss or damage suffered by the assured on account of jettison of his cargo can be covered under the clauses B policy.

In addition to the above coverage, the B clauses policy also affords additional coverage for loss or damage that can be “reasonably attributable to”: Earthquake, Volcanic eruption or lightening.  

Exclusions:  The Institute Cargo Clauses B policies do not include coverage for the loss or damage accruing to the assured on account of theft, shortage, or non delivery of the goods.

Even though the clauses B policies provide greater coverage compared to the clauses C policies, yet it is useful only for certain types of cargo, on account of its restrictions.

Institute Cargo Clauses C:  Clauses C policies offer the least coverage on account of the highly restrictive scope of these policies.

Clauses C policies offer coverage for the following risks, but with the rider of “reasonably attributable to”.  

1) Fire and Explosion.

2)  Sinking of ship etc.

3)  Collision of ship etc.

4)  Cargo discharged.

5)  Transit Losses.

6)  General Average Sacrifice.

7)  Jettison.

  Exclusions:  Clauses C policies do not offer coverage to losses or damages suffered on account of Earthquakes, volcanic eruptions or lightening.   Also exluded are risks like cargo being washed overboard, entry of sea water into the ship and resultant loss or damage etc.

Conclusion:  Insurance obtained under any of the above three Institute Cargo Clauses is subject to respective exclusions.   In spite of that, it is necessary to obtain insurance for the cargo, in view of the uncertainties and dangers posed at various stages of the journey of the cargo.

Further, the enormous protection enjoyed by the carriers under various national and international rules and conventions, gives them ample opportunity to bail themselves out of tough situations, leaving the shippers high and dry.   Even where the carriers are liable to compensate the shippers, such liability is limited in scope and quantum.   It is for these reasons that it is important to obtain insurance and play it safe.

Marine Insurance in International Trade-Part V

In this article, we shall study what is the Institute Cargo Clauses, and what it covers.

Institute Cargo Clauses:  Historically, London has been the center for marine insurance business, and many of the customs and practices, as well as guidelines relating to this trade have originated from here.

Of  such guidelines, one of the most important one  relates to the extent of risk coverage offered by various marine insurance policies, as laid down in the Institute Cargo Clauses, A, B, and C.   These guidelines have been accepted by several marine insurance organizations across the globe.   The risks covered under these clauses, and the exclusions thereof, are discussed below.

Institute Cargo Clauses-A:  This clause provides the maximum coverage against the risk of loss or damage to the insured cargo.   Because of its very wide scope and application, it is also called “all risks” coverage.

The coverage offered by this type of policy includes loss or damage by fire and explosions, that are not so rare on ships.   It covers the risk of the ship being sunk, grounded, stranded, etc.   Also covered here is the risk of collision between two vessels, the discharge of cargo at a port of distress etc.   That apart, it also covers loss or damage on account of jettisoning of the cargo.   As can be seen, the coverage offered under clause A is quite comprehensive.

Exclusions:  The following are the exlusions applicable to Clause A.

1)  Willful Misconduct:  Willful misconduct of the assured in relation to the insured cargo may nullify the policy, thereby releasing the insurer from his liability to the insured.   If the assured acts in a manner that has the effect of causing loss or damage to his own property, then he loses the protection of the insurance coverage for that cargo.

2)  Ordinary Losses:  Often, cargo, depending on its nature and constitution, undergoes changes in its quantity and or quality, thereby reducing its value.  Similarly, leakage is inherent in certain types of cargo like oil.   Further, certain cargo suffers wear and tear in the course of voyage, without any deliberate action towards this end.   Such losses are excluded from the scope of this clause.

3)  Improper Packing and Loading:  Many a time, shippers do not ensure proper packing and loading of the insured goods, resulting in loss or damage, in the course of the voyage.   Such losses care not covered under this clause.

4)  Inherent Weaknesses:   Certain types of cargo suffer certain inherent weaknesses, that may render them vulnerable to loss or damage.  Insurers would not be responsible for such losses.

5)  Delays:  The insurer is not responsible for loss or damage that can be attributable to delays, even though such delays may be a result of risks that are insured.   For example, a ship may stall on account of mechanical problems, resulting in the fresh fruit cargo on board going bad.

6)  Insolvency, etc., of Carrier:  Loss or damage to the insured cargo, on board a vessel, whose owner is insolvent, bankrupt, or otherwise in financial default, cannot make the insuere liable to settle the claim of the shipper in respect of such cargo.   Financial distress of the carrier affecting the well-being of the cargo, does not make the insurer liable to compensate.

7)  Deliberate Action:  Deliberate actions to cause loss or damage to the insured cargo relieves the insurer of his liability toward the insured.   Deliberate destruction or damage of the cargo is a criminal offence, and cannot be allowed to result in a pecuniary gain to the insured.

8)  War, Civil Disturbance, etc.:  Outbreak of war, or civil disturbances resulting in loss or damage to the insured cargo will not be underwritten by the insurer.   However, some insurers do allow coverage for cargo even under such circumstances, on payment of additional premium.   The current unrest in Thailand, is a case in point.

9)  Un-Seaworthy Vessels etc:  Where the deployment of vessels that are not seaworthy, etc., results in loss or damage to the insured, the insurer would not be liable under the policy to compensate for any loss or damage to the cargo.

                                                                                   To be concluded

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