Question

What does it mean when a company tries to mitigate their transportation risk? How can they accomplish this? What is the role of insurance in transportation risk management?

Answer 1

Transportation involves many risks like accidental damages, theft, delays and many other external threats. These risks are multiplied due to the fact that majority of transportation of goods is through third party logistics. Since during the transit goods remains in possession of neither the buyer nor the seller, accountability of loss / damage / delays is difficult. Hence companies put measures to either prevent these risks or hedge the risks so that any loss arising can be covered. This is what mitigating transportation risk means.

Following are the transportation risk mitigation measures that companies take:

- Clearly assigning and articulating responsibility at each stage

-design KPIs to incentivize cargo loss avoidance and put preventive measures like driver certification, robust product packaging, security procedures

- Use technology such as fleet management and tracking system, RFID and Acousto-Magnetic tags

- Use economic means such as Railways, Inland Waterways, Pipelines

-Consider transportation insurance

Role of insurance in transportation risk management: Insurance is a way to hedge some of the risks involved in transportation such as damages and delays or misplacement. Insurance companies charge a premium during the onset of the journey and incase some risk events occur, they compensate the financial loss incurred by the insurer.Hence insurance plays a huge role in reducing the risk to a great extent.