INSURANCE AND CONTAINERIZED SHIPPING–SOME HISTORY

Marc Levinson, The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger.  Princeton University Press, 2006.  $24.95.

Brian J. Cudahy, Box Boats: How Container Ships Changed the World.  Fordham University Press, 2006.  $29.95.

It is not often in America that two books of non-fiction telling roughly the same story are published within weeks of each other by university presses.  It is even rarer that they are both quite good.  These two books are one of those rarities.

Their basic plot-line concerns the huge, radical change which has taken over maritime shipping since the 1950s: the shipping of solid cargo has moved from break-bulk ships to containerized shipping.  Roughly speaking, containerized shipping is the putting of cargo in containers at factories, or some location of that sort, and then shipping in mass.  The “boxes” resemble, and often constitute, the trailers of semi-trucks, or train cars.  Huge cargos are then shipped around the world without having to be individually—package-by-package, bag-by-bag—carried onto ships, arranged, and then transported.

This new method of shipping cargo has simplified shipping, saved enormous amounts of time, reduced pilferage and theft, speeded up shipping, and formed a network (as it were) with sophisticated computerization.  It both kept tract of locations and planned trips.  Not only has shipping speeded up and cheapened, but it has transformed ports; their organization has changed, loading and unloading no longer particularly involves longshoremen but utilizes ship and/or land based cranes instead.  Even the sizes and organizations of ships has changed.  That is not all.  According to Levinson, containerized shipping has made “just-in-time” manufacturing rationally possible on a truly international basis.

In addition, government regulation has changed substantially around the world: sometimes it has disappeared; sometimes it has been transformed; sometimes it has adopted radically different approaches.  Indeed, a very different thinking has swept both government and business.  This includes administration, law, freight costs, accounting, and insurance.  It even includes business management technique.

The history of the growth and evolution of shipping in “big boxes” and the creation of “box boats” is told in somewhat different ways in both of these books.  Both of the books focus on the life and achievements of Malco[l]m McLean.  He went from running a service station to owning and running a huge commercial trucking outfit based in North Carolina.  McLean successfully conceived and brought into being the idea of containerized shipping, although he was not actually the first one to think of it or even the first to try it.  However, he was the first one to aggressively pursue it and, as it were, make it happen.  Apparently, McLean was something of a business genius in a variety of ways.  He was gifted in business mathematics, colleague selection and cooperation, business finance, and in the gutsy pursuit of intuitive insights.

This process of containerization involved adapting existing ships, designing new ones, convincing governmental agencies of the need for changes, spending and borrowing enormous sums of money, the purchase of corporate subsidiaries, the consolidation of many companies, the transformation of old companies, and the creation of new ones.  Containerized shipping companies in turn caused major transformations in geographical, political, and economic—not to mention business—organization.

One of the most interesting parts of this story is the role the Vietnam War played in the development and evolution of box-based shipping.  The United States needed supplies delivered to Vietnam quickly and in an orderly way.  Beginning in the winter of 1965, with the rapid buildup of U.S. military forces in Vietnam, the government “created what may have been the greatest logistical mess in the history of the U.S. armed forces.  The resolution of that mess represented containerized’s coming of age.”  This quote is from Levinson, but both books discuss these events.

McLean bid and got the job.  His containerized ships went from U.S. ports to Cam Ranh Bay; they turned around and went to other ports, picking up new containers, returned to the U.S., then went back to Vietnam.

There are wonderful stories in this area of discussion.  They include how cranes got from the Philippines to Cam Ranh Bay; how cargo pilferage (e.g., of whiskey and brandy) was reduced; and how all of this contributed to the rise of McLean’s principal company, Sea-Land.  As Cudahy remarks at one point, “Sea-Land was able to transport ten percent of Vietnam-bound cargo aboard two percent of the hulls used in such service.”  What McLean and his colleagues accomplished in this unhappy chapter in American history “was yet another dramatic demonstration of the efficiency and the effectiveness of containerized transport[.]” according to Cudahy.  The theme in Levinson’s book is exactly the same: “McLean’s persistence in pushing containerization was vital to the U.S. war effort in Vietnam.  Without it, America’s ability to prosecute a large-scale war half way around the world would have been severely limited.”  He continues: “Containerization enabled the United States to sustain a well-fed and well-equipped force through years of combat in places that would otherwise have been beyond the reach of U.S. military might.”

Both books discuss the evolution of containerized shipping.  Both books discuss its probable near future.  There is very little disagreement between them, if any.  Both discuss, in some detail, the changes in the Port of New York and the rise of New Jersey Port locations.  The last chapter in Cudahy’s book, however, is a more typical last chapter.  Interestingly, it dwells upon the growth of southern ports in the United States, such as Savannah, Norfolk, and Charleston.  It also points out that most of the other countries that are leading participants in the international “box boat” trade are Asian countries, including China, Japan, Hong Kong, South Korea, and Taiwan—the five leaders, aside from the United States.

Both of the authors discuss the role of Wal-Mart in all this.  Here is what Cudahy says:

Wal-Mart, the largest single transpacific shipper of containerized cargo, routes considerable traffic through the port of Savannah to its inland distribution centers, while such other retail giants as Home Depo and Best Buy also make heavy use of southern ports.  (Wal-Mart is so dominant a presence in the container-ship industry that the firm is also rumored to be on the verge of establishing its own container-ship line!)

The last sentence of this quote illustrates Cudahy’s inclination for humor.  Levinson also discusses Wal-Mart, and his remarks too occur in the last chapter: “In the United States, inventories began falling in the mid-1980s, as the concepts of just-in-time manufacturing took root.  Manufacturers such as Dell and retailers such as Wal-Mart Stores have taken the concept to extremes, designing their entire business strategy around moving goods from factory floor to consumer with minimum time in between.  In 2004, non farm inventories in the United States were about $1 trillion lower than they would have been had they stayed at the levels of the 1980s, relative to sales.  Assume that the money needed to finance those inventories would have bordered at 8 or 9 percent, and inventory reductions are saving U.S. business $80-$90 billion per year.”

Interestingly, these quotes illustrate important differences between the two books.

Levinson is an economist, a business journalist, and an economic journalist.  He has been an editor at the Economist; he has been a writer for Newsweek; and he has been an editorial director of the Journal of Commerce.  In addition, he has written about political economy for Foreign Affairs and he has written reviews for the Harvard Business Review.  He writes extremely well.

Levinson has published several books in the past.  One of them, Guide to Financial Markets is in its fourth edition.  Another one, The Economist’s Guide to Financial Markets, is in its second edition.  His book, After Reagan, first published in 1988, is still in print and still semi-popular.  It examines the revival of “activist economics” and it was preceded by a lengthy article in Foreign Affairs.  The ideas in Levinson’s post-Reagan book are also in his Beyond Free Markets: The Revival of Activist Economics, first published in 1990.

In contrast, Cudahy is a historian, of sorts.  He has written books on maritime tales, New York ferry boats, New York subways, and cruise ships.  Often, he writes with more gusto, and humor, than Levinson does.

As you might expect, the differing orientation of the authors suggests how the books will differ.  Levinson’s book is very much about economics.  His historical chapters are mainly about economic history, and its interaction with politics.  His chapter on changes in port unions, such as the International Longshoremen’s Association and the International Longshoremen’s and Warehouseman’s Union are particularly interesting.

In contrast, Cudahy discusses many of the same economic trends and changes, more broadly and briefly.  Cudahy spends much more time discussing what types of ships were initially involved in “box boating,” what types of ships came to be used, a little bit about how they were designed, and so forth.  It is perfectly clear that boats—as beings—are much more significant to Cudahy than they are to Levinson.  The former refers, several times, for example, to “the magnificent SL-7.”  Levinson mentions it too, of course, but he never conveys Cudahy’s senses of attachment, aesthetic appreciation, and love.  His history of World War II cargo ships is also much briefer.

Levinson’s book is somewhat better written than Cudahy’s.  It reads in a more stimulating way—not that Cudahy’s is poor.  Levinson gets a prose grade of A, while Cudahy gets a B+.

Levinson also puts a little more attention to the interaction between law and shipping than Cudahy does.  Although each has a little to say about it, neither will educate the lawyer interested in how containerized shipping has changed the law of the sea, or any other area of the law.  Cudahy’s book contains a significant number of photographs in two groups, while Levinson’s contains none.  Cudahy even has a photograph of McLean.  Levinson’s bibliography and footnotes are more detailed than Cudahy’s, from a variety of points of view.  In contrast, Cudahy had access to the McLean Foundation and its archives, whereas Levinson apparently did not.  On the other hand, Levinson found and interviewed lots of players.

There are also trivial differences.  For Levinson, the word is “breakbulk,” while for Cudahy, it is “break-bulk.”  There is more discussion of administrative law in the Levinson book, but—even though he is an economist, there are no charts and no graphs in his book, whereas there are lots of them in that of Cudahy, the maritime historian.  One of them is nearly 30 pages long; it is entitled “Sea-Land Vessel Roster, 1956-1999,” and it has 85 explanatory notes.  That chart is followed by a second one entitled “Sea-Land Liner Services, 1999.”  

These specifics illustrate fundamental differences between the two books:  Cudahy is far more interested in the details of maritime history than Levinson is.  He is not, however, utterly uninterested in the economic impact of containerized shipping, he just tells that part of the story in less detail.

Interestingly, the two authors characterize their topic in roughly the same way, although they tell the stories differently.  Levinson’s main title speaks only of containerization shipping, whereas Cudahy mentions both it and boats.  The books likewise reflect their titles.  The subtitle in Levinson’s book emphasizes both container shipping and economics.  The subtitle in Cudahy’s book has nothing explicit about economics, although it too emphasizes change.  Interestingly, the Levinson book emphasized the connection between computerization and containerized shipping more than the Cudahy book does, although Cudahy is not ignorant with respect to this interconnection.

There are at least four topics that neither author spends very much time on, gets very far into, or traces, although both of them mention it here and there—each only a little.  These are changes in cargo insurance, containerization and politico-legal controversies, such as the rise of terrorism, other legal controversies, as well as containerization and the Carriage of Goods by Sea Act.  Occasionally, according to Cudahy’s very interesting last chapter, there were accidents involving containers, even though “container ships have maintained excellent records in the way of safety at sea.”  Nevertheless, “[h]eavy seas have been known to dislodge containers from their above-deck securement devices, and oceangoing yachts have experienced difficulty, from time to time, when such containers fail to sink.”  According to Cudahy, so did a major cruise ship, the Norwegian Dream in route to Dover, when it had to pick up out of the English Channel boxes containing cylinders of cyanide.  Fortunately, nobody was hurt.

The price of insurance has dropped dramatically as a result of containerization.  “Electronic exports had been on the rise since the early 1960s, but the lower freight weights, inventory costs, and insurance losses from container shipping helped turn Japanese products into everyday items in the United States,” according to Levinson.  Also, according to Levinson, “[i]nsurance claims for Europe-Australia service was running 85 percent lower than in the days of breakbulk freight.”

One would think that a transformational change in maritime cargo insurance would be important enough to discuss in books of this nature.  Alas, it did not happen.

Here is a little bit worth knowing.  The textbook literature on containerization and insurance is not deep—at least not yet.  The principal textbook on ocean marine insurance is by the Insurance Institute of America, published in 1988, and contains a three page discussion.  In contrast, its chapter on underwriting cargo insurance contains no discussion of containerization at all, including no discussion of the relationship between containerization and pricing.  Here is the most interesting thing said in the entire textbook on the subject:

“There is no question that containers have solved many problems for the shipper, but by the same token they have created some relatively new ones.  Containerization does not eliminate the need for adequate packing ….  The elimination of bothersome small claims for losses[, e.g. such as from pilferage, rough handling, and non delivery of individual packages] has been a boon to the underwriter.  This benefit has been offset by the increase in total loss of containers overboard due to heavy weather, hijacking, and sever losses due to condensation.  Maintenance of the containers also presents a problem to the shippers.”

In fact, insured losses from shipping by cargo containerization, unaggregated, are much less than they were before containerization.  This is true even though containers probably account for the “carriage of close to 95% of international shipments, excluding bulk and other specialized cargos, occasionally containers are lost off ships—a rare event.  In one case, half of a cargo ship carrying containerized cargo was lost, while the other half was not.

At first, insurance for containers was included as part of hull insurance.  Those days “are definitely over.”  Containers are now owned by shippers, non-vessel operating common carriers, groups, and competitors.  “Most of the world’s insurance markets regard container insurance as an independent line of business.  In view of the mobility intrinsic to containers, it is usually classified as a type of mean insurance.  Insurance for containers covers three areas: physical losses, confiscation, and liability.  The first two of these are relatively standard.  The third one, however, liability coverage, is often tailor-made.  There are a number of problems:

“Box” insurance is to be distinguished from hull insurance.  It is also to be distinguished from cargo insurance.  Any one-half of the ocean marine premiums, or $1 billion, comes from cargo insurance, sometimes referred to as transportation insurance.  Cargo insurance is inexpensive; it constitutes a very small portion of the cost of transporting goods internationally; say[,] one-tenth of one percent.  This low cost protection is in part possible because of the ability of cargo insurers to recover from carriers or others who are responsible for cargo damage.  Thereupon, Mr. Kramer discusses the Sky Reefer case.  Mr. Kramer comes near to closing by saying, “insurance of international shipments is becoming increasingly important to world economies.  Ten years ago, [1988,] international trade accounted for only 10 percent of the world’s domestic product.  Today, [i.e. 1988,] it constitutes 20 percent or about $30 trillion.”  Interestingly, one of the socio-economic, business trends which also went along with containerization was computerization.

A great deal of cargo insurance is now available online.  Cargo insurance started in the Seventeenth Century and didn’t change much for several hundred years until now.  Chubb first made cargo insurance certificates online in 1999.  The trend has grown enormously.  Purchase-ability is now possible online through some brokers.  Fortunately for shippers, the number of underwriters available is substantially large.

For those of us who love the contexts of the law—its history, commerce, economics, and surprising events—these are two excellent books.  If you like pictures, buy Cudahy.  If you like complicated footnotes and complex bibliographies, buy Levinson.  If one of your children has to write a term paper on recent economic and business developments, get them both, because they recount different events and themes in the evolution of McLean’s various companies.  If you want to study the impact of containerized shipping on the law of the sea, you may start with these books as contextual background, but be ready to go get other sources.

Following the disaster in the Suez Canal in March-April 2021, about which I posted a blog, there was press coverage for a substantial increase in containerized accidents in the recent past. See Ann Koh, “Shipping Containers Fall Overboard at Fastest Rate in Seven Years.” CLAIMS JOURNAL (April 27, 2021).  My blog, “Suez Ship Disaster of 2021 & Insurance,” was posted on April 6, 2021, and then supplemented several times thereafter