Insurance incentive to shippers by a container port: Issues of risk management in supply chain finance

Abstract

Letter of credit (LC) plays an important role in supporting financial activities and facilitating transactions in supply chain finance. An LC provides an option for advance payment by shippers (buyers) to exporters (suppliers). The payment is made by financial companies. For risk management, financial companies usually require shippers to insure their goods. The selection of shipping port designations and transshipment ports is a commonly listed LC clause. Thus, a container port could consider providing shipping insurance subsidies along with the quality port service to attract shippers. Recently, facility sharing (FS) has been adopted by the Hong Kong Port (HKP) to reduce operating costs at terminals. We study the shipping insurance subsidies provided to shipper by the HKP utilising the benefits of FS. Our research is based on real-life data. We propose an insurance incentive strategy (IIS) as a profit maximisation problem and examine the relationship between the optimal capacity for transshipment, insurance rate, FS cost savings, and benefits of the IIS. Our results demonstrate that the IIS could lead to a win–win situation for shippers and container ports. We observed that the IIS could reduce the risk in supply chain finance and strengthen the partnership between port operators, liners, shippers, financial companies, and insurance companies. The total shipping insurance cost can be reduced with improved credibility and economies of scale. We also discuss different scenarios that are particularly desirable for the adoption of IIS.

Appendix

Profit analysis of the three scenarios (S1, S2, and S3) in Sect. 3.3.

With FS, there could be three scenarios: Scenario 1 (S1) the actual demand is smaller than the shared capacity ($\theta < \varphi_{1}^{*}$), Scenario 2 (S2) with the actual demand is larger than the shared capacity ($\theta > \varphi_{2}^{*}$), and Scenario 3 with the actual demand is equal to the shared capacity ($\theta = \varphi_{3}^{*}$). We assume ($\varphi_{1}^{*} > \varphi_{3}^{*} > \varphi_{2}^{*}$). Accordingly, by analyzing their corresponding profits ($\pi^{S1}$, $\pi^{S2} ,$ and $\pi^{S3}$), we know that if $c^{U} \le p^{\beta } - c^{\beta }$, ($\pi^{S3} \ge \pi^{S1}$) and ($\pi^{S3} \ge \pi^{S2}$) hold all the time. Therefore, S3 as the optimal scenario, and we use S3 for the further analysis.

Assumption 1

The analysis is based on the optimal scenario (S3), where the actual demand is equal to the shared capacity ($\theta = \varphi_{3}^{*}$.).

In S3, $p^{\beta }$. be the price that a ship liner pays for transshipment with FS, in which ($p^{\beta } \le p^{\alpha }$).

In S1, if the actual demand is smaller than the spared capacity for the alliance, all transshipments can be handled by the FSS. As a result, there is unused shared capacity. Thus, the profit of S1 ($\pi^{S1}$.) is:

$$\pi^{S1} = \theta \left( {p^{\beta } - c^{\beta } } \right) - \left( {\varphi_{1}^{*} - \theta } \right)c^{I}$$

(28)

While in S2, since the demand is larger than the spared capacity, extra workload is required to handle the over-capacity demand. Thus, the profit of S2 ($\pi^{S2}$.) is:

$$\pi^{S2} = \varphi_{2}^{*} \left( {p^{\beta } - c^{\beta } } \right) - \left( {\theta - \varphi_{2}^{*} } \right)c^{U}$$

(29)

Lastly, in S3, the demand is equal to the sred capacity. The profit of S3 ($\pi^{S3}$.) is:

$$\pi^{S3} = \varphi_{3}^{*} \left( {p^{\beta } - c^{\beta } } \right)$$

(30)

Proof

$\begin{aligned} \pi^{S3} - \pi^{S2} & = \varphi_{3}^{*} \left( {p^{\beta } - c^{\beta } } \right) - \varphi_{2}^{*} \left( {p^{\beta } - c^{\beta } } \right) + \left( {\theta - \varphi_{2}^{*} } \right)\left( {c^{U} } \right) \\ & = \theta \left( {p^{\beta } - c^{\beta } } \right) - \varphi_{2}^{*} \left( {p^{\beta } - c^{\beta } } \right) + \left( {\theta - \varphi_{2}^{*} } \right)\left( {c^{U} } \right) \\ & = \theta \left( {p^{\beta } - c^{\beta } + c^{U} } \right) - \varphi_{2}^{*} \left( {p^{\beta } - c^{\beta } + c^{U} } \right) \\ \end{aligned}$

Since $\theta > \varphi_{2}^{*}$,

$p^{\beta } - c^{\beta } + c^{U} < 0$, $\pi^{S3} - \pi^{S2}$ becomes negative implying that $\pi^{S3}$ is less profitable than $\pi^{S2}$.