While the past year of pandemic laid waste to much of the economy, ecommerce has been one of the bright spots. Homebound shoppers have been buying goods online in record numbers, with sales at 50 U.S.-based marketplaces growing by 40 percent in 2020, according to an analysis by Digital Commerce 360.
But as ecommerce spending increases, the attendant shipping problems are also on the rise, raising the question for sellers if it’s worth it to safeguard their deliveries with an insurance policy.
Sixty-three percent of small online sellers surveyed in March said that they had seen an increase in lost or damaged packages over the last year, according to UPS Capital, the financial services arm of the shipping giant.
Nearly half – 48 percent – of those same SMBs (small and medium sized businesses) reported that they had seen an increase in “porch piracy,” theft of a package after it had been delivered.
Customers take notice
It’s no surprise that customers aren’t happy when their package arrives damaged or doesn’t arrive at all. In the UPS Capital survey, 81 percent of SMBs said that they are adversely impacted by lost or damaged shipments, citing financial hits from replacing or cancelled orders and the reputational damage that comes from dissatisfied customers.
UPS Capital has been aggressively promoting its insurance service to SMBs, arguing that the shipping experience is a critical opportunity for small sellers to differentiate themselves from their competitors, and to close the gap with large sellers that consumers tend to rate more highly on the shipping experience. Canvassing online shoppers, UPS Capital found that 64 percent gave Amazon a four- or five-star rating for the shipping experience. Fifty-three percent gave those high ratings to Walmart, but just 29 percent said the same about SMBs.
“If anything happens on the fulfillment side, there’s an easy, simple way for the SMB to take care of the situation,” UPS Capital President Mark Robinson said of his firm’s insurance offering.
Shipping insurance, he argues, allows sellers to “sleep good at night because you don’t have to worry about something popping out and hitting you financially.”
Is there a rule of thumb that determines when you should buy shipping insurance?
No. Experts say that it’s a calculation that each seller must make on their own, generally drawing on a combination of considerations including their risk tolerance and the type of items they’re selling, which tends to be more of a determining factor than the value of the item itself.
“Most SMBs today who use insurance don’t do it as a dollar amount,” said Kiel Harkness, head of global marketing and business intelligence at UPS Capital. “The leading trigger,” Harkness said, “is actually the product type.”
In the UPS Capital survey of SMBs, 31.6 percent of respondents said that they will purchase insurance when sending certain product types, compared to just 10.5 percent who say that they will purchase insurance based on the cost of the shipment. But SMBs weigh other factors as well, including when shipping with certain carriers or to certain destinations, and whether they are shipping to an important or new customer.
“I think that it’s entirely subjective,” said Matt Morelli, director of business development at U-PIC Insurance Services.
“If I were a shipper, I would assess my appetite for dealing with risk based on the commodity(s) I ship, their values, how prone they are to being lost, stolen, or damaged while in transit, how much time I have to attempt to determine what is a real and valid ‘claim’ and what is not, etc.,” he said. “There is no one-size-fits-all ‘reason’ for why people insure. Every individual has their own motivation.”
Insure through the carrier or a third party?
Shipping carriers are required to offer liability protection for the packages they transport, but numerous third-party insurance providers are available to sellers, as well.
Those firms contend that they’re more user-friendly and generally more responsive to claims than the carriers.
“Our phones tend to ring the most when a shipper has a negative experience with a carrier’s claims process, or their rates,” Morelli said.
Robinson acknowledges that carrier liability protections aren’t going to be right for every shipper, and, indeed, the insurance that UPS Capital offers is distinct from UPS’ carrier-provided liability protection, and is more of a direct competitor with the third-party services like U-PIC and Shipsurance.
Carrier liability protection from the likes of FedEx and UPS might make sense for low-dollar shipments, given that each offer declared value policies up to $100, though private insurance service providers pride themselves on a more streamlined claims process and, according to Robinson, many offer reimbursement up to the invoice value while carriers tend to pay only for replacement cost.
“The truth is, when working with a shipping insurance company such as Shipsurance, our goal is to pay valid claims rapidly,” said Shipsurance Vice President Ariel Shmorak. “The cost is typically lower and the claims process is fast and paperless.”
What are shippers’ biggest misconceptions about shipping insurance?
“That it is expensive and useless!” said Shmorak, who believes that many sellers still think of the declared-value insurance provided by carriers as the main option, when the marketplace is now full of providers that boasting of a better claims process and responsive customer service – including options available through the carriers themselves.
“There is an awareness gap,” UPS Capital’s Harkness said of SMBs. “A significant majority really aren’t aware of the benefits.”
But many sellers also tend to think of insurance more from the perspective of cost than the benefits it can provide, and “in business any new expense is an unwelcome one,” according to Morelli.
He explains, “It’s not until they begin to realize the customer service impact that shipping issues have on their business that they start to look at insurance as a solution. Shipping insurance makes the seller whole, which empowers customer service teams to rapidly fix any issues caused by shipping. This is such a powerful tool, and I don’t think a lot of businesses take into consideration the positive impact of a customer service representative who has the ability to say ‘Sir, please accept my apology for the shipping problem, I am going to send you a replacement today.’
“Consumers in 2021 expect perfection, and when they do not receive perfection in exchange for their money … they expect rapid resolution. Insurance gives businesses the ability to rapidly resolve these customer service issues, to both make and keep customers happy. A happy customer is a return customer.”
My customer says an item arrived damaged, but won’t provide any information to me to file a claim. What do I do?
“We see this all of the time,” Shmorak said. “We work with the sellers and offer alternative methods for verifying losses.”
Shipsurance will discuss the matter with the shipper and try to see what options are available. Sometimes they are able to rely on emails from the buyer or communications sent over a platform. In other cases, they might be able to process the claim based on a copy of a chargeback through PayPal or a credit card.
“We try to get an indication of what happened and use the details to paint the complete picture,” Shmorak said.
What rule of thumb do you use to determine whether to use shipping insurance? Leave a comment below, and check out what readers had to say on the AuctionBytes Blog from May 10th.
Note: edited for clarity on 6/15/2021.