Faculty of Commerce.

Department of
Insurance and Actuarial
Sciences.

NAME SURNAME STUDENT ID QUESTION

Ayanda .S Mabutho N0162046Y Discuss the

underwriting
Christine .V Kakomwe N0164522X
consideration
Chrispen Shumba N0162802Q in Marine
Insurance.
Clifford Ndlovu N0164842M

N0164912A
Melissa Makiwa
1

N0164508X
Page

Miranda Marwenze
N0165807E
Muzomuhle Ncube
N0165462N
Ngoni .N Watadza
N0162478N
Nomore Mungana
N0164787Y
Sizani .I Moyo 18.
E CODE:
RTY AND TRANSPORTATION INSURANCE.
E:
Marine insurance is an agreement by which the insurance company agrees to indemnify the
owner of a ship or cargo against risks, which are incidental to marine adventures. It
originated in the Greek and Roman maritime loan. Separate marine insurance was developed in
Genoa and other Italian cities and spread to Europe. Premiums varied with the intuitive estimates
of the variable risk from seasons and pirates. Its low originated in the Lex mercatoria (law
merchant). In 1906 a specialized chamber of assurance from other courts was established in
England. By the end of the seventeenth century, London’s growing importance as a center for
trade increased demand for marine insurance, as a result Edward Lloyd opened a coffee house on
Tower Street in London. It was the first marine insurance company.Standardized clauses
(institute clauses) for the use of marine were developed by Lloyd’s and the institute of London
underwriters. Out of marine insurance grew other non-marine insurance and reinsurance. Marine
insurance traditionally formed the majority of business underwritten in Lloyd’s(Felicia N, 2014).
Underwriting is a process of selecting insureds, pricing coverage, determining the terms and
conditions of cover (Rejda 1931). In determining the factors to consider in marine underwriting
it is important to identify the different types of marine insurance. These include hull insurance,
cargo insurance, freight insurance and marine liability insurance. The underwriting factors that
are to be considered in marine insurance are the nature of goods, nature of vessel, weather
condition just to mention a few.

While negotiating business, marine cargo insurance underwriters need to assess the nature of the
goods or nature of the cargo that is if they are finished goods, refrigerated goods,
pharmaceuticals or machinery. The differences in nature of the cargos will make a difference in
underwriting (Charpentier, n.d). As been stated before, underwriting will aid the rating process
and also in decision making of either to accept a risk or reject it, if accept, consider under which
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terms and conditions. When underwriting a fragile cargo like asbestos sheets, glasses or glass
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wares, the underwriters may choose to accept these but at an additional premium because the
cargo can be easily broken down in the event of be it misfortunes of the sea like strong waves
which might cause the ships to be unstable in the course.

Understanding of the nature of the cargo is also important for underwriters to determine which
cargos are not to be packaged or placed in closer proximities like, for example; highly
inflammable goods such as petroleum products, alcohol are not to be packaged together with
those goods which generates heat ( those which causes exothermic reactions) when in contact
with water such as coal, tobacco, oil cakes; as the heats they emit to the surroundings, may be
sufficient enough to result in a fire triggered by the highly flammable goods in a closer
proximity. Other natures which may need to be separated are those that are explosive in nature
(dynamites, fireworks), those that generate heat due to oxidation and then catch fire (spontaneous
combustion- soft coal, cotton, jute) (Kingstone, 2007). After ascertaining that some cargos are of
different natures, need arises to package these differently, underwriters may use this as a basis of
including certain exclusions in their policy covers. Failure to assess the nature of the cargo may
result in adverse selection and unfair premium ratings. Also underwriting is helpful to determine
the most suitable risk management process to put in place and try to mitigate the losses like
monitoring proximity of certain goods.

Underwriters can also consider the origin and destination of the cargo. This underwriting factor
in marine insurance looks at geographical, physical or political conditions at the destination or
origin of the vessel which influence the risk involved. Rates can also be influenced by the
destination. For example, in countries such as Somalia or Sudan these countries are warzones or
terrorism inflicted areas as they are always experiencing wars from time to time due to the
perceived elevated. (Onkundi, 2014). Therefore, a cargo is when travelling from a war of
terrorism inflicted area they will be charged higher premiums as they will be considered as
higher risks because of the high risks they face on the journey duration and in areas with less war
risks they are mostly likely to be charged lower premiums as they will be faced with less risks.
However, in hull marine insurance, it does not cover the risk of a vessel travelling in warzone
(Harford, 2016). On the other hand, in cargo marine insurance they do cover risk resulting from
assailing thieves which should include the forcible taking of a shipment rather than mysterious
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disappearance and pilferage.

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Having considered the origin and destination of the cargo. An underwriter will also consider the
time taken for the voyage. The time taken will generally be determined by the distance (from
point of origin to destination). The longer the time it takes, the higher the risks. A voyage lasting
for a longer period is certainly exposed to far greater risk than that which takes a shorter period
(Choudhury,2011). Since the ships travel longer distances, for example they use different routes
some which are dangerous (passing through a dangerous sea) and areas of different weather
conditions,this pose threat to both the goods and the ship. They may also pass through different
jurisdiction regions which may interrupt the voyage for example getting blocked at a port which
result in delay of delivery of goods and other remote result.They are also largely exposed to risk
of pirating, although a general cargo insurance policy excludes such risk.

Taking the insured as an underwriting factor, there are several factors which need to be taken
into consideration like attitudes towards risk (moral hazards), claims history, experience and
exposure of the captain. For example a vessel which doesn’t have fire extinguishers, in the event
of a fire, it will be difficult to prevent the propagation of fire from its point of origin. This will
result in total destructions of the cargo (cargo insurance). Also in the event where the captains
have no or little experience and exposure to the sea misfortunes. This will influence the
underwriter’s decisions on whether to accept a policy at normal rate or accept it on certain
conditions that ensures that certain housekeeping measures and controls are put in place,
monitored and exercised with due responsibility. Other considerations will include the claims
risk of the insured and other risk exposures which the insured is exposed to in order to determine
the riskiness of the insured.

Claims history also needs to be considered in underwriting. It is more important to make sure
that the quality of risk and previous experience (loss and insurance history) of clients are given to
consideration while pricing and deciding the scope of cover and terms (Syed, 2016). According
to Onkundi (2014), insurance is about probability. The best way to calculate this, is going back
to the loss history of the proposer. Depending on the outlook, the underwriter may quote very
different rates for two proposers even where other factors are the same. The claims history will
help the insurer to decide whether to take the risk or not, for example claims history of a marine
cargo of transporting goods will indicate a bad or a good claims history. A bad risk such as more
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background claims give the underwriter to decide whether to accept this risk, take the risk on
certain conditions or delay the taking of the proposal (postponements).

The other underwriting consideration is the sum insured. If the underwriter faces two quotations
of similar nature, but different sum insured. According to Onkundi (2014) the underwriter is
bound to quote a lesser rate on higher sum insured. This is because with a high sum insured the
premium generated may be able to support a partial loss on the insured cargo. The other reason
for lower rates on consignments with very large sum insured is the interests they generate in the
market. Interests are earned since insurers after receiving the premiums, they may reinvest those
either in real estates which will intern generate some returns from the investments in forms of
interests. For example, let’s say there is a high sum insured of, say $50 000 and the insured is
charging a rate of, say 10%. The interest they will generate is $5000 and if considering a low
sum insured of lets $10 000 only $1 000 interest is generated. As shown by this example the
interest on high sum insured is high enough to support a partial loss on the insured cargo.

Nevertheless, weather is also a key underwriting consideration that most marine underwriter
consider. Weather is the short-term state of the atmosphere at a specific time and place, including
the temperature, relative humidity, cloud cover, precipitation and wind (oxford dictionary).
Marine underwriters are very conservative in underwriting marine cargo since most of the
underwriting in marine insurance is done once the voyage has commenced (Guy, 2017). In
reference to this weather becomes very crucial where underwriters consider the weather
conditions at that particular time and place in terms of atmospheric pressure, winds prevailing
which are likely going to affect the stability or turbulence of waves in the sea (Young,
2017).Monsoonconditions has a special reference in relation to underwriting by marine
underwriters. Monsoon condition is a seasonal change in the direction of prevailing or strongest
winds in the region (Wheeler, 2005). Underwriters of marine insurance carefully considers
summer monsoon which is associated with heavy rainfall which is tantamount to flooding and
increase the giant and vibrant of the sea as compared to winter monsoon which is dry and less
powerful (Woodruff et al, 2005).

In summer monsoon such as in India and south-east Asia, underwriters are likely to charge a
higher premium after deciding to place cover on the cargo once the voyage has started from
information found from their radars (radio waves) and weather predicting and forecasting
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equipment. On the other hand, where the weather is deemed to be favorable for example the
winter monsoon, this attracts a relatively lower premium to the insureds due to the slightly lower
risk exposure of the cargo, vessels since chances are very slim that those cargo or products which
get contaminated like grain, furniture as a result of adverse weather conditions will be affected
(Trenberth et al. 2007). So, in general where the weather conditions especially in seas are
adverse, marine underwriters place a higher rate of premium and possibly a restricted form of
cover, like what the Hurricane Maria (Young 2017). On the other side of it if marine
underwriters are satisfied about the weather conditions prevailing at that particular time under
which the cargo, is going to be transported via sea, the underwriters are less conservative and
stringent and this attracts a lower rate of premium to the insureds. (Janson et al, 2007).

Nature of the vessel entails the state of the vessel itself in terms of age, size and maintenance.
These factors are of paramount importance to marine insurance underwriters.Age of the vessel
can be used to determine the current strength of the ship to withstand the diverse hazards of
ocean navigation such as sea waves. The older the vessel the higher the probability that it will
not be that strong to stand against these waves. This might be because of old time mechanisms in
designing the ships and also if the vessel is new it is likely that it will indeed pose a lower risk of
destruction by the seas mainly because less of wear and tear could have affected the strength of
the vessel yet when faced with similar portfolios for hull insurance, for instance, the underwriters
are enhanced to charge a higher premium on an old vessel than the new vessel because of the
higher risk associated with old vessels as compared to new ones(Charpentier, n.d).

The size of the vessel is of paramount importance when considering a proposal for hull insurance
policy or even marine third-party policy. This is because the larger the vessel the higher the
potential that it can cause higher damages to the third parties for instance in collision with
another vessel more passengers are likely to be injured if the vessel is big as compared to the
small vessel with small capacity to carry passengers.If it collides with other vessels it is more
likely that even if all the passengers are injured their number will be less than that for a large
vessel.This knowledge on the sizes of the vessels enhances underwriters to clearly classify the
two portfolios in different groups hence charge the equitable premiums basing on the likely
liability associated with each of them. The size is also important because it’s a telling factor
when it comes to the cargo’s stability. For example, a 15 000-tonner vessel whose gross tonnage
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is 15 000 will normally ride through an Atlantic storm or an Indian Ocean cyclone with greater
stability than a 2000 tonner.

Maintenance is also important when underwriting a portfolio for hull insurance.Good

maintenance may mean a moderate or favorable risk which can be accepted at normal rates and
conditions whereas poor maintenance status may show that the proposal before hand needs much
attention in terms of weather the portfolio is to be accepted.Too bad maintenance level might
mean that underwriters needs to accept the portfolio at a high rate or accept it at ordinary rate but
with special exclusions or even declinature if the state of the vessel is too bad as to be charged a
reasonable and economic premium.

In most national legislation they have jurisdiction that hold the courts in the country where the
defendant is domiciled to be competent in the case (Johnson, 2010). Furthermore, this is also
relevant in the marine insurance. When we look at the case of Johnson, (1923), it was concluded
that there was no jurisdiction in Sweden as the shipowner had taken the policy in Norway but the
agent was not domiciled in Sweden and has not been registered in the Swedish company register.
The European laws have changed to address the problem of marine insurance. According to
these rules, an insurer can be sued by a policyholder whether he is in the domicile in the member
state or not (Wilhelmsen, 2014). In the event that a jurisdictional court will be based in a
different country as the holder’s origin state, this has an effect of differences in rulings and
judgements. Most developed countries like Sweden apply strict liability which could be a
disadvantage on the insurers side who is not in the same domicile country or court since these
may result in higher than normally would have been attached, had it been held in his domicile
country. Considering this, if cargos take those routes to such destinations, underwriters should
take this into consideration and account for the likely costs of claiming. This will aid in the rating
process and even in the decision making whether to accept or reject a proposal risk.

Conclusively, as outlined above there are so many underwriting considerations in marine

insurance that needs to be taken into account when underwriting different classes of marine
insurance policies such as hull, cargo, marine liability and freight marine as these are different
classes.
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REFERENCES

Charpentier, W (n.d.) Fundamental factors when underwriting Marine Cargo Insurance.

Choudhury, M (2011) Rating marine cargo risks and international competition. Geneva Papers.

Felicia N, (2014), Marine Insurance Subject-Innovations topic: Marine Insurance. Felicia

Nazareth, John Marc Dsouza (8136-8144) Class- SYBBI; 3

Guy, J (2017) Global insurance forum-October 2017.

Hartford (2016) “Ocean marine insurance” The Hartford Marine Insurance-The Hartford
Financial Services Group, Inc Retrieved May 2016.

Johnson et al (2007) Temperature and pressure measurement on ships and vessels.

Johnson, S.O, (2014) Settlement of Disputed Marine Insurance Law Claims. NJA 1923 p202

Kingstone, C. (2007) Marine Insurance in Britain and America, 1720-1844: A comparative

Institutional Analysis. The Journal of Economic history, 67(2), 379-409.

Onkundi, S (2014) Marine Insurance underwriting medical department. The jubilee Insurance
Company.

Oxford Dictionary

Rejda, G.E, (1931), Principles of risk management and insurance 10th edition, New York, Greg
Tobin

Syed, D.A,(2016) Underwriting Consideration for Marine Cargo Insurance. 30 December 2016.

Trenberth et. al, (2007) Climate change, observation surface and atmospheric climate.

Wilhelmsen, T.L (2014), Marine Insurance Law

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Woodruff et al, (2005) Tropical cyclone, wind speed.

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Young, M (2017) Effects of Hurricane Maria.