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12 12/4 M97/February 2018 Reinsurance
Chapter

Structure of the cover The structure of the cover is usually based on the class of transportation by which we mean the type and
is usually based on quality of the vessel. For this purpose different categories can be formed as illustrated below:
the class of
transportation • ocean-going hulls, classified 100 A1 in the Lloyd’s Register or equivalent, up to 15 years of age and
having a gross tonnage of more than 1,000;
• other marine vessels;
• coasters;
• tugs;
• barges, launches, including small boats;
• river and inland boats; and
• lighters.

Be aware
A lighter is a vessel having a stepped cargo deck for selective float loading and unloading. The open-sided cargo
deck is stepped upward in a plurality of steps from amidships to both ends. A supporting hull is compartmented into
a plurality of tanks.

Entire fleets are usually ceded to the treaty on the basis of ‘top and pro rata’. This approach states that
the top value of the largest vessel in the fleet is taken and for each unit thereafter the same percentage,
in relation to its respective insurance value, is ceded.
Hull conditions are on a named perils basis, including limited collision liability and are rarely valid for a
Hull conditions are on
a named perils basis period exceeding twelve months.
A1B Underwriting considerations
All of the factors and general information referred to in earlier chapters, such as details of the reinsured,
the portfolio to be reinsured, claims experience, original policy sums insured or limits of liability and
exclusions, apply equally to marine risks.
It is important to remember that a marine hull account may be made up of ocean-going, coastal, fishing Reference copy for CII Face to Face Training
and river craft. It may also include a significant private yacht account which, due to the possible
inexperience of the owners, may present a considerable liability exposure.
While it may be possible to negotiate a treaty protecting the entire account or class, this breakdown of
the portfolio is a key underwriting factor for the reinsurer. One type of risk may be consistently profitable
in one geographical location, whereas another type of risk in the same region may be unprofitable.
Commission paid by the reinsurer is the major factor in determining the cost of the proportional
reinsurance to the reinsured. Any commission should make allowance for the usual acquisition costs
incurred by the reinsured and this information should be available to reinsurers. The reinsured will
expect to receive an overriding commission to contribute towards its own management and claims-
handling costs. This may be included in the overall commission percentage being sought.
Profit commission is another consideration with this type of reinsurance but it is contingent on the
reinsurer itself having made a profit. The amount of any profit commission is a matter for negotiation
when the treaty is being placed.

Be aware
Reinsurers cannot be expected to pay profit commission for isolated periods of profit. The treaty has to show a solid
record of profit over several years.

Rating of marine covers is very similar to that of most other lines of business. For proportional treaties
the reinsurer would rate the business by setting terms for the treaty on the basis of its past results. For
non-proportional treaties the excess of loss premium must cover normal losses, the reserve for
deterioration, a fund for catastrophe losses, acquisition costs and management expenses of the
reinsurer and a margin of profit for the reinsurer. It is important to understand from where and how the
underlying principle for rating marine is derived, because it directly affects the premium achieved by
reinsurance treaties and also reflects the way facultative reinsurance is rated.

For the rating of regular merchant marine vessels a two-pillar system is usually applied. One of the
pillars is the vessel value, represented by the sum insured, while the other is its tonnage.