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Chapter 12 Marine and aviation reinsurance 12/5 Chapter

Question 12.2 12
What is the significance of the majority of marine policies being written on a valued basis?

As total loss and sum insured are irrevocably linked when it comes to a claim, they are also linked for
rating purposes. The premium charged for the total loss element in hull insurance is expressed as a
percentage of the sum insured. The tonnage, on the other hand, becomes very important when
considering partial losses or damage to the ship.
Consider this…
It is likely to cost the same amount of money to fix a two-metre hole in the sides of two identical vessels irrespective
of the fact that one vessel may have a sum insured of $100m as opposed to $50m for the other.

The rate for the partial loss element is thus tied to the tonnage of the vessel and usually expressed as a
dollar amount per tonne.

Accumulations
Vessels can, and do, accumulate in the same risk area. An accumulation of values well in excess of a
Vessels can, and do,
single hull value can occur, for example, in a harbour or on a river and, therefore, merits special accumulate in the
consideration in assessing the need for any form of reinsurance. same risk area

Even when considering large ocean-going hulls, one must not lose sight of the fact that several such
vessels could be in the same area at the time of a major disaster such as fire or windstorm, or even an
act of war.

Following the hurricane losses in 2005 and the resultant losses in the reinsurance market worldwide,
‘natural perils’ recoveries were limited to two losses from the subsequent renewals with aggregate
deductibles being sought at primary levels of the programmes.
Consider this…
Using the knowledge that you have gained so far, give some thought as to the type of reinsurance that is most
suitable for marine hull. Reference copy for CII Face to Face Training

Suitable types of reinsurance
Due to the diverse nature of the risks that can be attached to such accounts, particular attention has to
be paid to the nature of the portfolio and the risks and liabilities that the potential reinsurer is asked to
assume. It is not unusual to see a higher proportion of facultative reinsurance being used. A facultative
reinsurance will be judged mainly on the quality of the risk itself, with any long-term relationship
between the insurer and the reinsurer being of lesser consideration.

Be aware
This is because facultative reinsurance is used to deal with one-off situations and does not infer a close or ongoing
relationship between the parties to the reinsurance contract.

On the other hand, any treaty reinsurance will have the terms and conditions available predominantly
determined by the reputation and performance of the ceding company.
While for the reinsurance of marine hull, surplus treaties can be considered more common than quota
Losses are divided
share, administrative considerations are generally predominant in determining the system of cover. The proportionally to the
control and establishment of accumulations only present minor difficulties with subsequent adjustments sums insured
not problematical. Losses are divided proportionally to the sums insured; in most cases this distribution
remains invariable for twelve months. For hull, one of the usual clauses for automatic termination of the
cover in the case of war between certain world powers must be stipulated in the original conditions.
Furthermore, reinsurance treaties provide for the cancellation of war risks at any time, at short notice
(usually seven days).
The necessary factors and information that influence the negotiation of marine excess of loss
reinsurances are the same as those set out in the previous chapters. However, due to the potential
variety of individual risks within any one class, other specific information should be available. The
majority of these covers are established on a ‘per event’ basis. An alternative may be to negotiate the
cover on a per vessel basis.
The exact composition of the account should be available, detailing the lines written on different types
of vessel insured and the terms and conditions that apply to the covers. It would also be important to
determine whether facultative reinsurance exists that will benefit the excess of loss reinsurer.