Recent development of legal issue in Marine Insurance

University Degree Business and Administrative studies

HD in International Transport Logistics

Practices in Marine Insurance, LGT3502

Written Assignment

Shortfalls in insurance coverage for terrorism risk

By: Chan Po Yin

Chan Man Ting

Yiu Fung Mei

Lam Pui Hei

Date: 9 November 2007

Introduction

In recent years, shipowners are facing the shortfalls in insurance coverage for terrorism. Under the Athens Convention for the passengerships, compulsory insurance is required to limit the liability for the shipowners. The Wreck Removal Convention also requires a compulsory insurance certification of terrorism risk. Shipowners are concerned that the insurance market may not be able to provide practicable and affordable cover for the demand of the above conventions. Recently, it is difficult for the broker of shipowner to find cover in the commercial insurance market, terrorism losses are always be unforeseeable so that the loss is great. In addition, the P&I clubs, where the shipowners place much reliance, do not underwrite terrorist risks. All this circumstances create the issue of the shortage in the terror cover.

Background

There are 4 main causes for the shortfalls of terrorism coverage for shipowners.

Athens Convention

Athens Convention will require carriers to buy a compulsory insurance or other financial security not less than US$325, 000 per passenger on each distinct occasion. Ships are to be issued with a certificate attesting that insurance is in force. Under the convention, shipowners are forced to buy insurance otherwise the ships will not e permitted to trade without certification.

Wreck Removal Convention

Obligation placed on the owner of ships of 300 gross tonnage and above to maintain insurance or other evidence of financial security to cover the shipowner’s liability under the WRC. Certificate will be issued.

Those two compulsory insurance, also require certification of terrorism risks, it increase the difficulties for the broker to find cover in the insurance market.

2.3 Exclusion of the P&I clubs

Recently, P&I clubs do not underwrite terrorist risks. P&I clubs only cover the traditional risks relating to injury and death of passengers not caused by terrorism. The clubs are unlikely the cover terrorism risks in the near future, because of the number as well as the amount of claims are increased in these few years.

(See figure 1&2)

Figure1. The average claim amount ($) of P&I club

Figure2. Number of claims of London P&I club

Difficulty of insuring terrorism risk

From an insurance viewpoint, terrorism risk is very different from the kind of risks typically insured. Terrorist risks are hardly measurable, as there have been very few terrorist attacks, so there is little data to use as the base estimates of future losses. The frequency of the terrorist attack, the size of losses, could not be easily estimated. Besides, terrorism losses are usually be concentrated geographically, as terrorism targeted on a significant economic and political area. So, only the people most at risk will purchase coverage, and these people will become the people who are likely to file claims. As a result, it is difficult for the insurance firms to estimate the premium and the terrorism risk over those people who purchase coverage may be very high.

The Recent Marine Terrorism

Cruise Ship

Referring to the article, Athens Convention is relating to the passengerships. Cruise ship is the kind of the passengerships. It is under marine terrorism risk as the luxury cruise is reflecting the Western materialism, affluence and discretionary, which the Laden-inspired extremists are greatly opposed. The terrorist attack in a cruise ship will cause a great loss in life & capital, so the conventions require the shipowners to buy a compulsory insurance for a certification. It can protect the third-party liability.

Table 1. Potential Consequences of Terrorist Attack involving Cruise Ships

Container ...

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The Recent Marine Terrorism

Cruise Ship

Table 1. Potential Consequences of Terrorist Attack involving Cruise Ships

Container Ship

Container ships are under terrorism risk as the container supply chain is very assessable. Currently, only 2 to 5% of containers are checked at the ports around the world, terrorists can easily control the container and use the container ship to transport weapons to the targeted areas. The terrorism attack in container shipping is mainly destroy the in economy aspect. (see Table 2)

Table 2. Potential Consequences of Terrorist Attack involving Container Shipping

Recent Practice in Marine Insurance

It is difficult for the broke of shipowners to find terrorism coverage in the marine insurance market. It is because of the terrorism risk will cause a catastrophic casualty or some other event causing a serious loss of capacity in the insurance market. So, there are different measures to deal with the coverage of terrorism.

Reinsurance Pool

In the 911 incident in 2001, the losses stemming from the destruction of the World Trade Center and other buildings by terrorists, including commercial liability and group life insurance claims, totaled about US$31.6 billion. About two thirds of these losses were paid by reinsurers, which are the companies that provide insurance for insurers. It indicated the important of reinsurance. However, after 911 incident, terrorism coverage was scare. Reinsurers were unwilling to reinsure policies in urban areas perceived to be vulnerable to attack. Insurers then started to seek other programs to transfer their liability.

The program that most of the insurers use nowadays is the reinsurance pool. Terrorism pool has been operated in different countries to cover insurance company losses from property, business interruption and third-party liability coverage up to a certain limit. Insurers pay premium at a rate set by the pool.

So, shipowners who have insurable interest can purchase insurance with a terror cover from an insurer. Then the insurer can reinsure his liability in the reinsurance pool. This program limits the liability for the insurers so that they are willing to provide terror cover for the shipowners.

Besides, some of the country, such as France and Spain, government will sponsor the reinsurance pool. The government will pays for all terrorist claims that exceed a specific amount.

However, as the loss in marine terrorism is a huge amount. The reinsurance pool may not be sufficient for some kind of terrorism risk. The risk such as war, including nuclear and biological contamination which is caused by terrorists attacks may not be cover in most of the reinsurance pool.

In addition, due to the high demand of terrorism coverage which required by the Athens Convention and the Wreck Removal Convention, shipowners are still concerning whether the marine insurance market will be able to supply practicable and affordable cover for the types of ships in the conventions.

Deductible & Retention

Under the Terrorism Risk Insurance Extension Act in USA, insurers would pay in the effect of a terrorist attack. The individual company deductible, which is the amount an insurer must pay before a claim is payable, increased from 17.5% to 20% of the commercial property or casualty insurance premium in 2007.

When deductible or retention is in a large proportion of the premium, insurers may have low incentive to underwrite terrorism policy. It will affect supply of the terrorism coverage, so that there are shortfalls in terrorism risk cover.

Future Practice in Marine Insurance

The 2002 Protocol to the Athens Convention was finalised by the International Maritime Organization last year and will come into force in mid-2008. The Protocol was on the following basis in respect of terrorism:

The insurance cover to be certified (and shipowner liability) could be limited to US$500million.
It would be acceptable for certification of terrorism and non-terrorism insurances to be given by different underwriters or guarantors.
Insurance against ‘excluded’ risks would not be required.

Under this Athens Protocol, shipowners would be obliged to obtain a “blue card” showing that they had appropriate risk cover.

Thus, Athens Convention produced a formula to solve the problem of uninsurable risk in the event of a catastrophic event resulting from terrorism. There will be two separate insurance covers: one cover to be provided by P&I clubs in respect of the traditional risks relating to injury and death of passengers not caused by terrorism, another separate cover to be provided specifically for terrorism risks.

It is expected that P&I Clubs will be in a position to issue certificates (“Blue card”) for non- terrorism risks on the basis of US$360,000 per passengers. Market insurers will provide a separate “Blue Card” to cover terrorism risks on the basis of US$360,000 per passenger to a maximum of US$500 million per ship, per incident.

Under the protocol, Marsh, the leading broking group prominent in marine and terrorist risk advice, will establish a facility certifying cover a UD$500 million for terrorist risk, but excluding biological and nuclear risks. However, other conventions may not readily be amended so as to permit a similar solution.

Recommendations

6.1 A specialized terrorism coverage club in P&I clubs

In order to due with the shortfalls of terrorism coverage in shipping, the International group of P&I clubs may establish a separate sub-club which is specialized in the terrorism coverage. Only the shipowners who used to purchase terrorism insurance join this ‘terrorism club’. The shipowners will be required to pay a higher premium (call) as member fee. This club is just like the P&I clubs, which the shipowners grouped together to insure each other terrorism risk on a mutual non-profit making basis, for their third-party liabilities.

6.2 Government

Government could be liable for part of the losses caused by terrorism. It is because government should maintain security in the county. It there is terrorist attack, it is the government neglect to protect the citizens and their capitals. For instance, if there is a negligence on checking a container with weapons, so that the container ship exploded at commencement. Then, part the losses might be cover by government. In addition, an aggressive policy made by the government might also caused terrorist attack. So, government might bare 10% of a terrorism loss if the loss is higher than a specific amount of claims, eg. US$2 billion.

Conclusion

Marine Terrorism Insurance, which may cause a serious loss of capacity in the insurance market, is being scared in the market. It is difficult for the brokers the find the terrorism coverage for the shipowners. The implementation of the Athens Convention in mid-2008, will require the shipowners to buy a compulsory insurance so as to obtain a ‘blue card’, otherwise the ship will not allow to trade. As a result, shipowners are concerning the shortfalls in the terrorism coverage might greatly affect their operation.

As the losses claim of a marine terrorism insurance must be great, an estimated figure shows that the total loss of a cruise ship with all hands at US$3 billion. Shipowners must buy a terrorism coverage to limit their liabilities and to guarantee the security for the passengers and customers, so compulsory insurance of terrorism is necessary.

Athens Convention is producing a solution to solve the shortfalls. Their formula is to separate a marine insurance policy into two parts, terrorism and non-terrorism, so that P&I clubs can cover part of the risk which is not cause by terrorism. However, there are problems for those companies covering the terrorism risk, as some of the risks are still uninsurable. It indicates that those insurance companies are still unwilling to provide terrorism coverage.

In long term, the International Maritime Organization and the other Conventions should find another solution to solve the problem. We recommend the P&I clubs to establish an separated international mutual pool for the shipowners to join. The government should also help to maintain a peace and safety environment for the marine trade. If necessary, they could be a insurer for the terrorism coverage in the future. Then, the problem of the shortfalls in terrorism coverage could be solved.

8. Bibliography

Article chosen:

1. James Brewer - Friday 20 July 2007

Warning over terrorism risk cover shortfall

News:

1. Based on IMO Briefing 12/2007, 22 May 2007

Wreck Removal Convention 2007

2. Justin Stares in Brussels - Wednesday 4 April 2007

Brussels to extend terror cover guidelines

3. Sandra Speares – Monday 23 October 2006

IMO paves way for cruise terror and war risk cover

Website:

1. Bilingual Laws Information System by Legislation Council – Chapter 434 Merchant Shipping (Limitation of shipowners Liability) Ordinance, Schedule 1 - Convention relating to the Carriage of Passengers and their Luggage by Sea (PAL), 1974

2. Center for Terrorism and Management Policy

3. International Maritime Athens - Convention relating to the Carriage of Passengers and their Luggage by Sea (PAL), 1974

4. IMO Correspondence Group on Provision of Financial Security in Respect of Passenger Claims

Report:

1. International Group of P&I Clubs

Athens Convention and Terrorism (FAQs)

2. Mark A.M. Gauthier Chairman, IMO Liaison Sub-Committee

CMLA Annual General Meeting – 18 June 2007

3. Michael D. Greenberg, Peter Chalk, Henry H. Willis, Ivan Khilko, David S. Ortiz

RAND Center for Terrorism Risk Management Policy 2006

Marine Terrorism – Risk and Liability

4. The London Mutual Insurance Association limited

Annual Report 2007 p. 22

Compulsory Insurance – Athens Convention

CONTINUOUS ASSESSMENT

Student’s name________________________________________________________

Group: __________________

Date: __________________

Remarks:

Number of words: not more than 2,000. Word count : ________________
Date of submission - on or before the 10th week of the semester.
This sheet is to be attached at the end of the assignment with the copy of the article from Lloyd’s List.