Recent development of legal issue in Marine Insurance

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HD in International Transport Logistics

Practices in Marine Insurance, LGT3502

Written Assignment

Recent development of legal issue in Marine Insurance

  • Shortfalls in insurance coverage for terrorism risk

By:   Chan Po Yin

Chan Man Ting

Yiu Fung Mei

Lam Pui Hei

Date: 9 November 2007

  1. 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.

  1. Background

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

  1. 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.

  1. 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

  1. 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.

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  1. The Recent Marine Terrorism
  1. 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

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