Marine Insurance Premium Calculation

Premium can be ascertained either by numerical rating system or by judgement method. The numerical rating system evaluates each and every item and marks are assigned to them according to their merits and degrees of influencing risk.

Since the marine perils are varied, the only numerical rating system cannot be successfully utilized. However, tabulation of statistical experience on many risks can serve the purpose as a basis of supplementary factors for underwriter’s judgement. Marine insurance grants protection against a large number of perils which are viewed in relation to

(i) the inherent character of a large variety of subject-matter of insurance
(ii) the effects of season, adverse physical forces and trade customs,
(iii) the policy conditions

Individual insurance account is used for personal valuation by a leading underwriter who enter into the making or marine insurance rates very materially. The judgement and personal evaluation is very vital in rate making.

There are various factors in influencing the risk. The management and ownership are very important factors while risks are evaluated for the purpose of rate making. Residents in India are not permitted to take marine insurance cover with insurance companies in foreign countries without prior permission of RBI.

Rate Making in Marine Insurance

Hull Insurance

1. Management

One management may be efficient in the upkeep of the vessel and the appointment of officers and crew. Other management, through negligence, indifference and undue economy, may show a bad record.

To treat these managements alike would be an injustice to the better managed concerns. It would penalize efficiency and carefulness and put a premium on inefficiency and carelessness.

2. Natural Forces and Topography

The underwriters consider the character of the route, the construction, type and the nationality of the vessel and conditions of the contract.

Some natural hazards are permanent while others are of seasonal dangers. References are made to storms, submerged shoals, shifting sand bars, shallow water, narrow channels, ice, currents, tides and seaquakes while calculating the premiums to a particular route.

Dangers from an underwriting point of view are associated with the ports of departure, call or destination. Some ports are known for insufficient depth, absence of good anchorage ground, lack of protection against tides or tidal waves.

3. Construction, Type and Nationality of the Vessel

The quality and fitness of the vessel to serve as a carrier on the particular route is naturally on the utmost importance.

The underwriter wants to know the vessel with respect to its builder and owner, structural plan, material used in construction, type of propulsion, structural strength to resist stresses and strains, adaptability to carry various kinds of cargo and its age and physical condition.

In foreign countries, certain societies are formulated to promulgate rules for the construction of vessels, supervising such construction and assigning a class to each vessel.

The Lloyd’s Register contains information to numerous vessels of other countries , name and nationality of the vessel, materials of construction, details of the decks, the engine and boiler equipment of the vessel.

Periodical changes are noted down there. Nationality of the vessel is important to insurer because it discloses the dependence of the nations upon the ocean trade. The nationality reveals the skilfulness of the masters and crew.

The rates may vary greatly as to the standard or commercial honour in trade, high standard and commercial ethics. Premium rates are based on the age of the vessel, propelling method, body-structure, risks covered, distance for transit and nature of the vessel, tonnage capacities, port classification and season of sailing.

4. Policy Conditions

Innumerable clauses are used to limit or increase the underwriter’s liability. Some policies may cover again total loss. Some may cover partial losses. Others may relate only to generate average or particular average.

Cargo Rates

The premium on cargo depends upon the following factors:

1. Ownership

It may happen that two separate ownerships of the same kind of cargo, carried on the same ship and to the same place will command different rates.

Proper packing, profitable accounts and previous refusal of insurance may determine the rate.

2. Character of the Cargo

The difference in hazard between various kinds of commodities, different forms of the same commodity, different shipments, different types of packing and durability of the commodity may influence the premium rates.

3. Hazards and Customs

The natural forces and topography considered in the case of ship are also considered in the case of cargo. The effect of seasons has important bearing upon commodities that are seriously affected by cold or heat.

The season or climate at the port of destination may influence the risk. In certain season the port is busy with a particular cargo. Varying trade customs associated with the different commercial routes will influence cargo rates materially. The moral hazard is greater on certain routes.

4. Quality and Suitability of the Vessel used as Carrier

The underwriters take into account the fitness of the vessel to carry the particular cargo. The premiums are higher in the case of ship of slower speed due to longer exposure of the cargo. In case of highly perishable goods, moving in large quantities, special types of vessels have been designed to carry such commodities.

5. Duration of Voyage and Policy Conditions

Insurers take into account the length of time. Sometimes, loading of the goods abroad the vessels and protection of the goods while on the dock are considered in calculation of premium.

6. Miscellaneous Factors

The operating efficiency or proved experience of ship may affect the risk on cargo. The methods of handling and stowing cargo, the regularity of the service, etc., are the various factors to influence the premium rate.

Return of Premium

Circumstances may happen when the proposed shipment of goods may not take place or only reduced quantities may be shipped.

In the following circumstances the premium is returnable.

1. By Agreement in the Policy

The assured may pay full premium while effecting the insurance. The insurer may agree to return it wholly or partially at the happening of a certain event.

The premium is returnable by agreement in the following circumstances:

(i) Improvement in the character of insurance. For example, change of ship to safer routes, use of first class liner, good packing, etc.

(ii) The insurer may encourage to return a part of the premium if claims do not arise.

(iii) Cancellation of policy due to change in the ownership of hull.

(iv) Mutual cancellation of the policy.

2. For Reasons of Equity

The premium is returnable for reasons of equity.

(i) Non-attachment of risk : Where the subject-matter has never been under the risk, or the risk has not been started. For example, the voyage might not have been made or the goods might be short shipped.

(ii) Undeclared balance of an open policy is entitled for return of premium. The premium shall be returned only when there has no further interest to declare within the scope of the policy.

(iii) Where there is a total failure of an apportionable part of the consideration, the apportionate part of the premium is returnable to the assured provided where is no fraud or illegality on the part of the assured or his agents. Where voyage was to be completed in stages and each stage is being rated separately.

If some stages are not completed, the premiums relating to uncompleted stages are returnable.

(iv) When the assured has no insurable interest throughout the life of the policy the premium is returnable provided the policy does not amount to fraud.

(v) The insurer can cancel the voyage when there is unreasonable delay in commencing the voyage.

(vi) In case of over-insurance, a proportionate part of the premium is returnable. Where two or more policies are effected by or on behalf of the assured on the same adventure and interest or any part thereof, and the sums insured exceed the indemnity allowed, the assured is said to be over-insurance by double insurance.

In this case, a proportionate part of the several premiums is returnable, provided that if the policies are taken at different times, and any earlier policy has at anytime borne the entire risk, or if a claim has been paid on the policy in respect of the full sum insured, no premium is returnable in respect of that policy.

Special Premium Rates for different purposes and cargoes

Vessel or LASH barges : A flat extra premium is charged for extension of cover upto on board the overseas vessel in addition to the appropriate premium chargeable for inland transit. Additional rate is charged for extension of storage risks at port/docks.

Additional rates for shut-out cargo is charged from the goods which arrives too late for vessel at a loading port or else the gods are not loaded became the vessel has a full cargo load. Its rate depends on coastal and overseas ex-craft, raft or lighter in midstream will depend upon category of port and type of inland transit cover.

In the event of the goods are returned to the shipper’s warehouse involving rail/road transit, appropriate full premium as per Inland.

Transit (Rail/Road) risks; schedule shall apply for the return journey in addition to the above.

Sailing Vessels

The premium for sailing vessels depend upon voyage between ports and type of cover. Premium rates apply for non-mechanised sailing vessels. A discount of 33 1/3% on the premium rates are allowed for shipments by mechanized sailing vessels.

Where the vessel involves the West Coast of India, there is increased hazard of shipping during monsoon month. Suitable loading of rates take place between certain dates. Extra premium is charged for that. Thus reduction for mechanized vessel and tonnage of vessels is applicable. Extra premium is charged based on commodity and period.

Bullion and Species

Two rates apply for sending them through insured post: one for sending within India and the other for sending from India to any foreign country and vice versa.

The policy covers all risks from the time the peril is delivered. Securities shall be insured for their face value or market value whichever is less and 40% of the schedule premium rate is charged. When valuables are carried in the Bullion Room of a liner, 75% of the schedule rate is charged.

Major Commodities

When commodities are transit by sea, the rates are indicated for cargoes carried by steamers, classed in accordance with the Institute Classification Clause.

Where the cargo is carried in vessel not so classed, extra premium for over age, under-tonnage and non-classification shall apply. Insurance of petroleum product, cement, edible oil, bagged rice, coffee, tea, etc. are charged different.

The premium for cargo is decided on the vessel, voyage, nature of cargo , type of packing and insurance cover bases.

Vessel

Cargo carried on vessels not complying with or not coming within the classification clause will be subject to additional premium and possibly a restriction in cover.

Additional premium is payable for the vessel not on regular trading pattern and is over 15 years old, vessel is under 1000 GRT and over 15 years old, when the vessel is on a regular trading pattern but is over 25 years old, when the vessel is not a mechanically propelled steel vessel, where vessel is not classed.

Voyage

“Warehouse to warehouse” clause includes risks of land transit by rail or load from the time the goods leave the warehouse to the port of shipment. There is no cover during any permit before transit actually commences; transit to a container terminal for stuffing into a container, a period in the warehouse awaiting customs formalities inspection and shipment.

Nature of cargo

There are goods which are specially vulnerable to damage in transit. The nature of the product or commodity insured from the point of view of susceptibility to tonnage through various causes is a vital consideration for an underwriter to take into account.

The tendency is to require protection which is as comprehensive as possible. Inherent vice is not covered unless the policy specially so provides. Some commodities lose weight by evaporation of their moisture content. The insurance does not cover also ordinary leakage, ordinary loss in weight or volume or ordinary wear and tear.

Packing

The purpose of packing goods for transit overseas or inland is to ensure as far as possible that the goods reach destination the same perfect condition. It should be made certain that the goods are packed in a manner which will enable them to withstand normal handling during transit.

Normally insurance covers content of the package not the packing material except when this specifically included. Insurers may not pay for the loss aggravated by inadequate packing. Packing involves strength of the packing material weight of the packing unit, handling mobility inherent qualities of the commodities and hazard involved in the transit.

Insurance cover

Rating should take into consideration each material element of the risks involved whether it is the characteristic of a given vessel or voyage or the nature of cargo and packing.

These are common area of risk in all sets of Institute Cargo Clause (ICC-A,B,C).

There are some risks which are covered only in (B) of ICC i.e., earthquake volcanic eruption or lightning, washing overcovered entry of sea, lake or river water into vessel loading.

However, ICC(A) covers “all risks” whereas ICC(B) and ICC(C) are named risks.”