P. &. I Clubs Law and Practice

Steven J; Hazelwood and David Semark

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CHAPTER 7 Underwriting

A. GENERALLY

7.1 A detailed analysis of underwriting practice is beyond the scope of this book. What follows is a broad summary. 7.2 The peculiarity of underwriting mutual insurance is that the guiding principle is not “profit” but “parity”. Underwriting for P&I risks is therefore generally more complicated than for normal hull or cargo insurance. The uncertainty as to the nature of possible liability claims and of amounts involved presents problems. While in ordinary hull or cargo insurance the assured is asked to pay a premium for the exact value of the subject-matter at risk, the extent of an assured’s possible exposure to liability for claims by third parties is not so readily quantifiable. 7.3 Protection and indemnity underwriters have, however, become such experts in the art of predicting the unpredictable that P&I Clubs or their managers have branched out into insuring other events which the traditional marine market has shunned as being too esoteric.1 Examples of these other difficult fields are: strikes risk insurance, freight, demurrage and defence, offshore risks, loss of hire, professional indemnity and others.2 7.4 In recent years a certain amount of primary, in addition to reinsurance or excess, P&I insurance has been offered to the traditional market. There is evidence which suggests, however, that primary P&I insurance is not popular with traditional insurers. This attitude accounts for the fact that approximately 92% of the world’s gross registered tonnage obtains P&I insurance cover by entry into the clubs which make up the International Group.3 7.5 It is possible to explain the reluctance on the part of the traditional market to accept P&I in the following ways. First, the traditional market operates a system of “once and for all” premiums. This system is not ideally suited to the vagaries of P&I business. Under a single premium system where underwriters err on the side of caution, the premium may be set at unattractive rates; alternatively, where the premium is set at a rate too low, one catastrophic claim could ruin the underwriter. Unlike the clubs, traditional underwriters cannot go back to their assureds and ask for more premium when things go wrong. In the

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area of unpredictable marine P&I risks the clubs do have the possibility of seeing how things turn out and, if necessary, spreading unexpected catastrophes throughout their membership by way of “overspill” calls. 7.6 Secondly, traditional underwriters do not generally wish to get involved in the long and sometimes litigious business of negotiating claims whereas the claims-handling services of the P&I Clubs is a vital customary element in P&I insurance. Not only is the claims-handling service a great attraction to the particular member with outstanding claims, but the service is of benefit to the whole body of the membership in that it contributes to reducing the size and number of claims made on the club. 7.7 Thirdly, traditional underwriters prefer to know as soon as possible the size of their losses, or profits. In P&I insurance there is an inevitable lengthy tail-back while claims are being advanced against members, negotiated and settled. Although it is not usual nowadays, in the past clubs might have waited for three, four, five or more years before being in a position to say whether it had been through a good year or a bad year.4 More commonly clubs can categorise good or bad years within 18 months or so.

B. THE MODERN SYSTEM OF INDIVIDUAL UNDERWRITING

7.8 In the early mutual hull clubs the members were local shipowners operating broadly comparable ships engaged in comparable trades in comparable trading areas and everyone was, therefore, more or less exposed to similar risks and liabilities and sought a similar form of coverage. Each club member, therefore, paid more or less the same rate per gross registered ton; so many shillings per grt usually based on a minimum entered grt. Supplementary and final calls were also apportioned equally per gross registered ton. This simple system had the unfortunate effect that the good and careful owners with efficient well-found and well-managed ships were bled by the owners of badly maintained vessels because the number of claims by the latter usually outnumbered those presented by the former.

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