By now, it should be common knowledge among insurance buyers that we are experiencing a hard market. It has been more than a decade since insurance companies last sharply increased rates, tightened terms and conditions, and restricted capacity for certain classes of business, but that is exactly what is happening in many lines of business – including ocean marine risks. As a result, insurance buyers and brokers are encountering something they might not have seen before: subscription-based stock throughput insurance programs.
Layered programs are common for large property schedules and excess liability towers, but until recently, most cargo programs could be filled by one or two capacity providers. What insurance buyers and brokers need to understand is cargo insurance has a few quirks that other lines do not, and the idiosyncrasies of the marine insurance marketplace go back a long time. For example, some cargo programs are layered, with primary and excess coverage, while others involve a lead underwriter and additional insurers sharing the total primary limits in a single layer.
To explore this, let’s look briefly at the history of marine insurance, which today is closely associated with Lloyd’s. Back in the late 1600s, merchants, sailors and ship owners frequented coffeehouses in London, to seek and exchange shipping information. The most respected source of marine news was Edward Lloyd, who operated a coffeehouse on Tower Street. Over time, interactions at Lloyd’s coffeehouse led to business transactions that supported marine voyages and international trade.
In fact, the word "underwriter" comes from the practice of investors writing their names at the bottom of contracts. Technically, marine risk transfer existed much earlier, in Babylon during the 18th Century B.C. Whether as inscribed in the Code of Hammurabi or the investment agreements at Lloyd's coffeehouse, the main method of spreading risk was to involve multiple parties - a "subscription" approach. Even today, 332 years after the London Gazette first mentioned Edward Lloyd, Lloyd's remains a subscription marketplace. This approach makes sense in an exchange, where brokers can discuss risks with underwriters at multiple syndicates under one roof, so to speak. The lead underwriter sets the terms for the desired amount of coverage, taking a percentage of the total risk, and brokers seek additional underwriters to share the risk, following the terms set by the lead, until the line slip is filled out.
This approach works well for risks requiring multiple capacity providers, but it differs in other lines of insurance. For example, in some excess liability programs, higher layers do not follow the terms and conditions of underlying layers. That can be quite tricky to administer in the event of a claim, not to mention chaotic and stressful for the policyholder. Follow-form policies are much simpler, but they do require underwriters to fully understand and commit to the terms of the lead underwriter.
Steps to take
Placing a lead-and-follow-form cargo insurance program calls for some steps that might be unfamiliar to retail and even wholesale brokers that have little experience in this line. For example, brokers should:
Prepare a comprehensive submission. Gathering data to ensure underwriters clearly grasp the insured’s risk is critical in a subscription approach. Missing information not only prolongs the underwriting process, but it also can taint how underwriters perceive the quality of the risk. In a hard market, most insurers don’t want to spend time on a sloppy submission.
Seek coverage from a specialist. Because the lead underwriter in marine cargo determines the terms and conditions that apply to the entire program, brokers should work with a specialist market that has extensive expertise in writing cargo risks. The lead insurer is the cornerstone of the program, so brokers should spend the time necessary to secure a strong foundation that other insurers can have confidence in joining.
Understand the lead insurer’s terms and conditions. Finding insurers with an appetite for cargo risk is not necessarily difficult, but identifying insurers that are flexible and willing to follow another company’s terms can be challenging, especially during a hard market. Understanding those terms and being able to discuss other insurers’ concerns can facilitate cargo placements requiring multiple capacity providers.
Start early. The more insurers a cargo program needs, the longer it takes to get all the pieces together. This isn’t something that can happen days before a renewal. Brokers should begin the renewal process much earlier so there is ample time for underwriters to consider the opportunity.
There is a lot more to selecting cargo insurance, and we will discuss additional topics in upcoming articles.
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