Recent development of legal issue in Marine Insurance

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. 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. 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.

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. 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. 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. 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. 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.