Terror on the seas: although terrorism is growing as a risk for marine insurers, they are still focusing on the same underwriting factors--geography, type of cargo and packaging. (Property/Casualty: War Risk).

As tension in the world swells and shifts, ocean marine insurers are faced with underwriting risks never imagined.

Ships and their cargo can be used as weapons, for example, and terrorists may set their sights on cruise ships. "Regrettably, you have a potential threat to human life with cruise ships," said Michael Civisca, president of the U.S. marine and energy operations of Navigators Group Inc. "They are essentially floating hotels and could be viewed as a likely target."

Oil tankers and offshore drilling rigs are likely targets of terrorist attacks as well, because of the high initial loss and the long-term environmental damage an incident would cause. In October 2002, the French oil tanker, Limburg, was struck by a small boat loaded with explosives. The attack reportedly killed one crew member and spilled 90,000 barrels of oil into the Gulf of Aden. In its 2002 annual report, the International Maritime Bureau said incidents such as what happened to the Limburg are difficult to prevent. "No shipboard response can protect the ship in these circumstances," according to the report.

"Take a very concentrated port like Boston--it's a small village compared to New York as a port," said David French, president of the American International Marine Agency, a member of American International Group. "You could imagine the concentration of risk with a major [liquefied natural gas] carrier coming into port."

Yet, despite the new risks and the impact of the terrorist attacks of Sept. 11, 2001, on many areas of the general property/casualty industry, the ocean marine line has seen little change. "There is an obvious need for increased attention to the possibility of a loss arising out of war or terrorism' said Mark Blackman, director of NYMagic Inc., an ocean marine and specialty-lines holding company. But underwriting factors are still comparable to those of the pre-Sept. 11 environment.

Underwriting Concerns

Foremost, geography continues to play an important role in underwriting marine policies and setting rates for most underwriters, particularly those in Europe. This factor considers both the ship owner's location as well as the ship's destination. "We don't cover vessels from just anywhere," said Nick O'Conor, financial director of the Strike Club, a mutual insurer that underwrites ocean marine coverage in the European market. "Where the vessels come from is equally important as where they are going, as we concentrate on covering vessels from Germany and other northern European countries where there is no war risk pool."

"Policies have normal war and strikes/riots rates for most of the world," French said. "But for areas such as the Persian Gulf, underwriters reserve the right in certain situations, such as another Iraqi war, to exercise a notice of intent to change war coverage and rates based on the exposure."

Some of the more scrutinized geographic areas currently include the Persian Gulf, Africa, the Arabian Sea, Malaysia, Indonesia, and the Panama Canal. "When events dictate, London underwriters issue a list of excluded trading areas," Civisca said. "For shippers transporting goods to these areas, additional premiums and greater restrictions are the norm."

The commodity being shipped, the way it's packed, the ports of loading and discharge, and the vessel also play an important role in determining rates, said Haig Dick, director of the American Cargo War Risk Reinsurance Exchange. "If it's general cargo--shoes or apparel--it's one thing," he said. "But if it's hazardous chemicals, ammunition or components that could make ammunition, it would get a different rating."

The accumulation of risk is an underwriting consideration, particularly in terms of war or terrorism coverage, for AIG. "Ninety-five percent of all non-North American trade to the United States moves by sea, and 43% of all containers coming into the U.S. come through the Port of Los Angeles at Long Beach," French said. "That is an enormous concentration, so you can imagine that one terrorist act there is something that underwriters need to be concerned about."

For Navigators Group, the use of technology solutions to improve risk management efforts and security is becoming increasingly important. "Some people fear a dirty bomb being placed in a container that could explode at a port anywhere in the world," said Stan Galanski, president and chief executive officer of Navigators Group Inc. A dirty bomb uses explosives to disperse radioactive, chemical or deadly biological materials. "Cargo security has improved dramatically from five years ago, and one outcome will be additional improvements in cargo and port security." The answer is a better ability to detect what is inside a container, as well as improvements in screening, controlling manifests and overall port security, he said.

Open to Interpretation

What constitutes an act of war compared with a terrorist attack and whether or not a war-risk policy would cover a loss is still open to interpretation, according to Tom Angiolino, senior vice president, and Andrea Jansz, marine risk analyst, with the marine practice of Willis Group Holdings.

"War-risk policies don't necessarily exclude terrorism, but they don't necessarily address it either," said Angiolino. Coverage depends on the interpretation of the policy, and an incident needs to occur for the interpretation to happen, Jansz added.

"Arguably, an act of terrorism could be the act of a sovereign state because the statute [the Terrorism Risk Insurance Act of 2002] says from a foreign person or foreign interest," said Christopher Kende, an attorney with Cozen O'Connor. "Traditional war-risk cover only applied to sovereign acts." The interpretation of war and terrorism has created a very confusing marketplace for insureds.

According to AIG's David French and American Cargo's Haig Dick, terrorism cover is normally provided by a strikes, riots and civil commotions endorsement. For Navigators, terrorism coverage has traditionally been provided by the insured's war-risk policy, Galanski said.

"Traditionally war-risk insurance covered the acts of princes, meaning a sovereign-backed attack," said Kende. "Technically, war risk does not have to cover terrorist acts by individuals or small groups."

Typically, war-risk insurance, which can be written as a separate policy or an endorsement to an existing policy, covers vessels while they are waterborne against the outbreak of hostile actions from sovereign states that could result in the physical loss of the vessel or its cargo. "An example is the ships that were lost in the last Iran/Iraq war, which were caught in the conflict for more than a year," O'Conor said. "Since they couldn't perform their functions, they were deemed to be blocked and therefore losses."

"There are various policies in the market, and coverage depends on the wording of the policy," said Guy Debry, an underwriter of the war and non-European delay book for the Strike Club. "It could be that a Scandinavian policy covers one way and a German policy another, and there isn't a full-stop war-risk policy." For instance some war-risk policies include civil war, insurrection and malicious persons in the definition, O'Conor added. "There was a case where a vessel was sunk by unknown parties, but the court ruled it to be covered by an existing war-risk policy," he said.

Terrorism Act: Help or Hindrance?

Opinions are mixed on the impact that the recently enacted Terrorism Risk Insurance Act of 2002 has had on this business line. Prior to the terrorism act, ocean marine insureds could purchase a limited terrorism buyback for losses from terrorist attacks, said Blackman. The act now requires underwriters to provide broader coverage, although interest on the part of insureds has been limited because most of their terrorism exposures are already covered, he said.

"The absurdity of the terrorism act is that the marine hull underwriters are now required to offer terrorism coverage, even though it would arguably be covered under a hull war policy," Blackman said. "Until the insured rejects the hull underwriters' additional premium to include terrorism, the insured has double coverage."

"TRIA hasn't had a major impact on the hull and liability side where terrorism may be covered under the strikes and riots endorsements," French said. "But it did impact the cargo side because of the post-Sept. 11 limitations."

For instance, immediately following Sept. 11, cargo was not insured for terrorism beyond 60 days after discharge from a vessel or beyond 30 days after discharge from air transit. Previously, there were no restrictions placed on the length of time cargo was covered with respect to terrorism, French said. "With the terrorism act, we now must offer cargo cover with the removal of all such limitations for an additional premium."

The terrorism act technically requires insurers to provide terrorism coverage to clients who have already purchased coverage through their war risk policy, Galanski said. The terrorism act requires premiums for war and terrorism coverage to be shown separately from the total policy premium, adding expense to their operations. "From a marine underwriter's perspective, the benefits of the act are outweighed by the expense of implementing the requirements," he said. As well, some confusion exists over who is to be notified, the broker or the insured, Givisca added. "As the underwriter, we don't have the primary contact with clients, so who should the letters be sent to?"

"Ultimately, we view the act as relatively neutral for Navigators," Galanski said. "While it provides a backstop, we don't believe our insureds face the same scarcity of terrorism coverage that was felt by the large commercial-property owners in major metropolitan areas."

Inland Marine, Top Writers--2001

Rank is based on 2001 direct premiums written.

($ Thousands)

                                        Direct
                                      Premiums
Rank  Group                            Written

   1  American International Group    $867,647
   2  Zurich/Farmers Group             593,477
   3  Kemper Insurance Cos.            549,896
   4  State Farm Group                 461,577
   5  Travelers/Citigroup              457,441

      Total U.S. P/C Cos.           $9,108,850

Source: A.M. Best State/Line Product

Ocean Marine, Top Writers--2001

Rank is based on 2001 direct premiums written.

($ Thousands)

                                        Direct
                                      Premiums
Rank  Group                            Written

   1  CNA Insurance Cos.              $267,554
   2  American International Group     220,526
   3  Ace INA Group                    124,833
   4  Allianz of America               120,800
   5  White Mountains Ins Group        110,178

      Total U.S. P/C Cos.           $1,987,957

Source: A.M. Best State/Line Product

RELATED ARTICLE: Shiver My Timbers

The roots of ocean marine insurance date back to a time when pirates roamed the seas plundering vessels and cargo. But even as the world fears the threats of war and terrorism, piracy on the high seas is still a major concern for ocean marine insurers.

Piracy is the seizure or plunder of property from a maritime venture by unauthorized people for their own purpose, said Haig Dick, director of American Cargo War Risk Reinsurance Exchange.

The International Maritime Bureau reported there were 370 incidents of piracy in 2002, particularly in Indonesian and Malaysian waters, Dick said, which is still a concern for insurers. According to the International Maritime Bureau's 2002 annual report, there were 370 attacks on ships, up from 335 in 2001. The bureau says although the risk of terrorist attacks can never be eliminated "the issue is how seriously do the governments take the threat of maritime terrorism."

Incidences of piracy fluctuate in relation to economic conditions, said David French, president of the American International Marine Agency, a member of American International Group. "Typically a downturn in the economy will raise the incidences of piracy."

A Very Large Bucket

Ocean marine insurance covers specific perils arising from the operation of commercial watercraft, such a tankers, freighters, cruise ships, tugs, barges and ferries. The coverage also extends to offshore energy production such as oil-drilling rigs or pipelines, and associated onshore exposures, including wharfs, marine terminals, ship repairers and builders, and marine contractors.

Covered perils include the stranding, sinking or burning of vessels, destruction of cargo, or liabilities arising from the operation of a vessel. "If you go back to the original marine insurance form it, covered many things, including the risk of seizure by pirates," said David French, president of the American International Marine Agency, a member of American International Group. "But at the moment, we're all glued to the possibility of outbreak of hostility in the Middle East."

Ocean marine insurance is underwritten through the use of exclusions based on such factors as the age and condition of the vessel, type of cargo, planned trade routes, expected weather conditions and the ship owner's loss experience. "In short, marine insurance is generally judgment rated," said Mark Blackman, director of NY Magic Inc., an ocean marine and specialty-lines holding company. "The diversity of risks makes it difficult to reduce marine underwriting to rating formulas."

Coverage for war risk and terrorism risk, which are often written as endorsements to the main ocean marine policy, excludes certain geographic areas, attacks from nuclear, biological and chemical warfare and losses arising from conflicts between the permanent members of the United Nations security council, said Guy Debry, an underwriter for the Strike Club, a mutual insurer that underwrites ocean marine coverage in the European market.

In addition to war and terror, insurance is available for strikes, riots and civil commotions, which primarily covers the time and financial losses arising from the disruption of trade, such as the West Coast port closings in 2002. "The principle is simple--as a ship owner, you have to pay something everyday for operation costs," said Nick O'Conor, financial director of the Strike Club. This endorsement covers those financial losses, he said.