Underwriting judgement: a fleet with a poor claims record and a sanctions flag
A shipowner seeks renewal of H&M and P&I for a fleet of 8 vessels (average age 16 years, mixed flags). The fleet has had 5 H&M claims in 3 years totalling USD 4.2 million against USD 6.0 million of premium, plus two P&I crew claims. One vessel traded to a sanctioned port in the last policy year; the owner says it was 'human error by the chartering desk'. The owner also has a subsidiary registered in a jurisdiction with weak beneficial-ownership transparency. The H&M policy is up for renewal with a 15% rate increase proposed by the incumbent. The broker asks you to assess whether to write the risk and on what terms.
1. Assess the loss ratio and the underwriting decision.
Read the worked answer
Loss ratio = 4.2m / 6.0m = 70% on H&M alone, before expenses; adding the P&I crew claims and expenses likely pushes the combined ratio above 100%. A 15% rate increase is unlikely to be sufficient unless the claims trend is improving. The underwriter should: (a) analyse the 5 claims by cause (machinery, navigation, cargo) to see if they are systemic; (b) consider age-related machinery claims; (c) impose a higher deductible and possibly a claims-cooperation condition; (d) require a fleet risk-management review. The decision should be to write only with conditions: increased deductible, improved maintenance warranties, and a sanctions-compliance warranty.
2. Address the sanctions and beneficial-ownership issues.
Read the worked answer
Trading to a sanctioned port is a serious red flag. The insurer must confirm: (i) whether the voyage breached applicable sanctions (UN, EU, UK, US OFAC); (ii) whether the owner had procedures to screen charters; and (iii) whether the 'human error' explanation is credible or a pattern. The weak-transparency subsidiary raises AML/KYC concerns; the insurer should obtain beneficial-ownership information and confirm no sanctioned individuals are involved. Conditions: a sanctions-compliance warranty, exclusion of liabilities arising from sanctioned trades, and a right to cancel if sanctions are breached. The insurer should also consider whether the P&I club's rules permit cover for such trades. If satisfactory answers are not provided, decline the risk.