Marine Advisory Bulletin #31 Published by University of Alaska Sea Grant College Program
Fairbanks, Alaska 99775-5040
ASG No. 34, 1996Self-Insurance Programsfor the Commercial Fishing Industry
Workshop Summary Report
National Workshop on Fishing Vessel Insurance and SafetyFebruary 4-6, 1987Washington, D.C.
Edited by:
Dennis Nixon, Robert Moran and Celeste Philbrick
The University of Rhode Island
Narragansett, Rhode Island
July 1987ACKNOWLEDGMENT
This report is the result of work sponsored by the Alaska Sea Grant College Program, which is cooperatively supported by the U.S. Department of Commerce and Extra-Mural Programs under grant number NA86AA-D-SG041, project number A/75-01; and by the University of Alaska with funds appropriated by the state. Thanks also to the University of Rhode Island for the time and effort of the authors.
The authors would also like to thank the many individuals in the insurance and fishing industries who contributed their wisdom and experience toward the common goal of developing self-insurance programs for commercial fishermen throughout the nation.
TABLE OF CONTENTS
Introduction
Organizational Alternatives in Fishing Vessel Insurance
Description of Various Types of Insurance Organizations
Dennis Nixon and Robert Moran
Stock insurance companies
Views from the U.K. Insurance Market
Barry GristwoodReinsurance
Winston PerkinsAlternative Insurance Systems in Operation
Neptune Mutual Association Ltd.
Leif JacobsenThe Point Club
Jake DykstraMassachusetts Lobstermen's Association
Roy TateWest Coast Marine Fund
Chuck RocknessPacific Coast Fishermen's Mutual Marine Insurance Company
Arne SorboCommercial Fisheries Inter-Insurance Exchange
Alyce VlacoAlternative Insurance Systems Being Developed in the U.S.
Bristol Bay Pool
Jeff IngmanSoutheastern Fisheries Association
Eldon GreenbergTexas Shrimp Association
Ralph RayburnSouth Carolina Shrimpers Association
W. A. SilcoxNew Jersey Fishermen's Mutual Insurance Company
Ed CattellNorthwest Marine Underwriting Fund
Bob JacobsonConclusion
INTRODUCTION
The following report is a summary of three insurance panels presented at the National Conference on Fishing Vessel Safety and Insurance held February 4-7, 1987, in Washington, DC. The objective of the conference was to bring together leaders of the fishing and insurance industries to discuss the existing insurance market for fishing vessels and the potential for new organizational alternatives. Insurance companies, brokers, and fishing industry leaders from the U.S., Canada, and the United Kingdom were represented. Virtually every existing and proposed self-insurance program from U.S. fishermen was discussed.
The result of the papers presented and extensive dialogue among the parties is this summary report. It has been prepared in an effort to inform others interested in developing self-insurance programs of the problems and opportunities faced by those already in business and those struggling to get past the proposal stage. As a summary report, the transcript of the conference has been heavily edited to focus on our primary objective and avoid repetition. A brief section was added to incorporate a major group not represented at the conference.
The report is divided into three parts. First, the alternative methods of insurance organization are described and analyzed. Second, existing self-insurance programs are evaluated and compared. Third, a brief conclusion will attempt to determine the factors which will likely lead to the success or failure of a new program.
ORGANIZATIONAL ALTERNATIVES IN FISHING VESSEL INSURANCE
DESCRIPTION OF VARIOUS TYPES OF INSURANCE ORGANIZATIONS
Dennis Nixon and Robert Moran
University of Rhode IslandThe alternatives available for obtaining affordable marine insurance cover a broad range from independent stock insurance companies to "self-insurance". "Self-insurance" systems have proven successful in providing marine insurance coverage and their designs and methods of operation have incorporated various elements found within the marine insurance spectrum.
The major forms of organization include 1) stock insurance companies; 2) Lloyd's associations; 3) mutuals; and 4) reciprocals or insurance exchanges. A review of the designs and characteristics of these organizations will provide a basis for understanding the subsequent discussion of fishing vessel insurance.
Stock Insurance Companies
Stock insurance companies are incorporated business organizations organized as profit-making ventures and owned by stockholders. Laws enacted by the various home states of the stock companies govern their operation, and the companies are obliged to satisfy designated requirements as to their capital and reserve funds. The contracts they issue are usually written for a definitely stated consideration (premium).
The insured receives no dividends from the earnings of the company and pays no assessment or additional premium if losses exceed income. The premium charge made by a stock company for insurance is a fixed sum so that the insured knows exactly what such protection will cost. Both the capital and surplus of the stock companies, as well as the reserves, help guarantee payment of claims made by the insureds; the insured cannot be called upon to pay additional premium amounts in the event that losses are greater than anticipated. The insurer bears the risk as an entity separate and apart from the insured.
In a stock company, management and control rest with the stockholders. They elect the board of directors, who in turn delegate their authority to the officers of the company. A policy-holder of a stock insurer is not involved with the company beyond the payment or denial of indemnity when he suffers a loss.
The scope of stock companies is often national or worldwide. In the U.S., stock companies generally write contracts through local agents or brokers, paying them a commission on the business generated.
Lloyd's Associations
A Lloyd's association is an organization of individuals who underwrite insurance on a cooperative basis. Lloyd's of London is not an insurance company, but is an association that provides certain services to members that write insurance as individual underwriting members of the Lloyd's organization. The insurer is not Lloyd's but the underwriter at Lloyd's. A policyholder insures at Lloyd's but not with Lloyd's.
Technically each member is himself an operating insurance company, issuing policies and underwriting risks individually or collectively through syndicates composed of a number of members. The individual underwriters have unlimited liability with respect to the insurance they write. An underwriting member must conduct his business as an individual proprietorship; in the event of insolvency, not only would his business assets be available for the payment of liabilities, but his personal fortune would be assessable as well. Thus, membership is limited to wealthy individuals with a high net worth who pledge their personal assets to pay losses.
Proposals for insurance are placed before Lloyd's underwriting members or their agents by authorized brokers seeing to obtain insurance for their clients. In practice the broker presents a "slip" to underwriters who sign the slip indicating the extent of their liability. When the "slip" is 100 percent subscribed, the broker prepares a policy and submits it to the Policy Signing Office at Lloyd's. There the policy is examined, stamped, and issued.
In the event of a loss, each underwriter is responsible only for his/her agreed-upon share of the loss and is not responsible for the other members' shares. Because each member is an individual company, in the event a dispute should arise on a policy in which several members have assumed the risk, the insured technically would be required to sue each underwrite separately.
Lloyd's is licensed only in Kentucky and Illinois. In other states, Lloyd's must operate as a non-admitted insurer.
Mutuals
A mutual insurance company is a nonprofit insurance carrier, without capital stock, that is owned by the policyholders; it may be incorporated or unincorporated. There are no stockholders and no capital stock is issued. People become members of the company by purchasing an insurance policy from it. The purpose of the organization is not to make a profit but to provide insurance at a low cost. The policyholders also participate in the operations of the company, having voting rights, and the power and responsibility to share in the company's financial success or failure.
The mutual policyholder-members elect the board of directors, and the board elects the executive officers who manage the company. The mutual corporation assumes the risks of its policyholder-members. When premiums in a given period are more then adequate to meet losses and expenses, part of the surplus can be returned to the policyholder as "policy dividends." The remainder is used to strengthen the company by building up surplus. Should there be a loss, the policyholders sustain it through lower dividends or assessments, or it is covered by the company through a reduction in surplus. Mutuals often purchase reinsurance as an added protection for their members.
Some mutuals are local in nature, providing protection against risks common to one geographic area, while others operate on a nationwide basis and write general insurance lines.
Small mutual companies are often assessable. They assess their policyholders for the money needed to pay the losses that occur. If an assessable mutual experiences no losses, the its policyholders will pay nothing, except possibly a small premium to cover expenses. As a mutual grows larger, it often acquires enough surplus to cover the losses it experiences; consequently, large mutual companies are usually non-assessable; the non-assessable policyholders pay only a premium.
Protection and Indemnity (P&I) clubs are mutual insurance associations that cover the liabilities of vessel owners toward third parties. A P&I Club is not-for-profit in nature, with member vessel owners sharing the costs of claims and other club expenses. Rates are based on actual claims experience with a small additional margin as a reserve against possible unusually large claims.
The rates of each vessel owner will be affected by his own loss record and to some extent the characteristics within the club as to vessel quality and operation. Therefore, clubs that restrict membership to well-run, modern fleets with low loss records will normally have lower rates than clubs that allow broader membership with higher loss records. In the P&I Club operation the vessel owner relies upon the club for liability coverage, and for that protection he shares in the success and failure of the club.
Reciprocal Exchanges
A reciprocal exchange is a cooperative insurance organization that may be defined by a group of individuals who combine for the purpose of exchanging each other's insurance hazards. As in the case of a mutual, the policyholders in a reciprocal are both the insured and the insurer. There are no stockholders.
The reciprocal is not incorporated, but is actually an aggregation of individuals, firms and business corporations that exchange insurance on one another. The reciprocal exchange is not in the legal sense a mutual because the individual subscribers assume their liability as individuals, not as a responsibility of the group as a whole. Another basic difference from mutual insurers is that reciprocals are not incorporated as companies but are formed under separate state's laws as associations. When an insured buys insurance from a reciprocal, part of the premium for insurance is paid to the attorney-in-fact who manages the reciprocal. The balance of the premium is credited to the account of the insured. The attorney-in-fact is not personally liable for the payment of claims and is not the insurer. The reciprocal exchange is the insurer. When losses are paid, each insured's account is charged with his proportionate share of the loss. At the end of the year, funds left to the credit of each account may be left in the reciprocal or paid back to each insured as they remain insured. When they withdraw, such reserves are refunded. Policyholders are individually liable for their separate shares of losses; there is not joint liability as in a mutual.
Insurance pools are generally organized as reciprocal exchanges. Their design varies from state to state to meet local requirements. Unlike most mutuals, pools often operate without reinsurance protection. Operating without that additional level of security can create problems with the banks holding mortgages on the pool vessels.
VIEWS FROM THE U.K. INSURANCE MARKET
Barry Gristwood
Sunderland Marine Insurance Co.There are three mutuals insuring fishing vessels in the U.K.; two in northern England and one in northeastern Scotland. May types of insurance companies exist in London: foreign and domestic-based, Lloyd's syndicates and about 2,000 other underwriters.
There are a dozen major P&I associations. These associations provide the blue water vessel owners with protection for legal responsibilities to his crew and other vessels. The average U.K. fishing vessel owner however does not look to the P&I associations for crew protection but to the hull club which can provide that.
In the U.K., the cost of P&I insurance is approximately 5 to 10 percent of a vessel's premium expenditure. In the U.S., it is closer to 50 percent. Thus the total cost of insurance in the U.S. is approximately twice as expensive as that in the U.K. or Canada. In the London market, there is little interest in providing P&I coverage at the primary level. Most underwriters favor provision of layer coverage starting from $200,000 or $250,000.
Many underwriters in the U.K. are reluctant to insure U.S. fishing vessels except those with larger ($1 million) sums of insurance. Disinterest in the business is even greater in the U.S. One reason the fishing industry is unattractive to insure is that there is not a large volume of premiums. There are several levels to the business -- the insurers of Lloyd's dealing with Lloyd's brokers who deal with one of the major international insurance brokers who then deal with a producing broker. This makes it uneconomical to deal with small clusters or individual fishing units. The U.K. insurers deal mainly with the biggest, most highly capitalized U.S. fleets such as those in San Diego and Seattle.
Another reason why the U.K. marine underwriters shy away from the U.S. fishing industry and why premiums have climbed so high is because of P&I liability suits under the Jones Act. Settlements made in the U.S. have been viewed in general as quite high. Awards are decided by a jury in the U.S. rather than by judge as in the U.K. Juries are considered more sympathetic in the calculation of pain and suffering awards. In Ireland, where P&I problems are nearly as significant as in the U.S., attempts are being made to switch awards from jury to judge. Insurance in the U.S. will remain high as long as the liability system remains in its present form.
In addition to the manner in which the legal system handles liability cases, the lack of safety regulations for the U.S. fishing fleet is another wedge bracing up high insurance premiums. There are no statutory requirements for fishing vessels less than 200 gross tons and very few fishing vessels are over that size. No regulations exist concerning manning, design, stability, maintenance or condition.
In 1975 in the U.K., regulations were introduced as to the condition and maintenance of all vessels larger than 40 feet. There are strict controls regarding manning by skippers of all vessels more than 25 tons. Two recent studies indicate that the efforts to regulate the fleet have produced better safety records. Such regulations may also clean up overcapitalization by eliminating unsafe vessels. When efforts to organize standards on a compulsory statutory basis prove difficult, local insurers, clubs or pools may decide to handle the responsibility. They may stipulate standards in order to improve safety of the vessels they insure. Recommendations for institution of safety standards might include a phase-in program beginning with all fishing vessels more than 100 tons, of which there are approximately 1,500 in the U.S. Then over the years, the size range could be lowered to cover smaller vessels ideally including all those more than 25 gross tons.
Part of the hesitation about legislating safety standards is over administrative costs. But considering the time, manpower, and expense incurred by the Coast Guard in the search and rescue of fishing vessels, inspections may in the long run produce a savings. Legislation does not guarantee that insurance premiums will go down. If the number of losses decreases and fishing vessels operate more safely, premiums may be reduced. The insurance industry requires some predictability with implies a history of level results. Tort problems and safety problems that make fishermen uninsurable must be attacked.
REINSURANCE
Winston Perkins
General Reinsurance CompanyGeneral Reinsurance Company is the largest U.S. reinsurance company, the only one to become active with several fishing vessel programs in the U.S. and Canada.
Insurance and reinsurance are similar but may have different interests. Reinsurance companies do not insure fishing vessels but provide coverage for companies that do. There are two types of insurance. Quota share is that in which the reinsurer accepts a percentage of every risk, collects the same percentage of the premium and pays the same percentage of loss. The other is excess loss reinsurance, that which General Reinsurance provides. This is provided when the primary carrier takes a specified first loss retention and the reinsurer picks up the excess over that value to a maximum of liability. The premiums paid are not commensurate with the size of line the reinsurer takes.
Reinsurance is marketed on a treaty basis and facultatively. On a treaty basis, the reinsurer accepts every risk within the scope of the agreement. He does not have the right to decline any such risks. Facultative marketing is when the insurer must gain the reinsurer's acceptance of each and every risk prior to binding.
The two main problems with fishing vessel reinsurance are hull risk, because of total loss, and the crew liability risk of P&I.
When asked to become involved with the fishing industry, we as reinsurers investigate the insurance company to determine their expertise at profitably underwriting fishing vessels. We also look for qualified personnel, financial stability and meaningful involvement in the risks insured. General Reinsurance, for example, sends a representative from the claims department to discuss reserving practices, claims handling, and assignment of attorneys with the underwriters. The most desirable groups seeking reinsurance are local mutual clubs or companies. These groups can separate the good operators from the bad, and better understand industry problems and explanations of loss.
Large nationwide insurers are often at a disadvantage in this aspect. Reinsurers like to have input into loss settlements and the underwriting of the risks with the lead insurers. They cannot, however, dictate the rates. General Reinsurance did not cut off marine insurance because of its mall volume or losses as did other companies who lack a strong commitment. Many insurers that are part of larger conventional organizations are not well aware of the danger and losses in the industry. They become involved with the fishing industry without understanding it, lose money and withdraw. They make no effort to take proper corrective underwriting measures.
ALTERNATIVE INSURANCE SYSTEMS IN OPERATION
Neptune Mutual Association Ltd.
Leif Jacobsen
Neptune Mutual was incorporated in 1971, originally in Luxembourg and now in Bermuda. It was formed by fishing vessel owners from New Bedford, Massachusetts after several insurance companies went bankrupt leaving them to pay their own claims. Vessel owners may become members of this insurance mutual subject to the approval of the board of directors, a satisfactory vessel survey and payment of a membership fee. The premium is determined by the estimate of losses for the year. Since such estimations are difficult to make, Neptune's policies are assessable, meaning the members are called upon for additional payments when losses exceed this estimate. Neptune has made supplementary calls during four of the sixteen years they have been in business. Neptune has also instituted safety rules that member vessel owners must abide by.
The board of directors receive a modest fee. A separate company undertakes all claim service for Neptune. The mutual insures 210 vessels most of which are in New Bedford, Massachusetts with others ranging from Maine to Florida.
The Point Club
Jake Dykstra
The Point Club has been insuring vessels since June 1986. This particular insurance club was formed in response to rapid changes in the service and rates provided by the Point Judith Fishermen's Cooperative. Their original insurance company and broker of 33 years was swallowed by a larger conglomerate that then had little contact with the industry. The rates suddenly skyrocketed. The next company provided poor service and eventually charged higher rates. Finally, members of the cooperative decided to form a self-insurance club.
The Point Club provides both hull and P&I coverage. The hull insurance is 100 percent with Sunderland Marine, a fishing vessel mutual based in England. Of the P&I, the club assumes the first $50,000 of risk and the rest is reinsured with General Reinsurance.
At present 56 vessels are members of the club. There is some expectation that the club will grow to include vessels from New York to Maine. The Point Club (as with Neptune and Sunderland) has a management company to handle business operations.
The Point Club "grandfathered" in all the boats that were in the fleet program of the Point Judith Cooperative, although the pool formed independently. The club is very selective about the vessels allowed into the program. Stringent surveys must be performed on all member vessels. The club has instituted 90 safety criteria that vessels must meet. Some of the minimum criteria must be met for the vessel to leave the port while others must be met within a two year period.
Massachusetts Lobstermen's Association
Roy Tate
In 1977, the Massachusetts Lobstermen's Association formed a non-profit boat protection cooperative for reasons similar to the Point Judith Cooperative. Rate fluctuations and disinterest in insuring older yet seaworthy wooden vessels were what motivated the association to create a self-insurance program.
The program insures 600 vessels and 1,200 members. It provides hull insurance for day boat operations, primarily for lobster fishing, but also some dragging, longlining, tub trawling, gillnetting, and tuna fishing. Member vessels are required to be in an approved mooring area every 24 hours. The group has also developed a list of required minimum safety standards. Vessels have 35 days from the time of joining the group to meet the requirements.
Hull insurance rates for new to five-year-old vessels are 1.9 percent while the oldest boat category, those 26 years and older, are charged 4.5 percent. There are two levels of deductible. The automatic deductible is $1,000. If a member prefers to have only $500 deductible, they are charged an extra $100 per year.
The club also offers P&I insurance for either nine or twelve months. The nine month policy does not include the months of January, February and March. The P&I rate in the lobster fishery is $20 per man per month. In the other fisheries, the rate goes up to $75 per month. There are two maximum levels, $100,000 and $300,000. Lloyd's of London reinsures the entire program. They have a stop loss of $250,000 which is the maximum loss they can experience each year. Excess P&I is with St. Paul Reinsurance of New York. Claims have been low and lawsuits minimal. The strength of the program is attributed to the discipline the membership exhibits over themselves and one another.
West Coast Marine Fund
Chuck Rockness
The West Coast Marine Fund is a Seattle pool started in the late 1930s when sardine boats were having difficulty finding insurance coverage. The pool initially provided partial coverage of about 10 percent and charged 5 percent. Over the past 15 years, the pool has been able to refund 90 percent of what the original membership paid. Currently rates are set at 6 percent of the insured amount. There is no deductible, but each member has a subsidiary reserve as part of the main reserve, built from his contributions over the years. In the event of a claim by a member, that portion of his current year reserve becomes in effect his deductible because it is used up before current earnings and other member's contributions are.
The pool is highly selective about membership, requiring an application, a current survey and a stability report. The board of directors accepts or rejects vessels. They consider the vessel type, condition, construction, maintenance habits of the owner and crew, the operations records, claims history, skipper and financial stability of the operation. They prefer owner-operated vessels.
The pool continually updates their by-laws mostly for safety reasons. They set territorial limits, specify frequency of vessel haul out, and require stability tests any time there is any modification to the hull. Other mandatory safety measures include notification of skipper changes, annual testing of alarm systems and exclusion of all gasoline engines.
Pacific Coast Fishermen's Mutual Marine Insurance Company
Arne Sorbo
Canada has a government-sponsored marine insurance plan that the current government is attempting to phase out while mutuals and pools take over the insurance scene. The Pacific Coast Fishermen's Mutual Insurance Company was incorporated in 1945. They covered only collision and total loss. The company had an original retention of $4,000. As of 1986, their retention has climbed to $200,000.
This particular mutual insures 1,857 vessels with an average value of $135,000. All obligations for insurance and claims must be approved by the board of directors though they are usually done on a conditional basis by the business office.
The mutual's contract for insurance is based on the Canadian Hulls (Pacific) Clauses 1953. Coverage for machinery damage is based on the Inchmaree Clause. Wear and tear to machinery is not covered.
Electronic equipment is replaced at no cost to the insured if three years old or less. For older equipment, the lower of the replacement cost of the survey value is allowed.
The policy deductible is a quarter of one percent with a high of $3,000 and a low of $500. Mutual Marine has divided the fleet into two classes for the purpose of assessing rates. The first class includes vessels that are in prime condition, valued at $200,000 and more, built of steel or fiberglass. This rate is 1.5 percent subject to a refund. The rest of the fleet falls into the 3 percent group -- also subject to a refund. A flat rate of 1.5 percent is available to certain values, age, and construction. The policy also covers each vessel with $2 million of P&I insurance. P&I insurance is inexpensive in Canada, because 1) there have been few claims and 2) every fisherman must have Workers' Compensation. The mutual currently has a $10,000 deductible; $5,000 paid by the fisherman, $5,000 paid by the insurance company, and the rest is reinsured. There is an accidental death and dismemberment provision for $50,000 for the assured only - not the crew.
Skippers are not required to have master certificates except for vessels of 100 gross tons or more. It is quite likely that within the foreseeable future, tickets will also be required for smaller vessels.
Vessels are surveyed every three years and herring boats are surveyed every season. The refund declared for 1986 was 67 percent to the 3 percent group and 55 percent to the 1.5 percent group. Due to the excellent performance, the 1.5 percent non-participating group was allowed 10 percent refund. After provisions for refund, $500,000 was transferred to reserve.
Commercial Fisheries Inter-Insurance Exchange
Alyce Vlaco
The Commercial Fisheries Inter-Insurance Exchange was not represented at the Fishing Vessel Insurance and Safety Conference but is one of the oldest marine self-insurance programs in the U.S. Formed in 1943 in San Pedro, California, the exchange was composed of only ten purse seine vessel owners. In the 1940s, fishing vessel insurance was as difficult to obtain as it is in the 1980s with premiums running then at 9 to 11 percent. The objective of the organization was to provide a stable insurance market for commercial fishing vessel owners.
Currently 150 vessels are participating in the reciprocal exchange. Some fish as far away as the western Pacific and a few participate in springtime fisheries off Kodiak, Alaska. The home ports of member vessels range from San Pedro to Washington state. Safety requirements include bilge and engine alarms, use of EPIRBs, and reporting of hours since last major engine overhaul. The group is working toward standards requiring survival suits on all member vessels as well as regular inspection of life rafts. The exchange maintains a "house surveyor" who checks all condition and valuation surveys on new and renewal accounts, follows up on survey recommendations and safety requirements, and monitors fishing conditions and market prices for fish. This improves consistency and promotes sound underwriting. The exchange underwrites only commercial fishing vessel hull insurance. Premium rate spreads are 4 to 6 percent, 6 to 8 percent and 8 to 11 percent based on vessel age, construction and type of fishing undertaken. The exchange maintains only a small retention of $25,000. All layers of coverage above that are reinsured.
Separate corporate entities accommodate exchange members by underwriting P&I, war risk, breach of warranty and builders risk insurance. The exchange can then provide quotes for the complete coverage requested by the member.
ALTERNATIVE INSURANCE SYSTEMS BEING DEVELOPED IN THE U.S.
Bristol Bay Pool
Jeff Ingman
There are roughly 10,000 licensed fishing vessels in Alaska. They range in size from 32 foot gillnetters to 300 foot catcher processors and in value from $30,000 to $20 million. Collectively, they participate in the richest, most diverse and geographically strung out fishery in the world. Fishing conditions vary from the protected inland waters of southeast Alaska to the open, hostile, frigid waters of the Bering Sea.
This variety of conditions, fisheries, geography and hull values poses a substantial obstacle to the establishment of a new marine insurance system. When asked, fishermen are attracted to the option of self insurance and pools, but they are understandably reluctant to team up with vessel owners from fleets and fisheries other than their own. Fishing is risky business and no one understands this better than the fishermen. They are only willing to consider pooling schemes with those they know to be safe operators. This tends to limit the potential size and spread of risk available in a pool.
The Alaska Legislature recently passed a bill to revise existing state law concerning the formation of pools, technically in this case "marine insurance reciprocals." The bill gavethe state director of insurance considerable leeway to regulate and eliminate fixed capitalization requirements. Before approving a reciprocal, the insurance director has indicated that he will require financial viability and sound management, plus 100 percent reinsurance for catastrophic losses.
To become viable, a reciprocal in Alaska must offer: 1) homogeneity of risk, 2) strict admittance policies, 3) hull and machinery with companion P & I insurance, 4) 100 percent reinsurance for catastrophic losses, and 5) at least 25 participating vessels.
Last fall we started working with an informal group of Bristol Bay gillnetters who wanted to initiate a pool under the new law. At the time, the fleet had 29 hand-picked prospective members. These were all newer vessels with an average hull value of about $110,000. They were all virtually claim free.
We developed a pricing scheme for a hull and machinery pool. Owners would pay about 2.9 percent of hull value. This was somewhat higher than the going rate for vessels of this class. We proposed to give reinsurance underwriters about one-third of the premium. They would assume all risk for total losses and partial losses above a specified level. P & I would be placed as a conventional fleet policy.
But underwriters declined this proposal. They offered our group a preferred rate with a more traditional fleet policy for both hull and P & I coverages, While initially disappointed, the leaders of this fleet have elected to go ahead and accept the underwriters' proposal. They primarily are interested to see if the can organize and maintain a fleet whose primary purpose is the promotion of safety and reduction of insurance costs. So we have proceeded with a small fleet program for Bristol Bay gillnetters this year, and will evaluate the situation again in September.
Southeastern Fisheries Association
Eldon Greenberg
The Southeastern Fisheries Association (SEFA) has members throughout the Gulf and South Atlantic region from Texas to North Carolina. Its membership includes boat owners, individuals and corporations in the processing business, importers and distributors of seafood and persons who are in the insurance business. The boat owner members (1,500 vessels) operate in many different fisheries, including the regionally and operationally diverse shrimp fishery, the mackerel, the snapper/grouper, and the spiny lobster fishery. SEFA is a heterogeneous organization that is geographically as well as economically diverse.
SEFA looked to the National Marine Fisheries Service and the Saltonstall/Kennedy Program as a source of assistance in establishment of loss control and risk finance mechanisms for its members. SEFA's investigation procedure involved communication within the membership as to the determination of the best and most workable alternative marine insurance system.
SEFA began its effort by creating a safety program. The association retained a marine surveyor as a consultant to develop surveyor's guidelines and crew safety requirements that are applicable to vessels operating in the southeastern fisheries. This comprehensive program has been refined into a set of 25 working guidelines.
The association also retained a broker to review both the proposed membership and the risks associated with the Gulf and South Atlantic fleets in an effort to develop loss ratios and prepare a claims profile or book of business.
In June of 1986, SEFA established a vessel owners' committee that would make the basic decisions with respect to the type of program and the type of coverage most suitable for the association.
SEFA and the vessel owners' committee initially focused their attention on a mutual marine insurance system. SEFA is discussing the need for 400 vessels to make such a program viable. They have also been exploring the prospects for group insurance.
The diverse membership poses a problem to any attempts at formation of an insurance system. The operationally and geographically varied fisheries makes the condition of sharing the risk a difficult one. Underwriters must be convinced that this condition exists before they will become involved.
Texas Shrimp Association
Ralph Rayburn
The Texas Shrimp Association (TSA), a producer-level association composed of vessel owners, has historically been subject to both the biological and economic cycles of the shrimp fishery as well as the cyclical nature of the fishing vessel insurance crisis.
There are 350 Gulf class shrimp vessels in the TSA. The vessels range from 60 to 80 feet in length and have replacement costs from $200,000 to $400,000.
The TSA has worked with the National Council on Fishing Vessel Safety and Insurance under the Saltonstall/Kennedy Program to establish some type of vessel insurance alternative for their members. The investigation of alternatives available and open to the TSA was intended to generate input from the insurance industry which was found unfortunately to be lacking. The insurance committee of the TSA was to review, analyze and select the preferred alternatives.
Texas is an agent state, meaning that an individual or broker serves as an agent for an underwriter rather than taking the potential insuree and finding the best underwriter. The "agent" in such a case, already has a line into an underwriter. This was seen as a problem by the TSA in that the association, as a potential insuree, was unable to deal directly with an underwriter. The one opportunity within the state where that situation could be avoided was through the formation of a reciprocal exchange.
A reciprocal exchange would allow the TSA to deal more directly with the establishment of its primary coverage and reinsurance.
Texas requires the reciprocal to meet the requirements of any other insurance company being established within the state, including a minimum amount of surplus and capital retention of $800,000. The amount of surplus and capital required was viewed by the TSA as an expensive proposal.
The TSA plans to capitalize the attorney-in-fact. The attorney-in-fact, through the acquisition of the capital obtained through a private offering memorandum, will then transfer that capital asset to the reciprocal, principally to cover the $800,000 surplus requirement.
The problems in forming a reciprocal exchange stem from factors both within and without the membership. The membership maintains an individualistic attitude both socially and economically. The underwriters are reluctant to provide reinsurance to a system in which the members display no solidarity. The TSA has found it difficult to enlist the insurance industry as a partner to its proposal. With the uncertainty of the membership's role in assuming the risk, the cooperation of the insurance industry will continue to be limited for primary coverages.Update: During the 70th Regular Session of the Texas Legislature (January 6 to June 1, 1987) requirements for surplus and capital were increased from $800,000 to $2 million. TSA intends to continue its objective of a reciprocal exchange but capitalization scenarios will probably be altered.
South Carolina Shrimpers Association
W.A. Silcox
The South Carolina Shrimpers Association (SCSA) is a small group of small boats operating with small amounts of capital. The member vessels are older, wooden-hulled diesel boats, built in the 1950's. The vessels are well maintained and operate for the most part in nearshore waters.
The SCSA found itself paying the astronomical insurance rates that the rest of the U.S. fishing industry was paying and decided to seek an alternative means if insurance.
The SCSA collected loss profiles and vessel statistics of its fleet and sought advice and comment from existing associations. Through contacts with the insurance and related industries a mutual insurance system was proposed. The SCSA solicited its program to a New York-based reinsurance company and was quoted premium rates that could be easily be afforded by the proposed mutual.
The plan slowed and eventually stalled with the refusal of the mortgage companies to back the plan. The companies held the mortgage on a majority of the shrimp boats in the fleet and believed the proposed system did not have a sound financial base from which to build.
In about one year, the mortgage company indicated its readiness to back the program due to the worsening insurance market conditions affecting their mortgaged fleet. The SCSA renewed its contacts and presented its fleet profile to the New York reinsurance company. At this time the company quoted higher reinsurance premiums, bringing the proposal to a halt.
The SCSA has since begun to work with the Point Club and Sunderland Mutual Marine in an effort to establish the mutual.
The mortgage companies have restated their acceptance of such a program and the possibilities of acquiring affordable reinsurance coverage for the fleet may make such a venture viable.
The proposed system is small enough to allow its managers to look at every risk. Peer pressure in the fleet is useful in maintaining the safety and communication necessary in a mutual system.
New Jersey Fishermen's Mutual Insurance Company
Ed Cattell
New Jersey has five major ports and has seven kinds of fisheries: lobster, trawler, scallop, surf clam, longline, gillnet and bay hard clam. Vessels operating out of New Jersey ports fish anywhere from 25 miles offshore to off the Flemish Cap and through the Caribbean.
As in a majority of U.S. fishing ports, the New Jersey fishermen felt their insurance premium increases were not in concert with their safe operations or experienced conditions of risk. The fishermen applies fro and received a Saltonstall/Kennedy Program grant to study the market for a fishermen's mutual insurance system. The design of the study was to prove the potential viability of a state-supported insurance system for a definable group of people that could afford to carry their own losses
A strong commercial fishermen's association exists in the state and can provide the foundation for an alternative insurance system. The study of a proposed insurance system involved an exhaustive survey of the association's vessels, both for defining the association's commitment to the plan as well as a means of updating the fleet profile.
The state of New Jersey has developed numerous means of aiding its commercial fishing industry. New Jersey has taken a close look at the whole mutual concept and appointed a special deputy insurance commissioner, whose job is to help form mutuals.
The proposed mutual relies heavily upon the state's financial backing made available through the New Jersey Commercial Fishermen's Loan Fund. Legislation is pending to create a $5 million rotating fund for loans to fishermen for a variety of purposes. One of the priorities of the plan will be loans to fishermen to pay calls on their mutual.
New Jersey law requires $50,000 on each line of insurance that is written by the mutual. There is still some question as to whether marine insurance is a line or whether hull and P & I are each a line. The mutual would also be required to have assessable policies.
The proposed mutual will carry $50,000 of P & I retention, reinsurance the rest and will reinsure 100 percent of the hull. The plan also will offer an optional disability policy for fishermen. The proposed insurance plan will require an initial fleet of 50m vessels to reach an operational mode.
The mutual has drafted its by-laws and has established a capitalization requirement of a signed $3,500 promissory note that must accompany each application for membership. Stability checks will be mandatory and the mutual will develop a written set of mandatory standards for vessel surveys.
The mutual plans to adjust its proposed rate schedule according to the varied risks of its covered fisheries, and the varied ages and conditions of its vessels. The fishermen wanted discrimination in the rates to take into account the differences in the perceived risk. This adjustment will undoubtedly not sit well with those fleets who are assigned higher rates than the across-the-board rates initially proposed. The problem of competition and active opposition from the existing insurance market and brokers is viewed as hindrance to the establishment and operation of the mutual.
The difficulty in acquiring long-term reinsurance for the mutual must be resolved. The loan fund could be utilized for reinsurance, but problems with the use of the fund could arise.
Northwest Marine Underwriting Fund
Bob Jacobson
In 1985, a group of 12 Newport, Oregon fishermen banded together in the interest of beginning a self-insurance program. They were motivated by a doubling of commercial hull rates within a two year period, The group proposed to make use of a 1979 Oregon statute which revised the state's insurance code to allow formation of vessel hull insurance pools in the state.
The statutory requirements for formation of an insurance pool in Oregon are: 1) a member must receive 50 percent of income from fishing, 2) initial pool formation requires a minimum of 25 vessels representing an aggregate $125,000 in annual insurance premiums, 3) unless pool surplus is greater than $500,000 all policies are assessable for not less than one or not more than ten times the premium, 4) no limit on amount of insurance risks that can be assumed by the pool on any insurance policy in relation to amount of surplus in the pool, and 5) pools must maintain a surplus of $5,000.
An array of vessels were to be initially insured by this group, most of them distant water boats that fish in the Gulf of Alaska and the Bering Sea. The members of the group were chosen on the basis of their reputation as safe operators and solid businessmen with few previous claims.
Core group members contributed $1,000 each for start-up capital plus$350 each to cover legal expenses. They elected a board of directors that selected a manager and legal counselor. Completion of paperwork for approval by the Oregon Insurance Commissioner's Office took longer than anticipated.
The pool requires members to sign a promissory note to the pool for the value of his annual premium. These notes are only called if pool reserves fall below a level that the board of directors deems desirable. The pool also requires its potential member vessels to comply with a list of mandatory safety requirements.
At present forty vessels have been approved for membership. The pool is still awaiting state approval and as soon as the mandatory safety standards are met the pool hopes to be in operation.
Conclusion
As can be seen from Table 1, both existing and proposed systems are fairly evenly divided between mutual and reciprocal forms of organization. They reinsure their own exposure either through another mutual (Sunderland), a stock company (General Reinsurance, St Paul Reinsurance), or a Lloyd's syndicate. The decision to choose one form of organization over another depends upon state regulations regarding the formation of insurance companies. For reasons largely historical in nature, reciprocals have been more popular in the West and mutuals more often used in the East.
Table 1 Existing and Proposed Programs
Existing Programs
Mutuals
Sunderland Marine
Neptune Mutual
The Point Club
Massachusetts Lobstermen's Association
Pacific Coast Fishermen's Mutual Marine Insurance CompanyReciprocalsWest Coast Marine Fund
Commercial Fishery ExchangeProposed Programs
Mutuals
Southeastern Fisheries Association
South Carolina Shrimpers
New Jersey Fishermen's Mutual Insurance CompanyReciprocalsBristol Bay Pool
Texas Shrimp Association
Northwest Marine UnderwritingThere are a number of factors successful self-insurance programs have in common. First, the fishery itself is relatively profitable and the fishermen have the necessary capital to begin sharing risks. Second, rigorous underwriting criteria are developed for each fishery. The most successful of these programs have the most thorough safety and equipment requirements. Third, it is very valuable to have an existing organization serve as the initial organizer of the program. If mutual trust and strong leadership is already present, one of the most difficult organizational problems can be overcome. Fourth, it is far easier to begin with one class of vessels in a relatively small geographic area. This keeps the organizational requirements simple and travel costs low. Finally, the group needs a skilled, honest and experienced insurance broker to handle the day-to-day management activities of the program and to secure reinsurance at competitive rates. The criteria are difficult, but not impossible; for the right group in the right fishery, it is an idea whose time has come.