6 . Tlfie effect of insuranc e ra ting an d practice s on loss 

 experience . Insurance rating, competition among insurers, and some 

 insiu'ance practices have contributed to the insurance problem, on the 

 one hand by limiting the revenue of insurers and, on the other hand, 

 by increasing the incidence of claims and claim expenses of insurers. 



I'/hether insurers operate efficiently in estimating the expecta- 

 tion of loss was tested by a comparison of insurance cost of vessels 

 rated on the basis of their loss record. Insurers differentiated 

 between various insurable risks as far as the coverage was concerned. 

 However, whether differentiation in terms of coverage was adequate, 

 especially among active wood vessels, is questionable. Additionally, 

 coverage differentials were largely offset by the premium ratio, 

 especially between best and worst of active vessels. Relatively 

 spesLking, insurers differentiated more in terms of coverage, which 

 determined tue scope of the insurers' obligation to indemnify the 

 insured, and less in terms of the premium ratio, which determined 

 the revenue from which obligations must be paid. Finally, failure 

 of insurers to differentiate between best and worst vessels is more 

 pronounced in protection and indemnity insurance than in hull 

 insurance. 



The fact that insurance companies operated on averages and their 

 failure to rate individual risks adequately on experience and merit 

 is in part responsible for the substantial rise in average rates when 

 expectation of loss increased during 1950-54. 



The highly competitive state of affairs among insurers is another 

 factor which prevented greater risk differentiation and kept the 

 premium lower than might have been possible othein/ise. 



On the other hand, other factors contributed to high cost and 

 losses for the insurers. The nature of the risk, requiring special- 

 ized knowledge in handling it, the geograjphical dispersion of the 

 risk, and the presence of physical and human elements which may 

 suddenly change the hazard, the relatively small value of the risk 

 compared with the time-consuming process in handling it, and possible 

 duplication in insurance services contribute to high operational 

 costs. Besides the above structural factors, operational costs may 

 have increased because of frequency and severity of claims during 

 1950-54. 



In spite of serious effort, competition among insurers prevented 

 adequate restriction of the coverage by limiting the provisions of 

 the contract, especially by increasing the amount of the deductibles 

 for hull and for protection and indemnity insurance . The above con- 

 clusion, hovrever, is reached in retrospect and in view of the realities 

 in the market. 



