CHAPTER VI 



INSURANCE RATING mD PRACTICES 

 AND THEIR EFFECT ON LOSS EXPERIENCE 



In previous portions of this report, some of the reasons for the 

 largely unprofitable loss e:<periKnce of insiirers have been discussed. 

 In this last section of the report special attention will be given to 

 insurance practices and their relation to the whole insurance problem 

 araong coiranercial fishing vessels. 



An ordinary risk carrier runs a business concern to make a profit. 

 Two major objectives dominate his efforts: on the one hand, he strives 

 to increase the revenue he receives by selling promises to indemnify 

 the insured vessel under the provisions and limitations of the insurance 

 contract and, on the other hand, to keep to a minimum the costs of nm- 

 ning his business, including payment of claims. Although subject to 

 nuiaerous qualifications, the above framework largely determines the 

 nature of the relation between insurer and insured. 



How efficiently have the insurers operated in their efforts to 

 maxiinize their profits or minimize their losses? In what ways may the 

 insurance practices have contributed to the insurance problem? In 

 order to answer these questions, the following topics will be discussed: 

 fi^st, the efficiency of insurers in estimating the expectation of loss; 

 second, the effect of the law of averages and competition on the revenue 

 of insurers; finally, factors affecting e:cpenses and losses of insurers. 

 Discussion of these topics may not fully answer the above broad questions, 

 but it will serve the purpose at hand, njimely, discovering and understand- 

 ing the importance of the basic soxuxes of the insurance problem, 



A. RATING AND COST OF HULL AilD PROTECTION AND 

 INDEI-iNITY INSURAI'ICE 



Other things disregarded, the degree of success or failure of an 

 insurer depends largely on estimating as accurately as possible tlie 

 value of the risk, i.e., the expectation of loss which is the product 

 of the amount of insurance at stake and the probability of loss. In 

 fact, the ejipectation of loss determines the insurence rate and the 

 assumed obligations tovrard the insured in undenirj.ting the risk. The 

 higher the expectation of loss, the higher the insurance rate or the 

 smaller the coverage. Conversely, the lovier the e:qDectation of loss, 

 the lovrer the rate or the higher the coverage. If this relationship 

 is true, the cost of insuring a good risk should be less than the cost 



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