Competition among insurers on insurance coverage and its probable 

 effect on loss experience is discussed in the next topic. 



C. FACTORS AFFECTING EXPENSES AND L0S3 

 PAYMENTS OF INSURERS 



Following the discussion of the factors which affect the revenue 

 of insurers, the next step is to observe how the collected premium is 

 allocated. This is done by an examination of the factors which affect 

 the cost of acquiring the risks, the coverage which determines the 

 Insurers' responsibility to indemnify the insured, and the expenses 

 for the adjustment of claims. 



The break-even ratio offers a suitable dividing line between 

 operational costs, on the one hand, and losses and claim expenses, 

 on the other. Here, the term operational costs is defined broadly 

 to include, in addition to acquisition cost, all other costs except 

 claim expenses v^hich are directly allocated to losses. Numerous 

 objections might be raised to this definition, since no sharp lines 

 of demarcation can be drawn between which costs and expenses are 

 allocated to claims and which are not. Similar objections might 

 be raised about vrtiat costs consist of in general. However, for 

 the .purpose at hand, the term operational costs is used as a 

 residual item consistent with the previously applied break-even 

 ratio of insurers. Therefore, if the break-even ratio of insurers 

 ranged from 60 to 75 percent of earned premiums, this means that for 

 every dollar earned no less than 25 cents or no more than kO cents 

 went to expenses other than those which were directly allocated to 

 losses. Contrastingly, for every dollar which the insured paid in, 

 no more than 75 cents and no less than 60 cents were available to 

 meet the payment of losses and claim expenses. 



1. VJhy operational costs are high . The existence of the fore- 

 going break-even ratios indicates that the operational costs of under- 

 writing commercial fishing vessels were relatively higher than in many 

 other insurance fields. A number of reasons may explain the high 

 operation costs of insurers. 



The nature of the risk required the technical knowledge of the 

 surveyor and the adjuster. In addition, it was necessary that insur- 

 ance broker and underwriter have a sound knowledge of the general 

 characteristics of the commercial fishing industry as well as the 

 special conditions prevailing in each port. Orthographical dispersion 

 of the risks and the presence of factors which might suddenly change 

 the hazard required constant obsei'vation. For the same reasons, the 

 process of handling the risk, i.e., acquiring it and adjusting claims, 

 was time-consuming and required a large personnel. 'I?he loyalty of 

 this personnel was of supreme Importance for the profitable operation 

 of the insurer, and the ectabli slime nt of reliable channels was a 

 costly proi^osltion. 



13l^ 



