Compared to all these factors which contributed to high operational 

 costs, the revenue which the insurers received per policy was propor- 

 tionately smsLLl. An example will illustrate this point. The time which 

 is required to handle a risk yielding a $3>000 premium may be almost the 

 same as the time required to handle another risk twice the value of the 

 first euid yielding twice that premium. Assuming that all operational 

 costs were measured in direct relation to the time required to handle 

 the two risks and amounted to $1,200 in each case, operational costs for 

 the small vessel represented hO percent of premium, while for the large 

 vessel they represent 20 percent of the premium. Thus, the inverse 

 relationship between insurance rate and gross tonnage (representing 

 roughly the value of the vessel) was not due to the difference in the 

 probability of loss alone but also the economies in operational costs 

 obtainable from leurger vessels. For the same reason, lower rates to 

 fleet owners cjinnot be explained in terms of quality of the risk alone. 

 Therefore, operational costs represent a relatively large proportion 

 of the premivim dollar because the value of the average risk was 

 relatively small when compared to such risks as cargo and passenger 

 vessels. 



Furthermore, operational costs may eilso have been high because 

 of excess capacity in the form of possible duplication in the seirvices 

 available for handling the risks. Competition is not identical with 

 efficiency. The insured may have benefited from a highly competitive 

 insurance market in terms of lower premiums. At the same time, he may 

 have paid higher operational costs because each competing insurer 

 might be compelled to maintain his chaxmels of handling the risks 

 irrespective of the volume of business. Not infrequently, as memy 

 as four brokers or agents were involved between the insured and the 

 insurer. This was particularly true in the placement of risks for 

 protection and indemnity insvirance. Although the adjustment of 

 claims may not involve all these middlemen, it required the services 

 of most of them, plus the services of the adjusters, lawyers, doctors, 

 and other specialists, depending on the case. Duplication in services 

 does not necessarily mean lack of effort on the part of the Insurer to 

 minimize his cost but rather in spite of it or because of it since the 

 loyalty of the middleman or lack of such loyalty may very well spell 

 the difference between profits and disaster. 



In addition to the above structural factors, the unprofitable 

 experience of insurers during 1950-54 may have contributed to higher 

 operational costs. It became necessary to survey or inspect the 

 insured vessel more frequently. Mobility of the risks Increased. 

 Doubtful claims multiplied. Litigation became more frequent and 

 the number of middlemen and their services may have multiplied. 

 Although some of the expenses which occurred from the above or 

 similar developments were allocated to particular claims, part 

 of them may have boosted the operations^, costs of the insurers. 



135 



