International Sales Contract: Risk

Assessment And Underwriting

Posted by: mms plus in SHIPPERS GUIDE November 20, 2015 0 1,072 Views

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Mr. Adu Gbolahan

Introduction
 The basis of the contract is the proposal form.
 Premiums must be paid upfront before commencement of cover.
 Premiums form the basis or the consideration for indemnity.
What is Marine Insurance?
Marine Insurance is International in nature. It is a transit risk policy covering
movement of cargo from one specific point to the other point of discharge. The
risk attaches from the time goods leave the warehouse of the consignor who is
named in the policy and continues during the ordinary course of the voyage up
to the consignee’s warehouse. The insurance is issued to cover:
 The hull i.e. The vessel itself.

 The cargo i.e. What the vessel is carrying.

 The freight i.e. The sum paid for transporting goods or for the hire of the
ship.
 Liability towards third parties

Types of Cover
We have three types which are:
1. ICC(A) – This covers all risks of loss of or damage to the subject matter
insured.
2. ICC(B)
3. ICC(C)
Types of Perils
The perils we cover under Marine Insurance are:
1. Marine Perils (Perils of Sea) – This may include fire, explosion, jettison,
storm, collision, sinking, contact with objects fixed or floating e.t.c.
2. War, strike, riot and civil commotion.
3. Extraneous Perils – Such as pilferage, non-delivery, rain water damage, hook
damage, oil damage, heating, breaking, denting e.t.c.
Full Risk Evaluation Information
 Transport

The full risk evaluation information should review containerization of cargo, sea
freight, air freight, rail freight and road freight as necessary in order to guide the
underwriter in assessing the marine risks and or seeking implementation of risk
improvement and determination of the premium rate applicable.
Underwriting Factors
Before granting cover, it is pertinent to take into consideration the following
factors :
1. Geographical areas covered;
2. Mode of conveyance;
3. Nature of goods;
4. Age of the vessel;
5. The voyage;
6. Political factors;
7. Physical and / or presence of fog;
8. Atmospheric disturbance;
9. Safety of port of discharge;
10. Packing;
11. Transshipment e.t.c.
Terms and conditions apply
Types of Vessels
1. Ocean Going Vessels
2. War Vessels
3. Crude Oil Carriers
4. Roll On, Roll Off (RORO)
5. Ice Breakers
6. Bulk Cargo Carriers
7. Coastal or Inland Water Crafts
8. Ferries
9. Dredgers
10. Oil Rigs
11. Canoes
12. Speed Boat
Types of Marine
1. Marine Cargo
2. Marine Hull
Marine Insurance Underwriting
The Underwriter has eleven tasks to perform for every new risk proposed for
insurance and every existing risk where a change of risk is notified or detected.
These tasks are as follows:
1. The Overview of Marine Hull and Cargo Assessment:
 The considerations for accepting Hull and Cargo business;

 The information needed from ship owners;

 The rating process for Hull & Cargo risks;

 Explain the types of Marine Hull & Cargo risks;

 Understand the rating considerations taken into account when underwriting

Hull & Cargo businesses;
The Overview of Marine Hull and Cargo Assessment.
 Understand the thoughts of Underwriters when rating Hull & Cargo
Businesses;
 World Trade, volumes and trading patterns;

 The principal types of vessels and their susceptibility to loss;

 The most commonly found hazardous voyages;

 Risk assessment factors for insuring Hulls & Cargo;

 The factors which determine the Hull & Cargo rate including Type of Vessel;
Flag; Classification; Ownership and Management and the type of insurance
cover;
 Hull & Cargo Trading conditions and the geographical location problems
they may present;
Overview of Marine Hull and Cargo Assessment.
 The effect of different types of ship finance arrangements;

 Variations in ship valuation and the implications for premium rating;

 The risk assessment factors for Hull & Cargo War & Strikes Insurance;

 The risk assessment factors for Hulls & Cargo Port Risks and Builders’
Risks;
 Loss prevention and Risk Management – the methods used and their
importance;
 The importance and significance of statistics for Marine Hull &
Cargo underwriters.
2 Check the general acceptability of the proposer and risk by establishing:
 Any previous losses by any of the risks proposed for insurance in the last five
years
 Any previous insolvency, bankruptcy etc.

 Any previous convictions or pending prosecutions for outstanding charges in

respect of Theft, Fraud or similar offence.
3. Identify the underwriting factors and estimated maximum loss: which
when taken together will define the risk in terms of likelihood of damage
by the perils to be insured, the probable extent of the damage and the
chances of early detection which will enable steps to be taken to stop the
damage and limit the loss.
4. Establish the type of risk and acceptance class which involves using the
insurer’s criteria for classifying risks into acceptance classes to allocate the
correct acceptance group;
5. Apply the acceptance limit for the class to the estimated likely to arise after
taking into account the probabilities established in task 3;
6. Utilize such automatic reinsurance as are available if the result of step 5 is to
produce an acceptance of less than;
7. Identify the premium/rating factors for the risk;
8. Calculate terms;
9. Make an offer to the proposer or introducing intermediary i.e. quote or
introduce a broker;
10. Make a list of all the factors which increase the risk with a comment
against each on whether it can be reduced or eliminated;
11. Review the case to ascertain.
Presentation of Risks for Underwriting
 Risk(s) may be presented in insurance for underwriting by Insurance
Brokers, Proposers, Solicitors, another Insurance Company or Insurance
Department of a large Company;
 Depending on the type of risk involved, any presentation made to insurers
must include the following information among others, to enable them in
determining the general acceptability of the proposer and the risk:
 Name of the Proposer

 Main address of the Proposer

 Occupation of the Proposer

 Type of Risk

 Description of the subject matter of Insurance

 Sum Insured.

Information Needed for Risk Presentation

 Upon the receipt of slip presented by broker, underwriters need to prepare a
quotation in response, but would need to go through the presentation, jotting
down their thought process and aspect they would query such as:
 Is the broker authorized by the proposer?

 Do we know or have any relationship with the proposer?

 Have we quoted or refused to quote for this business before?

 Do we hold any other business for this client?

 Is the occupation acceptable for the range of cover requested?

 Who is the current insurer?

 Size of sum insured – Survey. Is it cost effective?

 Are all the details included that we need to provide a preliminary quotation?

Types of Hazards
 Physical Hazards

 Moral Hazards

1. Physical Hazards: These relate to the physical nature of the risk i.e. that
describes the subject matter of insurance and it includes the details of any
unusual features of the subject matter of insurance.
2. Moral Hazards: Include the aspects of the risk that depend on the character
and behavior of the insured himself, e.g. criminal acts, previous losses and
claims under the policies, any adverse insurance history, details of other
policies currently in force.
Further Information on Moral and Physical Hazards
*Further Information on Moral and Physical Hazards
*Information on moral hazards which borders on:
*The ownership of the vessel and their financial standing.
*The management of the vessel, their experience on the trade, their level of
competence and their past claim records.
*Information on physical hazards which include:
*The name of vessel
*The vessel’s class
*The age of the vessel
*The flag of the vessel and country of origin
Marine Cargo Insurance
*The term “Marine Cargo Insurance” refers to insurance of cargo and in most
cases freight is included in the insurance.
*The insurance on Marine Cargo just like marine hull is usually insured in a
manner and to the extent agreed thus, it is a ‘valued policy’. In view of this
reasons, average does not apply to such policies.
*A valued policy is defined under Section 27 (2) of the Marine Insurance Act
1906 ‘as a policy specified the agreed value of the subject matter insured’.
Classification of Cargoes
*The goods imported into the country can be classified into the following
headings:
*Bulk Cargoes: These include cement, rice, beans, sugar, salt etc.
*Perishable Goods: Vegetables, fruits, pepper, etc.
*Fragile Goods: China, glass, ceramics, etc.
*Electronics Goods: refrigerators, televisions, etc.
*Building Materials: roofing sheets, ceramics etc.
*Pharmaceuticals: hospital drugs, injections etc.
*Industrial Goods: industrial raw materials, finished
*Chemical Gods: benzene, acids, potassium, etc.
*Inflammable Goods: Crude oil, kerosene, soap, etc.
*Textile Goods: cloths, cottons, etc.
*Agricultural Goods: agricultural produce, day old chicks, fruits, etc.
*Paper Goods: sisal, pauper, bond paper, etc.
*Valuable Goods: precious stone, work of art, jewelries, etc.
*Plants and machinery: generators, turbines, lift, motor cars, etc.
*Agricultural implementations: tractors, ploughs, etc.
*Liquid goods: water, mineral water and other liquid substances.
*Dry Cargoes: iron rod, steel, stone.
Documents used to effect Marine Cargo Insurance
The following documents are required in effecting marine cargo insurance:
*Proforma Invoice
*Central Bank Form ‘M’
*Marine Insurance Certificate
*Broking slip where such business is being introduced by an Insurance Broker.
Marine Cargo Insurance Policy
*Section 22 of M.I.A 1906 states that: “a contract of marine insurance is
inadmissible in evidence unless it is embodied in a marine policy in accordance
with this Act”. The policy may be executed either at the time when the contract
is concluded, or afterwards.
*The Act did not define what a marine policy is, neither did it specify what a
marine policy looks like. Rather it simply states that any document that is able
to meet the requirements of sections 23 and 2 of M.I.A 1906 will for all intents
and purpose be referred to as a marine policy
*Section 23 states that:
* A marine policy must specify the name of the assured, or of some person who
effects the insurance on his behalf.
*Section 24(1) states that a marine policy must be signed by or on behalf of the
insurer.
Types of Marine Cargo Insurance Policies
These include:
*Single transit policy
*Floating policy
*Open slip
*Single Transit Policy: This is also referred to as a one-off cover. The
insurance or such shipment is negotiated separately, whereby a Marine
Insurance Certificate or a policy is issued for every shipment.
*Floating Policy: This cover entail a situation where the proposer has a large
volume of shipment related to the performance of a specific project e.g Contract
to constant cement plan, refinery, bridge, roads, etc.
*Floating Policy: The policy will be issued based on the total value of the
equipment and materials required to be shipped and the total premium charged
 but a deposit premium would be paid. As the shipments are delivered, the total
summit insured value is reduced until the fund shipment. Thereafter,
reconciliation of the total value shipped in relation with the premium is done
whereby additional premium would be made once the shipments are concluded
the cover ceases.
*Thus, this policy covers all shipments of a particular kind; stating the
conditions, premium rate and limit per bottom and one policy document is
issued to cover all the declarations.
*Open Cover Policy: The most common cover for Cargo Insurance is the Open
Cover. This is very suitable for a medium or large sized business outfit which is
involved in importation or export of goods on regular basis.
*This is an agreement between the proposer/merchant/business man with the
insurer to accept and cover all shipments within the terms and conditions of the
Open Cover contract.
&The agreed terms are as follows:
*The assured’s Name is specified
*The certificate limit
*The bottom limit i.e. total sum that could be in one ship
*The rate chargeable per certificate
*The deductible or excess
*Sometimes named superintendent are agreed.
*The type of vessel to be employed is specified and subject to Nigeria
Classification Clause which limits the age of sea vessels allowed to bring cargo
to Nigeria to a maximum age of 15years, except where such vessels are liners
whereby age limit of 25years is allowed.
*Voyage allowed are state in general terms such as overseas or world-wide to
Nigeria then to the insured’s warehouse.
*Interest specified e.g. Building materials, Pharmaceuticals, Electronic goods,
Chemical & Industrial raw materials.
*Basis of valuation stated goods valued at cost and Freight (C & F) plus 10%
*Conditions: Institute Standard Conditions for cargo contracts
Marine Cargo Insurance Clauses
 Institute Cargo Clauses (ACC) A

 Institute Cargo Clauses Air cargo

 Institute Cargo War Clauses (Cargo)

 Institute Cargo War Clauses (Air Cargo)

 Institute Cargo Strike Clauses (Cargo)

 Institute Cargo Strike Clauses (Air Cargo)
 Rate: ICC ‘A’ – 0.65%

 ICC ‘C’ – 0.25%

 War & Strike – 0.15%

INTERNATIONAL CONTRACT
*International contract sales are term and conditions of contract between
the seller and the buyer and it’s usually embodied in a contract of sale.
The Subject-matter of this Contract is particularly the obligation of the Seller to
deliver goods specified in the Exhibit No. 1 hereto to the Buyer and to transfer
the property in goods to the Buyer under the terms and conditions herein and the
obligation of the Buyer to accept the delivered goods from the Seller and to pay
the agreed purchase price.
*Free on Board (F.O.B) : When goods are sold FOB, the seller is only
responsible for and has the right in goods until they are loaded on the carrying
vessel . The seller is responsible for paying all expenses and arranging transit
until the goods are on board .lt is the seller’s right to arrange insurance up to this
point .Once the goods are on board ,the buyer takes over all rights and
responsility including payment of freight and arranging for insurance .
*Cost & Freight (C & F) : The C & F sale contract is similar to the F.O.B sale
contract except that the seller has the responsility of paying the freight whilst
the responsility for arranging insurance is that of the consignee .
*Cost, Insurance & Freight (C.I.F) : Under the CIF sale contract ,the seller
undertakes to arrange and pay for all the cost of delivery and insurance to
destination (warehouse to warehouse) because the buyer has paid for these in
the sale price . Under this sale contract ,the consignee has no responsility until
the he takes delivery of the goods .
The insurance policy may however be assigned to the consignee(buyer) and he
can claim under the policy as though he had arranged the insurance himself
*Free Alongside Ship(FAS) : This sales term requires the seller to place goods
alongside the vessel or on the dock designed by the buyer and to the responsible
for loss or damage up to that point . The buyer ordinarily places insurance under
this term but the seller should protect himself with an F.O.B sales endorsement
for the risks prior to the transfer of title

By Adu Gbolahan