Exchange Operations

The business of the Exchange is the pooling of war risks and companion strikes, riots and civil commotions risks. Each member company cedes to the Exchange 100% of the war and strikes premium and losses which it writes subject to the reinsurance agreement and the rules of the Exchange, and takes out of the Exchange a share equal to its input. The effect, of course, is the widest possible distribution of a catastrophe exposure, thus permitting the marine insurance market to provide an important coverage for American international traders.

The affairs of the Exchange are controlled by a Board of Managers whose members are the representatives of the subscribing companies, and by an Executive Committee. The Rules and Regulations of the Exchange and the reinsurance rates are established by an Underwriting Committee which consists of executives from nine of the member companies. There are also a Loss Committee of eight members and two financial committees. Every member of the Exchange has a voice in its management.

The insurance buyer will sometimes ask why war risks should be insured when there is no war going on or the goods are not being shipped to a war zone. One simple answer is "for the same reason you buy fire insurance for your house before it catches fire". In the event of an outbreak of a general war goods afloat would be protected by war risk policies purchased prior to that time. Even if war risk policies were to be cancelled, insurance for shipments on which the coverage had already attached would remain in force.

One recent tabulation counted over 35 wars or civil commotions in progress around the world at that time. Not all, of course, were widespread and most would not have affected waterborne shipping, but the threat in these days of high-tech wars is always present.

Another concern is the presence of derelict mines and torpedoes left over from the Gulf War, the Iran-Iraq war, the Viet Nam conflict and still, surprisingly enough, from the Korean war and World Wars I and II. Mines are a war peril even in times of peace and are excluded from a basic cargo insurance policies.

"Strikes, Riots" may be one of the major exposures in the minds of insurance buyers these days inasmuch as terrorist acts and civil commotions may be recoverable under the terms of the Strikes, Riots and Civil Commotions Endorsement. These perils, when insured in conjunction with war risks at full schedule rates are recoverable under Exchange reinsurance.

Members will deal most frequently with the Exchange in determining war and strikes, riots rates which the member will pay for their reinsurance. These rates are established by the Underwriting Committee and published in rate schedules from time to time as occasion warrants. War rates are subject to change without notice, even though the war policy may be cancelled only on 48 hours notice.

The Underwriting Committee seeks to maintain a stable rate structure and to avoid hasty reactions to the morning headlines. Nevertheless, underwriters should avoid quoting future war or "all-in" rates which some shippers may pass on in their contract bids only to be embarrassed later when rates have changed unexpectedly.

Special Rating Plans ("Block War Rates") have been frequently used in recent years to establish an average rate paid by the member for reinsurance of war and strikes, riots. Rules for Special Rating Plans are established by the Underwriting Committee. They can also provide for the reduction of reinsurance rates in exchange for a reallocation of the risks, such as strikes and riots, between the member and the Exchange. In the haste to reduce reinsurance rates, underwriters should not overlook the fact that the reduced rate comes at the expense of reduced reinsurance coverage.

Copyright © American Cargo War Risk Reinsurance Exchange 2000 

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