National Maritime Day Safety at Sea Seminar Washington, DC May 22, 2014 Insuring Safety Risks

1. National Maritime Day Safety at Sea Seminar Washington, DC May 22, 2014 Insuring Safety Risks Joseph E. M. Hughes Shipowners Claims Bureau, Inc. Managers for The American Club

2. Insuring Safety Risks – Conceptual issues Some definitions and relationships Risk: A state of exposure to negative fortuity Insurance: The provision of cover against negative fortuity subject to preconditioning by reference to the type, magnitude or consequences of such fortuity Safety: A state in which exposure to negative fortuity has been removed or mitigated in proportion to its type, magnitude or consequences So…. Insured risks are those where the type, magnitude or consequences of negative fortuity have been subject to preconditioning (e.g. by considerations of safety) And…. Risk and safety are inversely proportional to each other in the determination of insurability, and the price of insurance

3. Insuring Safety Risks – Theory and practice Elements of preconditioning in the provision of marine insurance • No marine insurer will cover risk in any circumstances without preconditions, so that: • Conditions precedent to, and other fundamental terms of, cover may apply, for example: • Class • Flag state statutory requirements and other regulation • Specific exclusions from cover may apply, for example: • Part or all of the collision risk • Claims in respect of total loss or other disproportionate exposures • Specific policy stipulations may apply, for example: • Ship survey and management audit requirements • PEME procedures as to crew claims etc. • Deductibles/SIRs etc. • Proactive encouragement of best safety practice may apply, for example: • Education in loss prevention • Training initiatives etc.

4. Insuring Safety Risks – The evolution of insurer engagement Some observations • Since risk and safety are inversely proportional to each other in the insurance equation: • Insurers’ engagement in the interface between safety and risk has evolved as follows, where component A seeks to establish basic insurer expectations of the safety of an enterprise: • A  B  C  D • The alignment of the interests of insurers and assureds in safety as a component of insurance provision has developed steadily in recent times and continues to evolve, especially in regard to component D • This phenomenon has emerged robustly in recent years and will persist, both because of the public policy agenda associated with it, and as a means of moderating the price of insurance

5. Insuring Safety Risks - The contemporary approach Proactivity supersedes reactivity • The contemporary approach to marine insurance risk and safety: • The traditionally reactive preconditioning of cover contained in components A, B and C in the provision of insurance will remain • Both insurers and those who set public policy have an interest in proactivity to drive risk down by driving safety up • Growth in recent years in loss prevention and risk management embraced by component D • The P&I clubs may be said to have led the way in this respect within the marine insurance domain

6. Insuring Safety Risks – Modern risk management and loss prevention Elements of the proactive approach in modern marine insurance • The cutting edge of promoting safety and reducing risk: • P&I club proactivity intrinsic to the nature of mutual insurance. • International Group clubs have large tool boxes of risk management and loss prevention capabilities at their disposal: • Vessel condition survey programs • Management audit programs • PEME programs • Cargo/risk specific survey capabilities • Hard copy instructional literature (brochures, newsletters etc.) • E-learning tools (MARPOL, IMSBC Code, BLU Code etc.) • Shipowner in-house training programs • Regional/sector-based seminar programs • Risk avoidance/mitigation through deepening analysis of data

7. Insuring Safety Risks- Conclusions Safety First! Proactivity the current and future zeitgeist • Proactivity in mitigating risk through encouraging safe practices has developed steadily in recent years as a key leitmotif in marine insurance, given further impetus by higher regulatory standards: • Risk:safety relationship at core of insurance and its pricing • Reactive structures and traditional counterparty paradigms remain • Deep dive data analysis to identify patterns and mitigate risk • Growing range of initiatives to encourage best safety practice • Will act as leverage to improve loss results • Will tend to reduce insurance costs in difficult freight market • Rising regulatory expectations will maintain momentum • Trend represents the efficient use of insurer resources

8. National Maritime Day Safety at Sea Seminar Washington, DC May 22, 2014 Insuring Safety Risks Joseph E. M. Hughes Shipowners Claims Bureau, Inc. Managers for The American Club