Inland Marine: a Golden Opportunity

When you talk to insurance professionals in the United States and Canada, many will tell you “inland marine” insurance is a strictly U.S. concept.

They might be surprised, then, to see the annual report of Canada’s superintendent of insurance for 1882, summarized in a news report available online , indicating that Canadian insurers wrote more than Cdn$150,000 in “inland marine” premium that year. They would also be surprised by the superintendent’s report for 1895, also available online, which lists five companies — at least two of them based in Toronto — “by which the business of inland marine insurance was transacted” in the Dominion.

These tidbits gleaned from the Internet cast new light on some long-standing conventional wisdom, expressed here in an insurance textbook from 1970:

“The emergence of inland marine as a division of marine insurance is unique to the United States . . . the development of inland marine insurance as a broad form of insurance against loss of property in the United States was a peculiarity that resulted from the mono-line system of insurance.”

According to the author of the above text, inland marine insurance was not distinguished from ocean marine in the United States until 1921 (decades after the Canadian reports cited above), when U.S. regulators developed a new annual statement format.

Why the misconceptions?

It’s because the conventional wisdom, although wrong in the details, is substantially true concerning the essence of the matter. Although inland marine insurance may have roots in Canada, its trunk and branches were developed in the United States during the middle years of the 20th century, largely because of regulatory idiosyncrasies Canadians did not have to deal with (see sidebar on page 26). This would be of little more than passing historical interest were it not for one important fact: the inland marine “line” has become one of the most consistently profitable in the United States. And Canadian carriers can capitalize on the techniques, experience and knowledge U.S. carriers have gained in this line.

PROFIT

Throughout the 1990s, U.S. property and casualty insurers, particularly commercial property writers, consistently produced combined ratios well over 100%. Underwriting losses were presumed to be a cost of doing business, and carriers counted on extraordinary investment returns for overall profitability. In contrast, inland marine insurance stood out as one line that consistently demonstrated an underwriting profit, according to figures from the A.M. Best Co., Oldwick, N.J.

According to A.M. Best, the overall combined ratio for inland marine between 1996 and 2005 was 89.4%, compared to 114.2% for commercial multi-peril (liability) and 104.8% for commercial multi-peril (non-liability). These figures include an unusually bad year for inland marine in 2005, when Hurricane Katrina adversely affected construction classes and “difference in conditions” coverage (supplemental coverage for flood and other perils).

The generally healthy results in inland marine have prompted numerous U.S. carriers to get into the line in recent years. “There are a number of new entities entering the market and established companies adding to their capacity,” says Ronald Thornton, president of the Inland Marine Underwriters Association, based in New York City.

That said, Thornton and others would remind you that inland marine underwriting results should be read with some caution. “The published results for inland marine do not reflect the transit, construction, and other inland marine coverages that are provided in some commercial property package policies and reported as such,” says Robert Guevara, vice president of inland marine for the American Association of Insurance Services (AAIS), Wheaton, Ill. AAIS is an “advisory organization” (bureau) that develops policy forms and rating information used by more than 600 carriers throughout the U.S.

UNDERPRICED

According to Guevara, the profitability of inland marine depends on the level of effort a carrier is willing to put forth in underwriting, pricing, and maintaining loss control for the disparate “classes” in the line. (For a list of classes, see the sidebar on page 26.) Many companies forgo that effort, he says, because the premium volume in inland marine — for both individual accounts and the industry as a whole — is small compared to that for other forms of coverage. “In the past at least, those companies have tended to give away inland marine coverage or roll it into commercial property policies,” says Guevara.

Apparently this is a common practice in Canada. According to Steve Oxley, president of Avec Insurance Managers, Inc., Toronto, many Canadian carriers “tend to make [inland marine coverage] part of a commercial property policy and tend to under-rate it. These package policies tend to be driven by either the building exposure or the casualty exposure,” Oxley notes, “and the rating procedures [for inland marine] vary from seat-of-the-pants pricing to table-driven pricing” — indeed, if there are any rating procedures at all for inland marine pricing.

MARGINS

To the extent that carriers shortchange inland marine underwriting, they are also overlooking an important fact: inland marine exposures may account for only a small fraction of the premium for a commercial account, but they can provide a much greater percentage of the margin on that account. “They’re missing out, especially on transit exposures,” says Phillip Best, assistant vice president for inland marine and property programs for Elliott Special Risks LP, Toronto, a managing general agency. “That’s something I’ve been saying for the past 20 years. It’s a continuing educational process.”

To realize the potential of inland marine insurance, however, carriers need a cost-effective means of developing distinct products for property exposures that are not optimally covered under standard commercial property policies. That is easier said than done: inland marine is not a single, undifferentiated “line,” but a series of different classes requiring different products and underwriting expertise.

To address that problem, Canadian companies seeking to explore opportunities in inland marine may want to consider use of inland marine resources developed by U.S. bureaus, such as the Inland Marine Guide developed by AAIS. The Guide, now available to Canadian companies, contains policy forms, rating procedures, underwriting guidelines, and other information for a wide range of classes. Its forms are used as inland marine models in leading U.S. insurance reference texts.

In some cases, the Guide’s resources might be readily utilized in Canada. In most others, they may serve as references for modifying or refining homegrown Canadian products. Either way, the Guide can help Canadian insurers make the most of a line of insurance that has a long history in their country.

What exactly is ‘Inland Marine?’

When Canada’s early superintendents of insurance called for premium data on inland marine, they were probably thinking of inland marine as originally (and narrowly) understood — insurance for property transported on inland waterways, railroads, and roadways.

Insurance of property in transit is still an important component of inland marine, but is no longer the defining one. The classes listed on page 26 demonstrate the line has grown to encompass far more than transit insurance.

Given the scope and diversity of the list, it is more accurate to say that inland marine insurance involves risks that are unique in nature and change frequently.

To illustrate, it helps to compare inland marine with multi-peril commercial property insurance. Standard commercial property policies are written primarily to insure structures that are in the same location and essentially the same condition day after day. Inland marine insurance addresses risks for which change is constant.

This is clearl
y seen in the inland marine construction classes — builder’s risk (course of construction), contractors’ equipment and installation floaters. A backhoe operating on dry, flat ground one day could be operating on a slippery slope the next. A building under construction is in a different stage of completion at the conclusion of a day’s work than when work started in the morning.

The same idea of change applies to other inland marine classes, such as accounts receivable and electronic data processing, two forms of intangible property whose values are constantly in flux.

Still other classes provide coverage for valuable personal and commercial property — such as jewelry, furs, tools and more — that moves about easily or “floats.” Hence, they are insured by inland marine policies known as “floaters.”

This collection of classes arose from peculiar conditions created by the U.S. insurance regulatory system, which required fire insurers to file rates with the states. Those filing requirements did not, however, apply to many of the inland marine classes. Inland marine insurers were allowed to write “all risk” policies that were less regulated than standard fire contracts.

Protests from U.S. fire insurers led to limits on inland marine underwriting through the “Nationwide Marine Definition” of 1933, which effectively restricted inland marine underwriting authority to imports and exports; domestic shipments; instrumentalities of transportation and communication (bridges, tunnels, transmission towers, and more); specified types of property owned by individuals (jewelry, furs, musical instruments and more); and specified types of property related to a business or occupation (mobile equipment, property under bailment, electronic data processing, and more).

Last modified in 1976, the (U.S.) Nationwide Definition continues to be the principal delineation of inland marine insurance in the U.S., and as written by U.S. carriers in Canada. The definition, however, has lost its force as a restriction on underwriting authority as distinctions among fire, casualty, and inland marine carriers have largely disappeared.

Inland Marine Insurance “Classes”

Inland marine insurance entails property coverage for a range of exposures that are sometimes insured separately from other property exposures within Canada, the United States and elsewhere. The list here is taken from the Web site of Avec Insurance Managers, Toronto.

* Accounts Receivable

* Air Cargo

* Bailees

* Bridges, Tunnels, and Dams

* Builders Risks (course of construction)

* Communication Equipment

* Contractors Equipment

* Dealers

* DIC (Difference in Conditions)

* EDP (Electronic Data Processing)

* Exhibition

* Film

* Fine Arts & Museums

* Floaters

* Floor Plan

* Furriers Block

* Jewelers Block

* Installation

* Installation Sale

* Livestock Floater

* Logistics

* Logging

* Mining

* MOP (manufacturers output policy)

* Motor Truck Cargo

* Oil & Gas

* Parcel Post

* Patterns & Dies

* Piers, Wharves, and Docks

* Pipelines

* Processing

* Riggers Liability

* Radio & TV

* Railroad Rolling Stock

* Salesmen Samples

* Scientific Equipment

* Signs

* Storage Risks

* Tank & Tank Contents

* Transportation

* Trip Transit

* Valuable Papers

* Warehouseman’s Legal Liability