American Marine Insurance ForumAmerican Marine Insurance ForumFebruary 15, 2007February 15, 2007

Brian F. Murphy, CPCU

Starr Marine Agency, Inc.

Roy Hornbeck

General Reinsurance Corp.

Marine Builder’s Risk Insurance:

I. What’s Driving the Increased Demand?

II. Some Underwriting Basics

Why the increased Why the increased demand for builder’s demand for builder’s risks coverage?risks coverage?

1)1) Attrition of dry cargo barges is creating a demand for Attrition of dry cargo barges is creating a demand for replacements.replacements.

• It is estimated that 4,800 units will be retired over the next 5 It is estimated that 4,800 units will be retired over the next 5 years. This represents about 27% of the current dry cargo fleet.years. This represents about 27% of the current dry cargo fleet.

Source: Informa Economics, Inc.Source: Informa Economics, Inc.

Dry Cargo Barges in Operation Dry Cargo Barges in Operation By Year of ConstructionBy Year of Construction

0

200

400

600

800

1000

1200

1400

1600

1800

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Source: Informa Economics, Inc.

Why the increased Why the increased demand for builder’s demand for builder’s risks coverage?risks coverage?

1)1) Attrition of dry cargo barges is creating demand for replacements.Attrition of dry cargo barges is creating demand for replacements.

2)2) OPA 90 double-hull requirements are effective January 1OPA 90 double-hull requirements are effective January 1stst, 2015., 2015.

3)3) OSV / liftboat construction increasing due to oil boom. Recent reserve OSV / liftboat construction increasing due to oil boom. Recent reserve discoveries in the Gulf of Mexico will likely fuel this demand.discoveries in the Gulf of Mexico will likely fuel this demand.

4)4) U.S. government building a large amount of smaller, more nimble vessels U.S. government building a large amount of smaller, more nimble vessels due to the changing nature of external threats.due to the changing nature of external threats.

5)5) Hurricanes Katrina and Rita have resulted in:Hurricanes Katrina and Rita have resulted in:• Increased need for vessel repairs and replacements.Increased need for vessel repairs and replacements.• Insurers scaling back their writings in specific geographic regions.Insurers scaling back their writings in specific geographic regions.

6)6) High steel prices have accelerated the scrapping of older vessels.High steel prices have accelerated the scrapping of older vessels.

7)7) Shipping companies are expanding and upgrading their fleets to cash in on Shipping companies are expanding and upgrading their fleets to cash in on the lucrative shipping market.the lucrative shipping market.

Builder’s Risk can be a Builder’s Risk can be a profitable class of profitable class of business, but be wary business, but be wary of…of…

Recent entrants into the vessel Recent entrants into the vessel repair/building marketrepair/building market

Many individuals with little experience have Many individuals with little experience have entered the market to take advantage of the entered the market to take advantage of the favorable dynamics. Underwriters should look favorable dynamics. Underwriters should look for accounts with:for accounts with:

1)1) Five years or more experience in the vessel Five years or more experience in the vessel repair/construction industry building the repair/construction industry building the types of vessels we’re being asked to types of vessels we’re being asked to cover.cover.

2)2) An organized approach to safety and An organized approach to safety and proven track record of safe operating proven track record of safe operating procedures.procedures.

Delivery TripsDelivery Trips

1)1) Vessels may have to transit waters that are Vessels may have to transit waters that are more hazardous than those they’re intended for.more hazardous than those they’re intended for.

2)2) The crew for the delivery trip may be unfamiliar The crew for the delivery trip may be unfamiliar with the vessel.with the vessel.

Delivery trips present an increased risk of present an increased risk of loss…loss…

Delivery TripsDelivery Trips A trip survey should address:A trip survey should address:

1)1) Seaworthiness of the vessel(s) for the intended voyage.Seaworthiness of the vessel(s) for the intended voyage.

2)2) Towing arrangements, if vessel is to be towed.Towing arrangements, if vessel is to be towed.

3)3) Experience of captain and crew.Experience of captain and crew.

4)4) Weather routing / ports of refuge.Weather routing / ports of refuge.

5)5) Wave height restrictions.Wave height restrictions.

Additionally, the underwriter should review the towage Additionally, the underwriter should review the towage contract, if any, and adjust terms and premiums contract, if any, and adjust terms and premiums accordingly.accordingly.

Delivery TripsDelivery Trips

Delivery trips Delivery trips are not coveredare not covered by an unendorsed by an unendorsed BR form. Addendum #1 must be added to include BR form. Addendum #1 must be added to include this coverage. Addendum #1 requires that:this coverage. Addendum #1 requires that:

1)1) Prior Notice is given to the Underwriters.Prior Notice is given to the Underwriters.

2)2) Additional terms and premium are agreed to.Additional terms and premium are agreed to.

3)3) A trip survey is completed by an Underwriter A trip survey is completed by an Underwriter appointed surveyor.appointed surveyor.

Aggregation of RiskAggregation of Risk

Builder’s Risk is a unique hull coverage in Builder’s Risk is a unique hull coverage in that it presents carriers with a potentially that it presents carriers with a potentially large accumulation of static risk.large accumulation of static risk.

Dealing With Dealing With AggregationAggregation

1)1) For open policies, establish a For open policies, establish a location limit for any one location limit for any one occurrence.occurrence.

2)2) Develop a mechanism for Develop a mechanism for monitoring aggregation by monitoring aggregation by location and geographic region.location and geographic region.

Aggregate TrackingAggregate Tracking

At a minimum, an aggregate tracking tool should At a minimum, an aggregate tracking tool should monitor limit accumulation on…monitor limit accumulation on…

1)1) ……an individual risk basis, taking into account:an individual risk basis, taking into account:

Builder’s Risk Limit, inclusive of any pre-keel Builder’s Risk Limit, inclusive of any pre-keel coveragecoverage

Hull limit(s) for vessels covered under a hull Hull limit(s) for vessels covered under a hull form, i.e. drydocks.form, i.e. drydocks.

Contractor’s Equipment exposureContractor’s Equipment exposure

Aggregate TrackingAggregate Tracking

At a minimum, an aggregate tracking tool At a minimum, an aggregate tracking tool should monitor limit accumulation on…should monitor limit accumulation on…

1)1) ……an individual risk basisan individual risk basis

2)2) ……a portfolio basis, totaling the limits on a portfolio basis, totaling the limits on individual risks by regionindividual risks by region

Builder’s Risk Protection & Builder’s Risk Protection & IndemnityIndemnity

The P&I coverage within the BR form The P&I coverage within the BR form grants a limit equal to the Agreed grants a limit equal to the Agreed Value.Value.

When possible, the P&I should be sub-When possible, the P&I should be sub-limited to $1M and then scheduled as limited to $1M and then scheduled as an underlyer on the Assured’s excess an underlyer on the Assured’s excess policies.policies.

Builder’s Risk Protection & Builder’s Risk Protection & IndemnityIndemnity

The standard BR form excludes bodily injury, The standard BR form excludes bodily injury, illness, or loss of life to any employee of the illness, or loss of life to any employee of the Assured.Assured.

– The MARAD P&I clause of Addendum #1 provides The MARAD P&I clause of Addendum #1 provides this coverage when the vessel is waterborne.this coverage when the vessel is waterborne.

– Coverage under this clause does not cover liability Coverage under this clause does not cover liability under any compensation act (other than a under any compensation act (other than a seaman).seaman).

– Coverage should be sub-limited to $1,000,000.Coverage should be sub-limited to $1,000,000.

Coverage For Faulty Coverage For Faulty Workmanship, Design, Workmanship, Design, Etc.Etc. Lines 61-62 of the AIBR Clauses Lines 61-62 of the AIBR Clauses

exclude the “…cost or expense of exclude the “…cost or expense of repairing, replacing or renewing” part repairing, replacing or renewing” part or parts which, because of their faulty or parts which, because of their faulty design, have resulted in physical loss design, have resulted in physical loss of or damage to the vessel.of or damage to the vessel.

Ensuing damage Ensuing damage is coveredis covered under the under the AIBR Clauses.AIBR Clauses.

Coverage For Faulty Coverage For Faulty Workmanship, Design, Workmanship, Design, Etc.Etc. Addendum #2 tightens the Addendum #2 tightens the

exclusion in lines 61-62 by exclusion in lines 61-62 by broadening the definition of faulty broadening the definition of faulty workmanship and design.workmanship and design.

Proceed with extreme caution Proceed with extreme caution when you are requested to delete when you are requested to delete this exclusion as this is a this exclusion as this is a potentially large exposure.potentially large exposure.

ConclusionConclusion

Gathering of Underwriting Information

• Application

• Estimated building schedule for the year (open cover)

• Terms and conditions and loss history

• Yard survey, inspection or In house loss control report

• Insured website

• Diagram of yard or pictures

Yard Diagram

Jeffboat

Assembly Line

Launching Area

Cranes

Exposures

• Fire & explosion

• Flood

• Earthquake

• Damage from crane accidents

• Launching

• Trials and Delivery

• Wind/Hurricane

Fire

• What is management’s attitude toward loss control? (drills, safety meetings, housekeeping, manuals, rewards.)

• Age, type & construction of building facility.

• Distance from fire hydrants and firehouse.

• Adequacy of sprinkler system

• Location & storage of flammable materials

• Location of neighboring structures

Fire

• Public (paid vs. volunteer) and private fire protection

• Type of vessels being built, steel, aluminum, fiberglass, wood

• Do they have adequate ventilation for fiberglass, spray paint, flammable coatings and saw dust?

• Welding is the number one cause of fires

• Should be welding in the designated areas only. Fire watch for ½ hour after welding

Flood

• Survey report should provide information regarding high water mark & height above sea level.

• Does the yard have seasonal flooding issues?

• Google Earth will also give you elevation above sea level.

• FEMA flood maps would provide flood Zone.

• Do they have an emergency plan to minimize the effects of flooding?

• Where do they store their expensive parts and equipment?

Earthquake

• Is the yard located in an earthquake zone?

• Are the structures built to withstand an earthquake?

• Do they employ techniques for securing and bracing vessels?

• Are you charging for this exposure if it’s covered?

Damage from Crane Accidents

• Most of the sophisticated builders use a module or block process. Full blocks of the vessel are built separately and then moved into place for final construction. All of these large pieces will have to be moved and lifted into place.

• Each time a piece is handled, the chance for a loss increases.

• Cranes can topple or collapse causing damage to the vessel.

Crane Accidents can be Expensive!

Modular or block Modular or block constructionconstruction

Failure to Launch

• Covers damage to the vessel as well as necessary costs to complete the launch.

• Crane

• Stern Launch

• Side Launch

• Marine Railway

• Floating Dry-dock

• Slipway

GravingGraving DockDock

Floating Dry-dockFloating Dry-dock

Trials and Delivery

• What type of vessel? Barge/Tug/Jack-up/Dredge/Crane barge?

• Delivery trips are usually endorsed on open builders risk policies for up to 250 miles.

• Frequently, vessels are towed to the buyer. Make sure you get a trip in tow survey! Make sure all recommendations are complied with.

• Groundings on delivery trips are responsible for a sizeable amount of builders risk claims.

Hurricane

• You can’t prevent a hurricane from striking the yard, but management can minimize loss by developing a hurricane plan. Does the yard have a written hurricane plan?

• All yards on the East coast and Gulf of Mexico are exposed to hurricanes.

• Some yards are more exposed than others.

• Storm surge will cause most of the damage.

Hurricane

• In general, storm surge is worse in the Gulf of Mexico than the East Coast due to shallow depth of water.

• Mississippi & Louisiana, is considered “hurricane alley”

Need a good strategy!

Major Hurricane Frequency – Cat 3 or Greater

40

Gulf of Mexico Storm Surge – Cat 5

Source: P.C. Weather ProductsHurritrack software

New Orleans – Cat 5

Source: P.C. Weather ProductsHurritrack software

Cat 5 Storm Surge – Pascagoula, MS

Source: P.C. Weather ProductsHurritrack software

Overlay of Storm Surge

Rates

• Rates vary drastically by account

• Low of .04% per month on values declared

• High of .10% per month on completed contract price

• Rates immediately increased after Katrina & Rita, but leveled off quickly.

Review

• Gather as much information as you can.

• Review the policy form and endorsements.

• Pay particular attention to fire and hurricane risk.

• Determine if these risks are acceptable.

• Determine necessary rates to ensure long-term profitability.

• Manage your aggregation.

Good Public (Free) Information

• MARAD.gov – Shipbuilding report and survey

• Colton Company – History, Statistics, New Contracts

• Google Earth – birds eye view

• NOAA – Hurricane info

• FEMA

• Company websites

Stay Disciplined!

Discipline Undisciplined

Thank You!