Question

Underwriters use a considerable amount of judgement based on experience when evaluating applications for insurance. Identify four factors that will be considered by the insurance underwriter when determining the rate to be charged for a policy of ocean marine cargo insurance.

Answer 1

Four factors that underwriters consider for marine cargo insurance include the type and value of cargo, risks associated with the shipping route, the experience of the shipping company, and the condition of the shipping vessel. These contribute to determining a fair premium and mitigating moral hazard.

Step-by-step explanation:

Insurance underwriters assess several factors to determine the rate for a policy of ocean marine cargo insurance. The following are four key considerations:

• Type and value of cargo: The more valuable or fragile the cargo, the higher the risk and potential insurance premium.
• Shipping route risks: Areas prone to piracy, weather perils, or political instability might increase the premium due to higher risks.
• Experience of the shipping company: A company with a proven track record of safe transportation is likely to get a more favorable rate.
• Condition of the shipping vessel: A newer and well-maintained vessel poses less risk and can lower insurance costs.

These considerations directly impact the balance between what an individual pays into the system and potential claims as part of actuarially fair insurance policies. Moral hazard can further complicate rates, as it relates to changes in behavior resulting from being insured.