Issue link: http://read.dmtmag.com/i/613635
I DA U N I V E R S A L N ove m b e r - D e ce m b e r 2 0 1 5 11 LEGAL LINE Robert W. McIntyre IDA Association Legal Counsel Continued on page 76 T he concept of risk insurance originated in 17th century Europe when ship owners and traders needed a more aff ord- able way to send their valuable ships and cargoes on distant ocean voyages. Initially, insur- ance "companies" were essen- tially informal syndicates of individuals who each committed money or credit in amounts that they could accept losing without fi nancial pain. In exchange for this commitment, owners of the ship and its cargo paid fees to the syndicate, which were distributed to syndicate members according to their percentage of the total risk assumed. For, say, a trip from Rotterdam to Cape Town, each syndicate member would agree to pay his share of the total to the syndicate, which then would pay the ship and cargo owners an agreed upon amount if the ship was lost to an 'insured' cause. With this model, each syndicate member lost only what he could aff ord to lose. If the voyage was a success, syndicate members kept the fees paid in as reward for the risk taken. Many fortunes were made (and lost) on these ventures by people who backed the risk of loss. is business grew with the expansion of trade and explo- ration from Europe across the globe, and "exchanges" were born in European countries to handle the growth and formalize the process to maximize profi t and minimize loss. e most famous exchange was, and still is, Lloyd's of London, which continues Insuring Nothing to operate on the same basic principles today. Lloyd's, and other similar institutions, eventually broadened their scope to "insure" virtually everything under the sun: rubber production in Malaysia, oil rigs, aircra , movie completion schedules, Australian harvests of grain, oil machinery, and even Marilyn Monroe's legs. As the process evolved, each "Name" – as the members of Lloyd's came to be called – independently evaluated each risk to be insured, deciding how much risk to take and what they wanted to be paid for their participation. rough this brokering and negotiation process, Lloyd's could assemble a group of Names to insure almost anything. Lloyd's charged fees for administrative costs, and a form of "insurance company" was created. A key principle that emerged was the evaluation of each risk at the time of "off er" to insure. Some ships were built and operated better than others. Destinations and routes were treated diff er- ently based on length, the seas to be encountered and political factors, such as pirates and corrupt governments along the way. Nothing is signifi cantly diff erent in 2015, but the infor- mation for risk assessment has evolved to be almost scientifi c in its application. A more modern example is a Lloyd's insurance matter litigated a number of years ago. An additive supplier to a motor oil manufacturer insured with Lloyd's against potential claims by motorists for damage to their cars by a new kind of oil containing the client's additive. However, when the oil company actually manufactured the products (and shipped several million cans of oil), it decided to save money and not only changed to a cheaper base oil stock, but also bought several diff erent, cheaper a dditives. is new mix of base oil and additives did not play well together, and the result was oil that turned to jelly below -10 C and ruined thousands of engines. Fortunately for Lloyd's, the secret product change voided the insurance, and the oil company was on its own. Fast forward. e insur- ance industry now has become a multi-national spaghetti tangle of primary insurers, re-insurers, insurers of the re-insurers, and sellers of special securities that bet on the gain-loss performance of each tier and the stock markets where the insurance companies themselves are listed. All this is based on a foundation of formal underwriting, essentially a process where the risk-by-risk judgment of a group of "Names" is replaced by computer tools manipulated by persons remotely removed from the business risks they evaluate.