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safety and seaworthiness
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1. The possibility of insuring cargo was introduced earlier. How does the situation change, as far as incentives are concerned, when companies can insure their transported goods against possible shipwrecks? First of all, the companies’ most important aim is to safe money. Therefore if they have to deliver their goods from on place to another, they are intent on taking care about their products. Transportation companies comprehend that it is by no means more efficient to teach their staff to carry out good safety on board than leaving the ship in own responsibility and hoping that craft and cargo will arrive without a damage. In no doubt it is quite expensive to hold a good quality of security and seaworthiness. Preparing the stuff, checking the ship and everything cost time and money. The whole situation changes if the company has now the option of insuring the cargo against potential ship wrecks. The term moral hazard, originated in the insurance industry comes to light. It is a form of post contractual opportunism which arises when a contract or some kind of a contract has be signed. The main point of the theory of moral hazard is that people with insurance tend to change their behaviour in a way that harms the insurance companies. Before it has been a major point to worry about security and since the transportation company is insured this astonishing moral hazard problem occurs and it seems that security is a new term for the business. Being insured may make people do not mind about precautions which could prevent some happenings. One example for this phenomena might be the situation when you rent a small motorboat during the holidays. Normally insurance is included in the rent and you do not have to care about possible dangers. You would likely to be more careful in using a rented motorboat if you would be financially responsible for all possible damage. Certainly you want to check the boat before driving it, which is not the case if you would be insured against everything. In that case doing a security check is regarded as wasted time because you would get the money when something happened. If you are fully insured, then being careful brings you no extra benefits. Principally such a moral hazard problem occurs if people are likely to transmit false information or when they are tempted to take an inefficient action. Unfortunately there is a big difficulty to hold back the passing on of false information because you would have to monitor your clients constantly and this is sometimes simply not possible. So the insurance company has to react in a different way. It may not suffer any losses from moral hazard if it sets the insurance premium high enough to cover the extra costs. This is one successful solution. 2. Discuss a situation in which the same company owns both the ship and the cargo (say for instance a substantial amount of crude oil). If this entity is insured against a shipwreck, who stands to lose the most if an accident does occur? In my opinion there is no possibility to answer this question in only one genuine way. I will try to give an insight into the ´costs` for both, the company itself and the insurance company. I found a sentence which I would say, is an appropriate point in the situation, where a company looses its cargo or even its ship: “The market value of real property reflects the opportunity to use the property immediately. The change in a property’s market value after a loss reflects the loss of this opportunity”. So, the loss of not having the cargo now is an important point to name. Even when the lost cargo and the ship are replaced, there are probably lost earnings, caused of the effect of the loss. I would mention here a possible fact that the business partner is already waiting for the company’s cargo. He could be a manufacturer who needs these items to go on in producing. Someone has also to compensate for these costs that the machines are left empty. If the manufacturer would have to pay this loss by himself, he would probably break up his business relationship. So there is the cost of loosing its reputation, because nobody wants to risk something in building up a relationship with a company which is likely to have difficulties in bringing its cargo to the right place at the right time. All these sorts of costs a company has to finance by itself. Normally the insurance contract includes only the money for restoration or replacement of the vessel and its cargo and there is nothing written about paying for these extra costs. With offering an insurance benefit for the damaged cargo and the ship, insurance companies often face this problem: You would be better off as a business man by damaging your old ship if you would have received an amount of money which is of the value of a new one. Selling your ship would not be so effective. To control this way of behaviour, insurance contracts often include the condition of requiring replacement for getting an insurance benefit. An additional solution of controlling as an insurance company this problem, would be, in my opinion, not to pay the whole current market value, but with the reduction of depreciation, depending on the years the ship is already used. Therefore, trying to weigh up all these facts I would say that finally the company looses the most, because these are losses you cannot have under control easily and they can exceed the costs of the ship plus cargo. The company faces also costs which may come up later, like the risk of loosing its reputation and you are hardly able to define the arising disadvantages from a lost partnership. On the contrary the insurance company takes the risk of having to pay an insurance benefit into account and it has already in advance the ability to handle with particular numbers. 3. Section 3.2 ends with a short note on how the insurance companies have an incentive to somehow monitor the seaworthiness and safety of the insured vessels. How are the insurance companies doing this and how do insurance contracts work in the case of cargo carrying vessels? Based on a paper from the Internet about marine cargo insurance I will try to give an insight in the nature of insurance contracts concerning vessel transportation. Generally there are many international sales transactions, with goods having to be transported over long distances. Therefore a ship accident, result in the total or partial loss of the cargo or even with the loss of the vessel, is quite possible. Marine cargo insurance helps to remove the financial burden of the risks of loss or damage regarding to the transportation of these goods. In earlier times the Marine insurance used to refer just to the limited insurance of ships and their cargoes, but nowadays it takes the risk also for the movement of cargo which involves no ocean transport at all. The specialists, in assessing risks relating to goods in transit within the marine insurance are called Marine underwriters. An insurance company employs underwriters who transact business on behalf of the company. The main functions of the Marine Insurance are Spread of Risk, Aid to Security, Aid to Credit, Source of Employment, Source of Capital and Loss Prevention.
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