The health of the hull insurance market ultimately may come down to three short words, said experts this week at an industry meeting in Tokyo: Just say no.

Experts at the annual meeting of the International Union of Marine Insurance, held in Tokyo, said one of the most difficult challenges is to decline a risk that looks too good to be true and which later returns to bite.A long-term analysis of hull insurance underwriting raises questions about the rationality of the business, said Christian Kluge, director, marine division with Munich Reinsurance Co.

"Most insurers and reinsurers have not been able to balance the losses they incurred in bad times by the profits they managed to produce in good times," he said.


The German market, for instance, has endured three business cycles in 33 years. Fifteen of those years saw a profit while 18 produced losses. While that sounds roughly balanced, profits averaged 19 percent. Losses averaged 62 percent.

These conditions tend to produce two types of underwriters, Mr. Kluge said. The traditional underwriter takes a long-term view and reacts defensively. The more modern animal looks short-term and tries to exploit the cycle.

The challenge for reinsurers is to differentiate between the two, he said.

Both are experienced in the cycles and market fundamentals and seek profitability and an acceptable return on equity for those who supply their capital.

But the traditional underwriter - if not under orders from above to expand market share - will shun the idea of reinsurance as merely a way to pass losses down the line and will keep a relatively large amount of the risk.


Even more important, he or she will reach a point where quality underwriting becomes difficult and will say "no," thereby avoiding business that will later produce losses.

The more modern type, on the other hand, craves market share while being careful not to risk too much capital.

As the market gets soft, this type looks for reinsurance capacity, preferably on a proportional basis, where the reinsurer will only realize the effect of technically inadequate rates a few years later.

In the search, the modern underwriter is often helped by experienced brokers who are experts at dressing up the risk. The risk will look selective and the players experienced and prudent.

But beneath the surface, stated premiums may only be gross premiums - with deductions of up to 20 percent to follow - claims may only be paid claims and individual fleet data may conveniently omit a ship or two already resting on the ocean floor.


"A broker knows that wishful thinking is often stronger than realism," Mr. Kluge said. "When everyone's talking about a booming market, even geese can be made to look like swans."

In the end, the experienced underwriter's gut feeling that something seems too good to be true is the key to success, Mr. Kluge said.

However, in defense of the broker, J.W. Eagle, deputy chairman of Sedgwick Marine & Cargo Ltd., questioned whether life was that simple.

He said everyone talks about quality underwriting, "which is all well and good."


"But there is a price for everything," Mr. Eagle said. "And writing quality business at a loss is no better than writing non-quality business and making a similar loss."

Instead, the market should redefine the problem, he said. Instead of always trying to drive rates down, the insureds should be willing to support a service in which price is weighed alongside claims service, quality of capital and security and the skill to provide cover the owner really wants at prices acceptable to both parties. Unfortunately, most shipowners just won't pay that kind of premium.

In effect, Mr. Eagle said, competition imposes inevitable strains until prices fall below cost. The only answer, he said, is to seek out ever better sources of information.

But Karlheinz W. Timmermann, deputy chairman with P&O Bulk Shipping Ltd., said it's not fair to lay all the blame on the shipowner. Prudent shipowners will accept different premium levels if risk is properly assessed.


The problem, he said, is that most insurance companies don't do sufficiently detailed risk analysis. They should be more deliberate and sophisticated about questioning ship values and deductibles of the aging fleet, he said.

Mr. Timmermann said the insurance industry has also been too quick to congratulate itself. Only last month the Institute of London Underwriters said in releasing statistics for the first half of 1995 that the numbers seemed to support the view that vessel conditions were improving following industry

pressure to raise standards, he said.

Yet this appears to contradict the fact that the selling prices of second- hand vessels are lower than insured values. In addition, the world fleet is older on average than ever before and, by the ILU's own statistics, 90 percent of accidents involve vessels over 15 years of age.

"In some, if not most, cases, older vessels are insured at levels exceeding market values by $10-$20 million," Mr. Timmermann said. Typically, a 150,000 dwt bulk carrier of 10 years would sell for around $23 million in today's market.

Mr. Timmermann said the additional premium a shipowner had to pay to add $1 million to the insured value of his ship was minimal. "Isn't it tempting to err on the side of over-insurance and collect windfall compensation?"

Underwriters should strongly consider better valuation systems that more closely mirror real conditions, he said. This would provide an incentive for shipowners to replace aging tonnage and would help underwriters reduce losses.