REPORT OF A SUB-COMMITTEE OF THE COMMITTEE OF IMPERIAL DEFENCE ON THE INSURANCE OF BRITISH SHIPPING IN TIME OF WAR. if 63 CONTENTS. Terms of Reference REPORT. PART I.—GENERAL PRINCIPLES PART II.—THE INSURANCE OF HULLS .. The Mutual Insurance Associations The Insurance of Hulls on Voyages current at the Outbreak of War Shipowners’ Contributions The possible Liability of the State for Losses on Voyages current at the Outbreak of War The Insurance of Hulls on Voyages commenced after the Outbreak of Hostilities The possible Liability of the State for Losses on Voyages commenced after the Outbreak of War The Settlement of Claims Valuation Concluding Remarks on Hull Insurance PART III.-THE INSURANCE OF CARGOES The Market for War Risks The Insurance of Cargoes on Voyages current at the Outbreak of War . The Insurance of Cargoes on Voyages commenced after the Outbreak of Hostilities The Extent of the Liability of the State for Losses on Cargoes PART IV.—SUMMARY Concluding Remarks C£> 00 <1 Cn CnCOfcO Insurance of British Shipping in Time of War. TERMS OF REFERENCE. THE Prime Minister desires that a Sub-Committee of the Committee of Imperial Defence composed as follows :— The Right Hon. F. Huth Jackson (in the Chair), Lord Inchcape, Sir A. Norman Hill, Secretary, The Liverpool Steam Ship Owners’ Asssociation, Sir Raymond Beck, Deputy-Chairman of Lloyd’s, Mr. Arthur Lindley, Captain M. P. A. Hankey (Secretary), should meet to consider, without prejudice to the question of policy, whether an administratively practicable scheme can be devised for submission to His Majesty’s Government, which will secure that, in case of war, British steamships shall not be generally laid up, and that oversea commerce shall not be interrupted by reason of inability to cover the war risks of ships and cargoes by insurance, and which will also secure that the insurance rates shall not be so high as to cause an excessive rise of prices. Any scheme prepared must be on the basis of reasonable contributions being paid by the owners of ships and cargoes towards the cost of insurance. 2, Whitehall Gardens, S. W., May 7, 1913. REPORT. Part I.—General Principles. 1. In seeking to devise a scheme which will ensure that, in case of war, British steamships shall not be generally laid up, and that oversea commerce shall not be interrupted ­ by reason of inability to cover war risks of ships and cargoes by insurance, and which will also secure that the insurance rates shall not be so high as to cause an excessive rise in prices, we have kept the following principles in view r :— (1.) As laid down in the terms of reference the scheme must be on the basis of reasonable contributions being paid bv the owners of ships and cargoes towards the cost of insurance. (2.) The main object of the State is to keep the trade of the country going and not to make a profit. (3.) Nevertheless, it is necessary to safeguard the State against incalculable financial liabilities, and more particularly against fraud. C’TJj (4.) If the scheme is to have any prospect of success it is essential to avoids the hostility of any of the interests concerned. It is therefore necessary to avoid any step prejudicial to the legitimate business of shipowners, insurance brokers, underwriters, merchants, or bankers. (5.) The scheme should avoid the appearance of a gratuitous gift from the State to a particular trade, at a time when all branches of trade will be very much hampered and every class of the population will be subject to unforeseen and incalculable risks of loss. [593] B 2 2 Beport on Insurance of British Shipping.—Part II. (6.) It should, on the other hand, avoid disclosing to the enemy the real conditions prevailing at any moment, by the quotation of official rates of insurance corresponding to the actual risks as known to the Admiralty. (7.) It should avoid or minimise, as far as possible, the administrative difficulties which will fall upon the State, e.g., of valuation, avoidance of fraud, congestion of business, &c. 2. The details of our scheme are set forth below. Part H.—The Insurance of Hulls. The Mutual Insurance Associations. 3. With regard to the insurance of hulls, our attention was drawn to the fact that during recent years the insurance of shipping against war risks had passed from the Underwriters into the hands of Mutual Insurance Associations or Clubs, of which the principal are the following:— The North of England Protecting and Indemnity Association, comprising in its warrisk class steamers of a value of about 30,000,000?.. The London group of War Bisks Associations, comprising steamers of a value of about 27,000,000?. The London and Liverpool War Bisks Insurance Association (Limited), comprising steamers of a value of about 30,000,000?. The two last-named Associations have only been formed during the last two years. 4. The total values insured in these three Associations amount to about 87,000,000?., while the total steamer tonnage of the United Kingdom engaged in foreign trade was valued in 1911 at 127,000,000?. So far as we can learn, the majority of vessels not entered in one or other of the Associations are not at the present time insured against war risks. 5. The risks covered by these Associations differ somewhat in detail, but the main principles embodied in their insurance are the same. They cover fully the risks incident to war so long as this country is neutral, but the risks covered incident to a war in which this country is a party are strictly limited. 6. The losses and claims, to meet which these Insurance Clubs were formed, are those which are excluded from the ordinary marine insurance policy by the following or similar clause: “ Warranted free from capture, seizure and detention, and the consequences thereof, or any attempt thereat, barratry, piracy, riots and civil commotions excepted, and also from all consequences of hostilities or warlike operations, whether before or after declaration of war.” This cover applies both in the case of war between two foreign nations, and also when Great Britain is one of the belligerents; but when Great Britain is at war the cover is limited, in the case of vessels actually at sea, or in an enemy port, on the declaration of war or the outbreak of hostilities, until the time of first arrival at a British or neutral port which is a safe port for the ship to lie in. The period of cover while in such safe port varies. In one Club it is limited to ten days, in another to thirty days, while in a third it extends to the date of expiry of the policy. Vessels which are not at sea on the outbreak of hostilities, but are in a safe port, are held insured while they remain there for a similar period. Every vessel is deemed to be insured against all perils covered by an ordinary marine insurance policy, and must continuously sail under the British flag. There are a number of other conditions which are important, but which it is not necessary to mention in detail here. Only a nominal initial premium amounting to a few pence per cent, on the values entered is charged to cover the expenses of management, but the members share all losses on the basis of the insured values. The Club insurances are effected on the 20th February in each year, and run until the same date in the following year, when, under ordinary circumstances, the policies are automatically renewed for another year. 7. It must be recognised that these Associations have been organised with a view to restrain, as far as possible, the vessels they insure from running risks in a war in which this country is engaged, and it is therefore evident that soon after the outbreak of such a war all vessels insured in the Mutual War Bisk Insurance Associations (that is to say, nearly 70 per cent, of the total British steamships engaged in the foreign The Insurance oe Hulls. ■3 ’ trade) will be found in a safe British or neutral port, and will remain there until the) r are able to secure fresh insurance against the risks of war. 8. There are some lines of. steamers which continue to run their own war risk insurance, notably the P. and 0. and the Alfred Holt Line of steamers. These vessels would probably act in the same way as the vessels insured in the Clubs, at any rate as far as voyages to and from Great Britain are concerned. It might, therefore, happen that within a very short period after the outbreak of a war in which we were one of the belligerents, the movements of practically the whole of the shipping under the British flag would be arrested, except, perhaps, in such areas (if any) as were outside the possibility of interference by the enemy. 9. We understand that the chief reason which has induced so many of the shipowners ­ of this country to combine for the mutual insurance of their vessels against war risks has been the difficulty, if not impossibility, of securing continuous cover for these risks in the open market. The extent of this mutual cover was naturally limited to the first arrival at a safe port of the vessels at sea on the outbreak of war, and could not have been extended on the same terms to voyages commencing 'Iter the outbreak of war, as the risks of these fresh voyages would vary considerably 10. This is a new and important development since the port of Mr. Austen Chamberlain’s Committee in 1908, and we have endeavoured to point out its consequences. ­ In any case the action of shipowners in forming these mutual Clubs has resulted in the creation of an effective machinery for the control of values and the settlement of claims ; and it must be emphasised that this is not a machinery which has to be improvised when this country becomes a belligerent, but is in daily use at the present moment. And it is obvious that it would be in the interests of the State to make use, if possible, of this machinery for the working of any scheme of war risk insurance of hulls after the outbreak of war. The Insurance of Hulls on Voyages current at the Outbieali of II ay. 11. The first thing to try and provide for was the completion of voyages current at the outbreak of war which would be automatically interrupted un ei ue exi g mutual insurance arrangements. Under these arrangements, whic ) are c esci i e 1 in paragraph 6, the Associations, and through them the shipowners, aie ia ® considerable amount of King’s enemy risks on the outbreak of war, a iciig " of these risks i» carefully safeguarded by the rules of the Associa ions, an_ particularly by the provision that ships are only covered until t ley at me a -iq or neutral port which is a safe port for the ship to lie in. M e have no oulK P ’ ‘ , i to estimate what proportion of the risks to be run in completing voyages cu _ outbreak of war would be the precise equivalent of the risks alrea y c • Norman Hill, who is the Secretary of the Liverpool and London \\ ar Risks insu a Association, suggested, however, that the Associations might ie m uc maximum of 30 per cent, of the total Kings enemy risks °u curren g > condition that the State undertook the remaining 80 per cent, o iese n - ■ . was quite convinced that shipowners would not be prepare o pay T P, oe to cover these additional risks. They would for the most pai ,e . 1 '( nu Jy h , freights, and would be under no obligation to run these additiona , ,-l • conditions of many bills of lading, they can, on the outbreak o wai, S cargo at a safe port, and start on a new voyage, at war rates of fi eig > a '' . ,, have been able to arrange their insurance. Failing this, it wou P r0 ^, T adonted better to lay up their ships for six or twelve months—a policy t a som Indeed in recent years, when they have been unable to obtain remunerative reig ’ i ^ we are informed that managers of shipping companies might consu ei insurance an obligation to their shareholders not to send ships to sea withou war • > and that every mortgage deed or debenture bond has a stipulation o so the vessel shall be amply insured. . ,. . - + - n 00 nld 12. Sir Norman Hill further told us that the Committee of his ^sociatio not accept these additional risks without the consent of its mem >eis , an , x Q f that this would mean a certain amount of publicity during time o peace, which it was impossible to gauge. . „ 13. We thought it desirable to consider whether any scheme was p itself would avoid publicity before the outbreak of war. The only pj an u1j s „ Tin blic to us was that the State should, immediately on the outbreak o war, ma • ? p r announcement that it was willing to accept 80 per cent, of the King s ene y the completion of all current voyages from the time when the cover provi 4 Report on Insurance of British Shipping.—Part II. Club policies ceased. But in that case an arrangement for the Associations to take the remaining 20 per cent, of these risks would be impracticable. In the first place, the members of the various Associations would have to be called together to approve of the arrangement. Seven days’ notice of the first meeting would have to be given, and a subsequent confirmatory meeting would have to be held. This would take at least three weeks, during which time the current voyages of the ships in question would all be suspended. Secondly, it would be very difficult to get the whole of the shipowners to share these risks equally. The country or countries with which we were at war would be known, and the zones which would be particularly dangerous to shipping could be easily diagnosed. Those shipowners whose vessels were not going to pass through the danger zones would very naturally refuse to share these risks on equal terms with those owners whose vessels were bound to pass through the danger zones. 14. The only alternative would have been to suggest that, in order to avoid publicity in times of peace, the State should, on the outbreak of war, undertake the whole of the King’s enemy risks for the completion of current voyages without premium. But this we could not recommend, as it was not in accordance with our terms of reference, which require that there shall be reasonable contributions from the owners of ships towards the cost of insurance. Besides, such a proposal would not have secured Tor the State the advantages of the active and interested co-operation of the Mutual Associations, which we consider of the highest importance. 15. We had therefore to face the fact that any scheme that would secure for the State the co-operation of the Mutual Associations in time of war would necessarily involve a certain amount of publicity in times of peace, and we came to the conclusion that, if there was to be any publicity at all, this publicity had better be complete. 16. We considered a form of policy for the Mutual Associations to issue, to cover the additional risks involved, and a form of policy lor the State to issue, to reinsure its share of the same risks. These policies were “voyage” policies, and it was evident that the preparation of separate policies to cover these risks on every voyage would involve a vast amount of clerical laboui*, and would probably entail the creation of a -Government office in time of peace, whose duty it would be to keep a record of all the contracts entered into by the State under this arrangement. 17. We therefore decided to go a step further, and to propose that the present standard form of policy of the Associations should be altered so as to include the additional risks involved. This new form of policy would run from year to year, just as the present policy does, and a list of the policies issued by each Club would be given to the State every year. The State would enter into a general agreement with each Association, accepting responsibility for 80 per cent, of the King’s enemy losses incurred under these policies in the case of a war in which we were one of the belligerents ­ The insurance would remain in force for ten clear days following the arrival of the ship at her port of destination. The war risks, other than King’s enemy risks, would be covered under the same Club policy, but the Club would alone be responsible for these. 18. The rules of the existing policies of all the Clubs contain provisions in varying terms for the control by the Committee or 'Directors of the Association of the movements ­ of the ships insured at times when war has broken out, or is considered by the Committee to be imminent. The most comprehensive provisions are perhaps the following : “ When, in the opinion of the Directors, special circumstances exist in “ regard to the probability of war breaking out, or otherwise, Members or Owners “ shall, on the request of the Manager, furnish full information as to the position “ and contemplated voyages of all their steamships entered in this class of the “ Association. When steamships are making, or about to make, a voyage in or through “ seas or waters in which belligerent action or hostilities are taking place, or expected “ to take place, Members shall forthwith report every voyage in progress or contem-“ plated which is likely to bring any steamship entered into such seas or waters.” (Rules of the North of England Protecting and Indemnity Association, 1913-14 Class III, Rules, No. 21.) 19. Or again, “ Provided that immediately upon the declaration of war or outbreak of hostilities, or as soon as the same can be notified to her, the ship insured shall without delay proceed to such British or neutral port and in such manner as the Committee by regulations made or specific directions given by them may direct. . . .” (Rules of the London and Liverpool War Risks Association. Form of Policv Clause 4 (c). ) 20. It war- however, felt—not only by us, but also by the Managers of those The Insurance or Hulls. j Mutual Associations who appeared before us—that as the State, under the arrangements ­ suggested, would be taking such a large proportion of the risks after the outbreak of a war in which we were a belligerent, the movements of all ships thus insured should be subject to the control of the Admiralty. It was therefore agreed that words should be introduced into the new policies providing a warranty that after the outbreak of war every ship shall, so far as possible, carry out any orders that the Admiralty may give in regard to their routes, ports of call, and stoppages. If, however, they fail to carry out these orders, they will not lose the benefit of insurance, provided the assured can satisfy the Committee of the Club that the breach of orders happened without the fault or privity of the assured and of the owners and of the managers of the ship. But, even then, we think the shipowner should be liable to some penalty, and we suggest that the State should require that the rules of every approved Club contain provision for an appropriate penalty. This might take the form of the levy of an extra premium payable by the Member to the Club on the insured value of the ship in which the breach has taken place, or it might take the form of a deduction in the settlement of a claim of an amount to be fixed, within reasonable limits, by the Committee of the Club, or, in extreme cases, the Committee might have the power of expelling a Member from the Club. It would not be possible for the Club to impose penalties upon the Master of the ship who deliberately disobeys the orders of the Admiralty, but we are of opinion that this might be made an offence with an appropriate penalty, under the Act sanctioning the scheme. Shipowners' Contributions. 21. We have already mentioned the reasons given us why shipowners cannot pay a premium to cover the risks incident to the completion of voyages current when war breaks out. Nor do we see how the collection of such a premium would be possi e, if our suggestion is adopted that the standard form of annual policy issued by ie Clubs should be extended to cover the additional risks involved. It would, of course, be possible to deduct such premiums from the amount paid in settlement of a oss , but it would be extremely difficult, if not impossible, to collect the premiums m tne case of those vessels (and we hope that they would form a very large proportion of t e total) which arrived safely at their destination. . . , , 22. It may then be asked how we reconcile this absence of premium wi 16 conditions laid down in our terms of reference “that any scheme prepared must re on “the basis of reasonable contributions being paid by the owners of sups • • • • “towards the cost of insurance.” Our answer is in the first place that we are on y now dealing with one portion of the scheme, viz., that relating to ships afloat at re time of the outbreak of war. In the case of voyages begun after the outbreak o war we recommend the charge of premiums (see below, paragraph 29). in ie secon place we consider that the fact that the Clubs, and through them t e s lpowners, retain 20 per cent, of the risks involved, and will pay the whole cost of administration may be looked upon as a “reasonable contribution towards the cost of insurance may be added that the managers of the Clubs whom we consulted assure us 1a i arrangement for the completion of current voyages without payment o piemium would probably be necessary as an inducement to the members of the u rs to nccep our proposals for covering the insurance of vessels starting after the ou >iea o vuu - An offer; made whilst the area which will be affected by our next war 1S a nl ‘ of pure coni ecture, to cover the King’s enemy risks incident to the comp e ion current voyages, is apparently the only inducement that can be offere °S e members of the Club to agree to share the risks of those members w rose v y & will be specially affected by the war. The possible Liability of the State for Losses on Voyages current at the Outbreak of War. 1 23. It may be pertinent here to try and form some rough estimate of what the sses on current voyages may be. Sir Henry Hozier submitted to Mr. Austen lam er <ain s Committee a statement showing the net registered tonnage and position ° a ocean-going British steamers on the 26th March, 1903. Taking this statement as d asis, and applying it to the number and net registered tonnage of British eameis employed in foreign trade in voyages to and from ports in the United c Repobt on Insubance of Bbitish Shipping.—Pabt II. vessels employed is as £ .. 13,000,000 .. 16,000,000 .. 29,000,000 .. 17,000,000 5,000,000 Total .. .. .. .. • • • • 80,000,000 24. We have, of course, no means of judging what the percentage of losses may be,, as we have no experience in recent years which can be of any practical use to us. But we do not think it necessary to assume that the losses will be very great. It must be remembered that the Admiralty will have the right to forbid any dangerous voyages, or to order a ship to proceed to a port other than that for which she was originally bound, and that the shipowners themselves will have no inducement to expose themselves ­ recklessly to risk of capture, as they will, by so doing, either forfeit their insurance, or in anv event, have to contribute themselves pro rata to the loss of their own vessels. 25. Without committing ourselves to any estimate, we would point out that, on the basis of the above statement, a 5 per cent, loss on the vessels employed in the foreign trade of the United Kingdom, homeward and outward bound, at the outbreak of a war with a first-class Power would represent 1,450,000b, of which the State would bear 80 per cent.—say, 1,160,000Z. If it is assumed that of the remainder of the vessels employed in the same trade two-thirds were on voyages or in the enemies’ ports, a 5 per cent, loss would represent a further 1,700,000b, of which the State’s share would be 1,360,000b 26. The value of British vessels employed in 1911 abroad, but in trades other than the foreign trade of the United Kingdom, may be taken roughly at a further 47,000,000b No particulars are available showing the positions of these vessels, but it is probable that a number of them would be outside of the range of a war with a Continental Power. If it be assumed that one-halt' of these vessels would be on voyages current on the outbreak of war or in ports of the enemy a 5 per cent, loss would represent a further sum of 1.175,000b, of which, to maintain the continuance of current voyages in the general oversea trade, the State would have to bear, without receiving any premium, losses amounting to 940,000b 27. If, therefore, the losses of vessels engaged on voyages in the foreign trade on the outbreak of war amounted even to 5 per cent, of the total number of vessels then at sea or in enemies’ ports, the State would have only to bear, without receiving any premium, losses amounting to 3,460,000b in order to maintain our oversea trade, and in particular to facilitate the completion of voyages to and from the United Kingdom. 28. It may be argued that, even if our suggestions are adopted, they will not compel any ship to complete its voyage after the outbreak of war. It will still be optional for the shipowner to give directions that his ship is to go to a safe port and remain there until the war is over. We admit that if this policy were generally adopted our scheme would fail in its main object; but we think that few, if any, shipowners are likely to adopt this policy. In the first place, the vessels on voyages current at the outbreak of war will only be earning peace freights, and it will be a strong inducement to the owner to get his present voyage completed, so that he may be able to take advantage of the higher freights for new voyages which would presumably be offered after the outbreak of war. And, further, the shipowner would realise that, even if he laid up his own ship, he would not thereby escape his liability to contribute pro rata to the loss of other ships insured in his Club which had run the risks he was afraid of. Kingdom in 1911, a rough estimate of the values of the under :— Homeward bound Outward bound In port and coasting in foreign waters .. In port and coasting United Kingdom On voyages between Continents intermediate The Insurance of Hulls on Voyages comrnenced after the Outbreak of Hostilities. 29. With regard to new voyages commencing after the outbreak of hostilities, we propose that these should be similarly insured by the Associations and reinsured by the State to the extent of 80 per cent, of such risks. But there will necessarilv be many points of difference between these arrangements and those suggested for the ^completion of voyages current at the outbreak of war. In the first place, each voyage will have to be separately insured, and a separate reinsurance policy issued by the State—though, perhaps, such reinsurance policies may be dispensed with, if the State is content to receive statements from time to time from the Associations showing the vessels on risk. The Insurance oe Hulls. I* c 1 o • . . . vr Secondly, premiums will be charged for these insurances. These premiums writ ’be collected by the Associations when issuing their policies, and 80 per cent, of them will be accounted for to the State in consideration of its taking 80 per cent, of the risks insured under the Club policies. Thirdly, a warranty will have to be inserted that ships will not sail when ordered by His Majesty’s Government not to do so. 30. We propose that the rates of premium for new voyages commencing after the outbreak of war shall be fixed by the State, which shall have power to vary them from time to time. It will in our opinion he necessary to have different rates of premium for different zones, and it may also be found advisable during the course of the war to change the rates for certain of these zones. But we are strongly of opinion that the different rates should be as few as possible, and also that the changes in these rates should be as infrequent as possible. It is admitted that the State is not undertaking this business with a view to making a profit out of it, but solely with the object of preventing the interruption of our oversea commerce in time of war owing to inability to insure against war risks through the usual channels. The rates charged by the State must not, therefore, be so low as to compete with the rates that the insurance market may be willing to quote, nor must they be so high as to be prohibitive, or materially to affect the cost of the food or other merchandise being brought to or carried from these shores. At the same time it would be obviously unfair to the State’s partners in this business—the individual shipowners in the Clubs—that they should be called upon either to pay premiums out of all proportion to the risks of the voyages undertaken, or to bear their share of losses in respect of voyages insured at much too low a premium. It is for this reason that we recommend that the premiums charged should to some extent depend on the risks involved. But we should like to suggest that the maximum rate for any voyage should be 5 per cent., and the minimum rate 1 per cent., and that any rate accepted for a particular voyage shall hold good, provided that the ship starts within fourteen days after acceptance of the risk. 31. It is in our view impossible to lay down beforehand what would be the proper premiums to charge for any particular voyages, as these will vary with the enemy we are at war with. It is obvious, for example, that if we were at war with an Eastern Power the risks of many voyages would be very different to what they would be if we were at war with a European Power. 32. W e suggest that the State should appoint a Board-of Experts to advise on the question of rates and variations of premiums, and we are assured that the members of Lloyd’s and other institutions would willingly place their ser vices at the disposal of the State for this purpose. The State would no doubt have one or two representatives of their own on this Board. 33. We recommend that any shipowner who has insured his vessel under this scheme for a certain voyage should have the right to cancel the policy and receive back the premium paid, if the voyage in question is prohibited by the Admiralty before his vessel has started. Such a proposition as this would not of course be acceptable or possible in the case of the insurance market, whose members are engaged in the business for the purpose of profit. But, as we have already said, the State is not expecting to make a profit out of this business, and it should therefore be quite willing to refund the premium, provided it is relieved of the liability. Besides, such action on the part of the State might very conceivably be furthering the main object it has in view—namely, to prevent the laying up of shipping during war time. For instance, a particular voyage is prohibited by the Admiralty, and a shipowner who has fixed his vessel for this voyage is able to cancel his contract and enter into another for a voyage which is not prohibited. It must surely be in the interests of the community at large that he should be able to do this. The 'possible Liability of the State for Losses on Voyages commenced after the Outbreak of War. ♦ 34. We found it impossible to give any estimate of what the State’s losses would ‘ e JU , r qH' ai( to vessels on voyages current at the outbreak of war. We find it equally impossible to give any estimate in regard to voyages commencing after the outbreak of war. or the purposes of illustration, we assumed (paragraphs 25 to 27) a loss of pei cent on all British vessels at sea or in ports of the enemy at the outbreak war, and showed that the value of the vessels so lost would be 4,325,000L The [593] C 8 Report on Insurance of British Shipping.—Part II. value of the British steamer tonnage employed in foreign trade was, in 1911, about 127,000,000?.., and if from this value is deducted the assumed loss on the outbreak of war 4,325,000?., there would remain steamer tonnage of a value of 122,675,000?. available for the oversea trade of the country. A loss of a further 5 per cent, of this tonnage would represent 6,133,750?., of which the State would bear 80 per cent., say 4,907,000?. The Settlement of Claims. 35. We make provision for the State to be represented on the Committee of each Club or Association. Claims will be dealt with and settled by the Committee of the Club. But if the State’s representative on the Committee should protest against a proposed settlement, the liability of the State will have to be settled (failing agreement to refer to arbitration) by the Courts of Law. 36. The question of when and how payment of claims shall be made gave rise to considerable discussion. The general principle underlying the proposed arrangements between the State and the Clubs is that the Clubs take the whole of the risks, and re-insure 80 per cent, of them with the Sta te. A Club would therefore be primarily liable for the settlement of the whole of an admitted claim, but would only call on its members for 20 per cent, of the amount involved. We were told that the present practice of the Club was to pay an admitted claim within a very short time. But would they be able to collect funds from their members so promptly when we are at war ? And would it be reasonable that the State should discharge its 80 per cent, liability to the Clubs before the Clubs had collected the remaining 20 per cent, from their members ? 37. We came to the conclusion that the State had no concern with the internal arrangements of the Clubs with regard to the collection of the contributions from their members to an ascertained loss. Even if a Club were unable to collect from its members the whole amount required, this would not affect the State’s liability to pay over its 80 per cent, of an agreed claim to the Club. 38. We then had to consider when the payments by the State should be made. It was obviously not fair that, if a vessel were captured by the enemy, the owner should be able to give immediate notice of abandonment and claim payment of a total loss. This point is dealt with in the existing rules of all the Clubs, which provide that if a ship is captured, seized, or detained, the owner shall have no claim for total loss unless the capture, seizure, or detention shall have continued for a certain period. This period varies in the different Clubs from one month to six months. We propose that, under the arrangement with the State, the Clubs shall not be bound to pay a total loss, if the ship be recaptured, released, or restored to the owner within six months of the date of capture. But if the vessel is so restored, the Club shall pay the cost of repair or damages to and expenses incurred by the ship by reason of such capture, together with a sum equal to 10 percent, per annum on the insured value from the date of capture. Also, in the event of loss by destruction, we propose that no payment shall be made within a period of six months uf the loss. It follows, therefore, that the earliest time of payment by the State for a total loss or a capture will be six months after the event. 39. We have decided to recommend that the liability of the State shall be discharged in three equal instalments: at six, nine, and twelve months from the date of loss or capture, with interest at the rate of 4 per cent, per annum. 40. It may be argued that this system of deferred payments will be a hardship to the owner of the vessel, who will naturally wish to replace her as soon as possible, so as to be able to take advantage of the higher freights which will presumably be ruling during time of war. Our answer is that there is no reason why the Club should not arrange to pay the owner at an earlier date if it can do so; and that if, as we assume, some certificate of acknowledgment of the liability in question is given by the State, the Club, or the owner of the lost vessel, should be able to obtain temporary advances from a banker to provide for his necessities. If, therefore, the money is to be used to construct a new vessel, or to purchase a vessel under a foreign flag, no inconvenience should result. 41. One of our principal objects in suggesting these deferred payments is to relieve the State as far as possible from immediate and, perhaps, heavy calls on its resources to meet these losses, at a time when its resources are sure to be strained to the utmost to meet the expense of carrying on the war. The Insurance of Cargoes. 9 Valuation. 42. What is to be the basis of value of shipping for the purpose of this insurance ? We find that the practice of the various Associations differs in this respect. One takes as the value the first cost less depreciation at the rate of 5 per cent, per annum, with a minimum value of 21. per ton gross. Others agree the value of each ship with the owner every time the insurance is renewed. We suggest that, for the purposes of this arrangement, the basis of values should be the first cost of the vessel, without allowance for the cost of alterations or additions, less depreciation at the rate of 4 per cent, per annum, but without any minimum limit per ton. This is the basis accepted for income-tax purposes, and we consider it a reasonable one; but we think the committee ­ of each Club should have the right at its discretion to refuse to accept a vessel for insurance on this basis, if they are of opinion that the value thus arrived at is excessive. The agreement for valuation on this basis will be provided for in the articles of association or rules of the Clubs which will, in accordance with the practice of the Clubs, be incorporated ­ in the policies. Concluding Remarks on Bull Insurance. 43. Mr. Austen Chamberlain’s Committee on National Guarantee for the War Risks of Shipping drew attention in their report to the “ immense difficulties attendant on the determination of values and on the settlement of claims.” We are satisfied that by making use, in the manner outlined above, of the co-operation and mutual responsibility ­ of the Insurance Associations now in existence, the interests of the State will be well safeguarded, both in the matter of claims and of values, so far as vessels are concerned. These Clubs will have as great an interest as the State has in preventing any overvaluations of shipping, and will in their own interest satisfy themselves that every claim is fully substantiated. 44. It will be necessary, if these proposals are adopted by His Majesty’s Government, ­ for the Clubs to adopt identical rules for all matters concerning King’s enemy risks. In all matters apart from this class of risk State interference will be unnecessary, and the Clubs can be left to make their own rules. 45. It will be observed that we have in this report assumed that the State would confine itself to arrangements with approved Mutual Insurance Associations or Clubs M e think it would be more satisfactory if it could do this, but we do not wish to say that the State should not be prepared to make arrangements with other bodies who were able to provide satisfactory machinery for the protection of the State in the matter of values and of claims, and who represented a sufficiently important amount of tonnage. 46. We have now, we think, dealt sufficiently with the proposals we are putting forward for the insurance of war risks on vessels by the State. Part III.—The Insurance of Cargoes. The Market for War Risks. i7. We have already explained (see paragraph 9) the reasons which have induced so many shipowners to combine for mutual insurance of their vessels against war risks. ° S11 nilar combination for purposes of insurance seems practicable among cargoowners. . They are not, like shipowners, a distinct body with constant and clearly f enned interests and limitations. Every merchant, trader, and manufacturer—in fact, roadly speaking, every consumer—is a potential cargo-owner, but the nature and ent of the interests of the individual cargo-owner vary from voyage to voyage and rom seas °n to season. Cargo-owners, therefore, only insure against war risks in the uiarket ; and we considered it necessary to find out what the present attitude ° the insurance market was towards this class of risk, and also how far cargo-owners were in the habit of availing themselves of this insurance. 48. Mr. Austin Chamberlain’s Committee reported on the question of insurance rates (paragraph 215) that “it does not appear that there was ever real difficulty in “ f? CUnn S a quotation in the past, and though it seems to be supposed in some quarters at rates have often been fixed too high, and that underwriters have been accustomed [593] " C 2 1© Report on Insurance of British Shipping.—Part III. “ to make unduly large profits out of them, the evidence we have collected does not “ bear out this view. Nor has it been proved that in future wars the market would be “ so restricted or the rates so prohibitive as to necessitate interference by the State. It “ is impossible to give any estimate of what the rates are likely to be in any future war “ in which we may be engaged, or to state with any approach to exactness what the “ extent of the facilities would be. They will vary with the circumstances and the “ episodes of the particular struggle. That the rates will be sometimes high enough to “ handicap seriously particular trades must, we think, be admitted as probable.’’ While expressing great hesitation in offering an opinion of their own, they were (paragraph 56) “ inclined to believe that, though the market for war risks might be seriously restricted “ just before and after the outbreak of a great naval struggle, and though rates might “ be subject to violent fluctuations at such a time, yet that if our Navy did not sustain “ any serious reverse the market would expand and become steadier as. the situation “ developed, and that there is not sufficient evidence to justify the belief that private “ enterprise would be insufficient to bear the financial strain that is likely to be put “ upon it.” 49. From the evidence submitted to us, we gather that the attitude of the insurance market towards the insurance of war risks has in recent years changed considerably. Not many years ago the war risk was included in the marine insurance policy without extra premium ; and a careful perusal of the evidence given by insurance representatives before Mr. Austen Chamberlain’s Committee gives the impression that at that time underwriters as a body looked favourably on those risks, and did not wish to part with the business. Now, some of the marine companies refuse to cover war risk, except for special customers; and many underwriters at Lloyd’s have adopted the same policy. Others, as one of the witnesses put jt, “hop in and out” of the market. One of the reasons given us for this change of view is that many underwriter's believe that, if they had to realise their securities in time of war to meet their losses on war risks, the severe depreciation in values would not in any way be compensated by the higher premiums they were receiving. 50. At the same time, we were told that there is still, in times of peace and in the absence of war rumours, a sufficiently large market to deal with all the war risks offering. The premium charged is a nominal one compared with the usual normal premiums for marine insurance. When there are rumours of war the market contracts, but all war risk insurances offered can still be placed. The rates of premium rise, owing partly to the contraction of the market, and partly to the increased demand for war risk insurance ; but the rise is not very great as long as there is not much likelihood of this countiy being involved in war. If war was regarded as imminent, and this country was likely to be a belligerent, there would be little or no market; and the same conditions would prevail on the actual outbreak of a war in which this country was involved. 51. At present very little cargo is insured against war risk. The estimates of the amount vary considerably : some say not more than 10 per cent, of the total, while one witness estimates it at something like 50 per cent. Nitrate of soda and specie are always insured against war risk, but practically no grain, or wool, or cotton. The increased demand for war risk insurance in times of t umours is stated to be mainly due to the requirements of bankers. The Insurance of Cargoes on Voyages current at the Outbreak of War. 52. We have now to consider whether we are to recommend that the State should provide facilities for the insurance of King’s enemy risks on cargoes afloat at the time of the outbreak of a war in which we are a belligerent. It is evident that if such a war broke out suddenly, a great deal of cargo then afloat would not, under present conditions, be insured against war risk; and it may be argued that if the State is providing for the insurance of war risks on ships afloat at that time, it ought in equity to provide similar protection for cargoes. Otherwise the owners of uninsured cargo on ships, which will continue their voyages under protection of the Club policies extended as recommended in Part II, paragraph 17, may find themselves compelled to run uncommercial risks which may prove uninsurable except at prohibitive rates. We felt the force of this contention, and gave therefore the fullest consideration to a number of proposals that were put before us. 53. It was suggested that the State should undertake to make good to cargoowners, without premium, 80 per cent, of the invoiced value, leaving the remaining 20 per cent., together with the estimated profit, shipping charges, &c., to be covered in fHE Insurance oe Cargoes. 11 the open market. Another suggestion was to offer cargo-owners insurance, at a premium, from the first port of call of a vessel after the outbreak of war ; or, alternatively, to offer such cover to those cargo-owners who had and exercised an option to order their cargoes to a British port from a port of call. These suggestions, if acted on, would in our opinion afford an inducement to cargo-owners to discontinue all war risk insurance in the open market in future. The main inducement to a cargo-owner to insure these risks at present (apart from the insistence of bankers in certain trades) is the fear that, if war becomes imminent or breaks out, he may not be able to effect his insurance at all. If you give him the certainty of being able to cover this insurance, he may consider it unnecessary to continue to insure in the market. He will be saving premiums on a very large number of transactions, and will not much mind what premium he has to pay on the few shipments or cargoes he may have afloat when war breaks out, as long as he knows for certain that, at a price, he can cover these risks. There is also the possibility that, in respect of cargo actually insured in the market, the underwriters would, if the State insurance were established before the outbreak of war, reinsure these risks with the State when war broke out, and to that extent the State facilities would not benefit ■cargo-owners but only relieve underwriters. 54. We also considered a suggestion that the State should limit its protection to insured cargoes by undertaking to reimburse underwriters for 80 per cent, of the actual losses they were called upon to pay in respect of insured cargo afloat on the outbreak of war. But it was pointed out that, if insurance were thus made a condition of obtaining State protection, this meant handing over cargo-owners, bound hand and foot, to the insurance market, while there would not be any means of controlling the rates of premium charged by underwriters to cover these risks. Even if the State confined its offer to such cases where the premium charged was limited to a certain rate, it would not be possible to compel underwriters to work at that rate. If they did not consider it sufficiently remunerative they would simply decline the risks altogether. 55. It was also suggested that the State should be prepared to open an insurance office for war risks, when the insurance market, before the actual outbreak of war, was demoralised owing to the serious nature of the outlook. But if this were done, the opening of the State office might not unreasonably be construed bv the British public— and possibly by the potential enemy as well—as an admission on the part of the Government that war was inevitable. Besides, it might quite conceivably happen that the State would find that it had insured enemy goods against war risk at such a time. Suppose, for instance, a British steamer to be sailing from Hamburg to Chile with goods consigned to a German house there, and the w r ar risk on these goods is offered to the State office at a time of extreme tension between this country and Germany. If the principle we recommend later on is accepted, that the State insurance of war risk on cargo should be extended to all cargo (other than enemy cargo) in British bottoms, irrespective of the nationality of the owner of such cargo, the State office could not on that account refuse to accept this insurance before the outbreak of war. It is true that a similar situation might conceivably arise after the actual outbreak of war ; but at that time the transaction would have to be carried out 1,1 the name of a British or neutral firm, who would have to face the risk of exposure and its consequences. Many of these schemes had the further objection that they postulated the establishment of a Government office in times of peace to deal with any business that was offered to it. An essential condition of any scheme of State insurance of cargo is, in our opinion, that it should not compete with the insurance market as long as that market is prepared to transact the business offering and to charge reasonable rates. It should only intervene when the ordinary channels for insurance are no longer available, or available only at prohibitive rates. It might therefore happen that the State offide would be in existence at considerable annual cost, for a great number of years, without transacting any business. 56. Besides, we were informed that unless State action is confined to the period after the outbreak of war, or is limited to a time of panic, the insurance market would not view such action with favour. This is a very important consideration, as it is, in nur opinion, essential to the success of the proposals set forth later in this Report for State insurance of cargo starting after the outbreak of war, that the scheme should have the hearty support and co-operation of the insurance market. 57. For all these reasons we are unable to recommend any scheme for the insurance against war risks by the State of cargo afloat at the outbreak of war. We ully realise, as we have already pointed out, that this may be regarded as unfair teatment of cargo, in view of the proposals we have made for the protection of hulls 12 Report on Insurance of British Shipping.—Part III. under similar circumstances. But we think there is no real justification for this view. In the first place, it must he remembered that shipowners have already combined together for the mutual insurance of war risk on voyages current at the outbreak of war. It is true that the premium paid in the absence of losses is very small, but the liability to make good these losses in full exists at the present moment, and our proposals in the case of hulls are confined to extending the existing cover so as to secure the completion of the current voyages. Then, again, it must be borne in mind that the reason which has induced shipowners to combine for the mutual insurance of these risks is that they have found it impossible to secure continuous cover at reasonable lates in the open market. This continuous cover is essential in many cases, as many steamers have freight agreements extending over long periods. Cargo-owners, on the other hand, can, as we have pointed out, in normal times cover these risks in the open market at a nominal premium ; and even when there are rumours of trouble, they will still be able to cover these risks at a reasonable though somewhat higher rate of premium. This state of affairs will probably continue right up to the actual outbreak of war, or at any rate until a few days before the outbreak. If the State office for insurance of cargoes is opened immediately after the outbreak of war—as we suggest it should be—cargo-owners would only be prejudiced by a few days’ delay in securing war risk insurance for their cargoes ; and this delay at such a time may not be to the disadvantage either of shipowners, cargo-owners, or of the State, in so far as it leads to the avoidance of unduly hazardous risks. It is quite possible, too, that if our proposals are accepted and made known, they may have the effect of keeping the insurance market open longer and at reasonable rates 58. Further, it must be remembered that most steamers will, on the outbreak of war, be running at peace freights, and will not be getting higher freights until they start on voyages after the outbreak of war ; whereas cargo-owners may reasonably look forward to a substantial profit on the sale of cargoes afloat at the outbreak of war, if and when these cargoes safely reach their port of destination, 59. Quite apart, however, from these considerations, we were influenced in our decision lmt to propose any scheme for State insurance of cargo afloat at the outbreak of war by the feeding that this would be outside the terms of our reference. We are asked to prepare a scheme which will “ secure that, in case of war, British steamships “ shall not be generally laid up, and that oversea commerce shall not be interrupted by “ reason of inability to cover the war risks of ships or cargoes by insurance.” We have jput forward certain recommendations which will, in our opinion, secure the continuance of the current voyages of steamers afloat at the outbreak of war. And, if these steamers continue their voyages, it is obvious that the cargoes on them will come along too. This would certainly apply to all liners, which bring in 40 per cent, of our total imports, and to all other ships in which the cargo belongs to so large a number of owners that they will not have time to get together and put concerted pressure on the shipowner to stop the voyage. The only exceptions will be those cases where the cargo is the property of a single owner or of a very small number of owners, who are able to communicate with the owner of a vessel, and offer him sufficiently attractive terms to suspend the voyage. Besides, we are satisfied that cargo-owners can now, and will continue to be able to, secure war risk insurance in the open market at reasonable rates up to the time immediately preceding the actual outbreak of war ; and we see no particular reason why they should receive special consideration, if they choose not to avail themselves of these facilities of insurance. 60. We would also point out that we are (as will be seen later on) offering cargoowners substantially better conditions alter the outbreak of war than we are offering shipowners ; and this is a point which must be borne in mind in considering the whole question. The Insurance of Cargoes on Voyages commenced after the Outbreak of Hostilities. 61. We now come to our recommendations for State insurance against King’s enemy risks of cargo starting on a voyage after the outbreak of war. 62. VI e recommend that arrangements should be made for the State to cover these risks when the insurance market is no longer prepared to accept them at reasonable rates. For this purpose we propose that a State insurance office should be set up immediately after the outbreak of war ; and we are assured that the insurance market can be relied upon to give every assistance to the State, both in regard to the necessary machinery for working the State office and in regard to technical advice on all questions of administration or policy that may arise. The Insurance of Cargoes. 13 63. We suggest that there shall only be one State office, and that in London. A proposal was made to us that offices should also be opened in Liverpool and Glasgow, and possibly Cardiff as well ; but on the whole we came to the conclusion that the administrative difficulties of establishing and conducting so many separate offices at such a time would not be compensated for by any corresponding advantages.. 64. Every cargo-owner will be able to obtain provisional cover for war risks on his cargo at this office, pending the production of details of shipment. The value gi’ven must be the outside limit of his requirements on a particular shipment. It subsequently he produces evidence to show that this provisional value was excessive, the piemium paid on such excess value will be refunded to him ; but he will not be permitted to increase his provisional insurance for that particular shipment. 65. Pavment of premiums must be made to the State office in cash when the provisional insurance is effected. An insurance slip will be handed over to the State office. Stamps to the amount of the premium required will be impressed on a counterpart ­ of this insurance slip, and this counterpart will be handed to the assured, and wi be conclusive evidence that the insurance has been accepted by the State. 66. In order to fix values the assured must subsequently produce to the State office his marine insurance policy or policies covering the same goods, and the values m these marine insurance policies will be accepted by the State as the final values foi war risk insurance. ^ ... . 67. Marine insurance policies will only be accepted by the State it issued by members of Lloyd’s, British insurance companies, and other approved insurance companies anc j undcrwriijcrs 68. The final State policy will then be issued for the same values, and for the same voyage as covered by the marine policies, and these documents will be attached to each other, so as to form a complete insurance for the risks of the voyage in question. _ . . . 69. In requiring the issue by the State of a policy guaranteeing a specified value m the case of each shipment, we are adopting the conclusions ol Mr. Austen Chamber am s Committee (see paragraph 210), as such a policy will be required by bankers, bi brokers, and others when financing the movement of produce in time ol war. 70. It will be seen that we recommend the adoption for State insurance ol war risks or' the values agreed in the marine insurance policies covering the gooils on t le same voyage. We considered many other suggestions for arriving at values for k.tate insurance, as we were anxious to secure for the State the fullest possible protection against fraud. The most attractive of these suggestions was to take the mvoicec va ue of cargo at port of shipment, plus cost of insurance and shipping charges, but we o not consider that this would afford any better protection to the State than la mg e values in the marine policies, while it would certainly make the adminis ra ive machinery much more cumbrous and lengthy. Nor would it facilitate the requiremen s of bankers and others who are financing the shipment of the goods, as the values m re State policy would differ from those in the marine policies, and there would not e tie same certainty that the two insurances covered the same shipment. 71. We'believe, too, that the interests of the State will be best protected by accepting for war risk insurance the values agreed in the marine policies. I <ese are now accepted by the insurance market for payment of losses, subject to cha enge in re case of suspected fraud or mutual mistake; and we were told by representatives o the insurance market that instances of fraudulent values are rare. It is rue a these values in marine policies habitually include an estimated profit on tie veil uie o up to 10 per cent, or 15 per cent. ; but if there is any doubt as to the correctness ol the values given, it is always possible to control them, in the case of all cuirent ai ic es, y the daily published quotations of prices ; and, besides, the original invoices an oner documents can be called for if required to prove the correctness ol the insurec va ues. 72. All claims will be settled by the Board ol Advisers, but in the even o '® ie being any dispute with the assured as to the proposed settlement the lia n y o le State will have to be settled (failing agreement to refer to arbitration) by e ourts 73. Payment of claims, when admitted, will be made at once in cash. In this respect cargo-owners, it will be noticed, will be treated better than s npowneis, w o will not be paid their first instalment until six months after loss. 74. On what principle is the rate of premium for State insurance on caigo o e fixed ? It will be seen that in the case of hulls we have good reasons lor recommending varying rates (paragraph 30), more or less proportionate to the risks of t e lespec ive voyage,-,, with a maximum rate of 5 per cent, and a minimum rate ol 1 per ceu ■ 11 ie 14 Report on Insurance of British Shipping.—Part HI. x A case of cargoes we recommend tlie adoption of a fiat rate for all voyages, irrespective of the risks involved. But we recommend that this flat rate should be subject to variation, up or down, within a maximum of 5 per cent, and a minimum of 1 per cent. In order to facilitate business, the State office must be authorised to accept risks for provisional insurance at the current fixed rate for a certain period—say, fourteen days—before actual shipment takes place. If on any day following an acceptance and before the commencement of the risk the State should alter its fixed rate up or down, the risk accepted will be hiyding on both parties at the original rate. 75. We admit that it can be argued that a flat rate will in some cases involve a hardship, and appear unfair to particular voyages, hut, on balance, we think that it will work out fairly for all shippers. It must be remembered that if the war risk on a particular voyage is very slight, the open market will probably be willing to take it at a lower premium than that charged by the State; or, alternatively, the owner of the cargo may in that case elect to run the risk of capture himself. 76. Nor do we believe that the charging of lower rates for less hazardous voyages would be found in practice to benefit the consumer. Assume, for instance, two cargoes of grain coming to this country from Odessa and Philadelphia respectively. If the Odessa cargo were charged a premium of 4 per cent, and tbe Philadelphia cargo only 2 per cent., we are of opinion that the price to the consumer in this country (provided that the Odessa cargo is essential to maintain our food supply) would be based on the higher premium, and the advantage of the lower rate go to the importer. 77. Apart from these considerations, the administrative difficulties connected with the issue of policies would be immeasurably greater if the rate for each risk had to be separately considered, and many of them referred to the Advisory Board for adjudication. 78. R is possible that under this arrangement the State will get all the bad risks and the market all the good ones, when once the market is again working. This is quite true, but then we recognise that the main object of the State will be not to compete with the insurance market, but only go secure the continuance of voyages after the outbreak of war, which might be arrested owing to inability to cover insurance against King’s enemies. It will not mind, therefore, if' it does little business in war risks so long as these risks are being covered elsewhere. 79. We propose that the State insurance of cargo shall be confined to vessels insured by the State. The State will thus have the power under the hull insurance policies to stop voyages, if it considers them unduly hazardous, and in this way will be able to avoid losses in respect of cargoes the prompt arrival of which is not essential to the community. 80. We understand that practically all insurance is effected through brokers, who receive a brokerage of 5 per cent, on the premiums. For this purpose the premiums quoted are in guineas, the broker receiving the shillings as his remuneration. We suggest that the same practice shall be adopted by the State office, the premiums being treated as net premiums, and therefore not subject to discount. 81. With regard to the ownership of cargo, this question was gone into thoroughly by Mr. Austen Chamberlain’s Committee, who came to the conclusion that it was impossible to impose any effective restrictions as to the nationality of the owner. It is, to begin with, very difficult to sav who is, at a given moment, the actual owner of any cargo afloat. Such cargo may change hands twenty times during the course of the voyage. Again, if an attempt were made to distinguish between British and foreign-owned goods in British bottoms, it would soon be found that all goods shipped in such vessels were British goods. We do not, therefore, propose to suggest any restriction for State insurance on the ownership of goods in British vessels, except, of course, that we exclude enemy goods. Nor do we propose to suggest any discrimination between different classes of goods or between different voyages. It may be argued that shipments of American hosiery from New T York to Buenos Ayres in a British vessel cannot have any practical interest for us in time of war. But this vessel, when she arrives at Buenos Ayres, is available to carry foodstuffs back to this country ; and if, for want of facilities for insurance of war risks, that voyage was not undertaken, a link in the chain of communication with this country would be disturbed, if not broken. It is, in our opinion, just as essential for us that these cross voyages should be maintained, as far as possible, in time of war as it is that the movement of shipping direct to and from this country should not be interrupted. 82. This brings us to the consideration of an important point in administration. At the present time many marine insurance policies are issued, on behalf of British underwriters, at the port of shipment of the goods abroad. One of the reasons for this The Insurance of Cargoes. 15 is doubtless the requirement of bankers at the foreign or colonial ports that, before negotiating the drafts drawn against a shipment, they must have documentary proof that the marine insurance on the goods has been properly covered. We have already indicated that the State office must require the production of the marine insurance policy on the goods as evidence of values, and although there will be no necessity to produce this document when the State insurance for war risk is originally arranged, it will probably follow that, as a matter of convenience, most marine policies will, during time of war, be issued in London. How will it then be j)ossible to satisfy the banker at the port of shipment abroad that either the marine insurance or the war insurance has been properly covered ? We admit that this is an administrative difficulty which will in the beginning be the cause of some friction and delay; but we refuse to believe that a satisfactory way out of the difficulty will not be found by the parties concerned. It. cannot be expected that everything will run as smoothly immediately after the outbreak of war as it does in times of peace. 83. We may add that, for the protection of bankers and others who may be holders for value of shipping documents, we have inserted in the State policy a provision that a breach of the warranty regarding the movements of the vessel carrying the goods shall only become operative as against the cargo-owner, provided that such breach has happened with the connivance or assent of the holder for the time being of the State policy, or of the persons seeking to enforce the policy. 84. Mr. Austen Chamberlain’s Committee were much impressed with the administrative difficulties of working the State insurance of cargoes through a single Government office, and quoted in their report the statement of an underwriter that in peace time from 50,000 to 100,01)0 policies were issued every day in London alone. A e believe these figures are very much exaggerated. There are in London some thirty companies transacting marine insurance business of importance; and we were told that the average number of policies issued by each of them would be from fifty to a hundred a day. If we assume much larger figures for Lloyd’s underwriters, it is difficult to believe that the number of policies issued daily in London can exceed 10,000, and it is probable that a large number of these policies refer to the same shipment, since the larger risks are usually spread through the market. The State war risk policy will cover the whole shipment, and therefore the number of policies which the State office might have to issue would probably be substantially less than 10,000, even if the trade of the country suffers no diminution in consequence of the war. Nevertheless, the number of policies is likely to be a formidable one to contemplate being issued from one office daily. We do not indeed wish to minimise the difficulties of establishing and administering the State office. We realise that they will be very great; but we are assured that, with the cordial co-operation of the insurance market, they will not prove insuperable. 85. We have already indicated that a Board of Advisers will have to be established to assist the Government both with the administrative work of the State office and with the settlement of claims. We are inclined to think that one hoard should be sufficient to deal with these matters; but it may be found necessary to have two separate boards with separate functions. In any case, there should be representative underwriters and average adjusters on these boards, together with one or two representatives of the Government. 86. We recommend that one of these boards should be appointed at once with a permanent secretary. Its first function will be to fill in all the details of the organisation of the State office, so that it may come into being at once when required. These details will require constant revision, as the personnel from which the staff of the State office will be selected will be constantly changing. The details of insurance business will also change in course of time, and many improvements in organisation may suggest themselves, which it would be wise to adopt. 87. Another important function of this board will be the following: We understand ­ that there are special standard clauses in marine policies covering certain articles such as meat, timber, wheat, and nitrate of soda, which have been settled after years of experience and negotiation between assurers and assured. These clauses define clearly he risks of the voyage which the underwriter insures against, and those other risks which have nothing to do with the perils of the sea or of war, and which therefore remain at the risk of the cargo-owner. But these and other clauses and conditions in marine policies are constantly being altered ; and it is essential, in our view, that a committee of experts should revise these clauses periodically in the interests of the mte, and settle from time to time what the standard clauses are which the State will assume to be included in marine policies when it is called upon to cover the war risks [593] D i/ % 16 Report on Insurance oe British Shipping.—Part IY. on cargo. It would not, we think, be necessary for the board to meet for this purpose more than twice a year. It is essential to protect the State against the insertion in marine policies of special clauses which might involve it in much more extended liabilities than are usually understood by the sea risk clause. There would, of course, be no possible objection to the adoption of such special clauses for ordinary purposes; but the State is entitled to fix the standard clauses which it will require in marine policies when it assumes the King’s enemy risks excluded from these policies, and cargo-owners, too, are entitled to know the requirements of the State in this respect. 88. There is one other point on which we wish to make a few remarks. We have shown that the State will be able, by forbidding the movement of vessels, to avoid the loss of these vessels and of their cargoes. It is quite right that the State should, in the interests of the community and in its own protection, have this right and exercise it; but we submit that the right must be exercised with great discretion. It must not, for instance, be possible for shipowners or cargo-owners to say that the State has taken their premiums to cover a certain risk and has then exercised such precaution as to avoid running all the risks it has undertaken. We have already suggested that, in the case of ships, the State should, when requested to do so, refund the premium it has received to cover a particular voyage if this voyage is prohibited ; and we are of opinion that this privilege should be extended to the cargo-owner. 89. We have now completed the general outline of our proposals for State insurance of cargoes after the outbreak of war. The Extent of the Liability of the State for Losses on Cargoes. 90. We are, of course, unabB to give any indication of what the losses in respect of cargoes will be in time of war. But the assumption we have made, by way of illustration, that 5 per cent, of the vessels engaged after the outbreak of war in the foreign trade would be lost in six months represents a loss of about 200 ships. The values of the cargoes carried under normal trade conditions vary greatly on vessels and on voyages, but each ship in the foreign trade of the United Kingdom carries, on the average, 40,000Z. worth of cargo per voyage. If this average be adopted for the purposes of illustration, then the value of the cargo lost on the 200 ships would be 8,000,Q0GZ. Part IY.—Summary. 91. We recommend— (A.) In the case of Hulls— (1.) That arrangements should be made with the existing Clubs, or Mutual War Risks Associations, that they shall extend their existing standard forms of policy to cover the King’s enemy risks up to the arrival of the vessels at the final port on the voyage which thev are making when war breaks out or hostilities have begun, and for ten clear clays after such arrival. (2.) That arrangements should be made with these Clubs for the issue of policies covering the King’s enemy risks on vessels starting on voyages after this country is at war. (3.) That the State shall reinsure 80 per cent, of all these risks. (4.) lhat no premium shall be charged by the State in respect of voyages current at the outbreak of war. (5.) That, for voyages begun after the outbreak of war, the State shall fix the insurance premium to be charged on a voyage basis and shall receive 80 per cent, of such premium. (6.) That the State shall have the right to fix and vary the premiums from time to time as may be considered necessary within a suggested maximum of a per cent, and a minimum of 1 per cent. ; but a rate agreed for a specific voyage shall hold good if the vessel sails on that voyage within 14 days of the completion of the insurance. On the other hand, if the starting of a voyage is delayed under the orders of the Admiralty, the assured, shall have the option of cancelling the policy and receiving back the premium paid. (7.) That the Clubs shall run the remaining 20 per cent, of these risks, both before Summary. 17 and after the outbreak of war, receiving for voyages com mencing after the outbreak of war 20 per cent, of the premiums fixed by the State. (8.) That all expenses of administration shall be borne by the Clubs. (9.) That the Club policy shall contain the following warranties:— (a.) That no ship insured by the State shall start on a voyage if ordered by the Admiralty not to do so, and that under both the policy relating to a new voyage and the policy relating to the completion of the voyage any orders that the Admiralty may give as to routes, ports of call, and stoppages shall he obeyed. Provided that, in case of breach, the above warranty shall not operate if the assured can satisfy the Committee of the Club that such breach happened without the fault or privity of the assured and of the owners and of the managers of the ship. (b.) That the ship insured shall be deemed to be at all times fully insured against all perils covered by an ordinary Lloyd’s policy (with collision clause attached) and containing an F. C. and S. Clause, and no claim whatever against which the ship is deemed to he otherwise insured as aforesaid, or against which she is in fact insured by any other insurance policy, shall be recovered under the Club policy. (10.) That ships so insured undertake, as far as possible, to carry out the orders of the State in regard to their routes, ports of call, and stoppages. Failure to carry out such orders will involve an appropriate penalty, but such failure shall not be treated as a breach of warranty. (11.) That each Club and its constitution shall be approved by the State. (12.) That the State shall be represented on the Committee of each Club. (13.) That the basis of values for the purposes of State insurance shall be the value accepted for income tax purposes, that is to say, the first cost of the vessel, without allowance for the cost of alterations or additions, less depreciation at the rate of 4 per cent, per annum, but without any minimum limit per ton. (14.) That the Club shall not be bound to pay a loss if the ship be recaptured, or released, or restored to the assured within six months after the date of capture, but in that event the Club to pay the assured— (i.) The cost of repair or damage received by the ship by reason of such capture, &c. (ii.) The expenses incurred in respect of the ship by reason of such capture, &c. (iii.) A sum equal to 10 per cent, per annum on the insured value from the date of capture until release. (15.) That claims shall be dealt with and settled by the Committee of the Club. If a claim be settled with the approval of the State’s representatives on the Club Committee, the State to pay on the agreed figures. If the State’s representatives protest against a proposed settlement, the liability of the State under its policy of reinsurance to be settled (failing agreement to refer to arbitration) by the Courts of Law. (16.) That in the event of loss by destruction or capture, the first payment by the State shall be made at the end of six months after the event. (17.) That the liability of the State shall be discharged in three equal instalments at six, nine, and twelve months from the date of loss or capture, with interest at the rate of 4 per cent, per annum. (18.) That a Board of Experts shall be appointed to advise the State on the question of rates and variations of premiums, and that the State shall have one or two representatives on this board. (19.) That this arrangement shall only extend to vessels which are in the Clubs and which are under the British flag and registered in the British Isles. (20.) That the State should be prepared, if necessary, to make similar arrangements with other bodies than the existing Clubs, provided such other bodies represent a sufficiently important amount of tonnage and can provide satisfactory machinery for the protection of the State in the matter of values and of claims. 92. (J3.) In the case of Cargoes— (l.) That no arrangement shall be made for the insurance by the State of cargoes afloat at the time of the outbreak of a war in which we are a belligerent. [593] E 18 Report on Insurance of British Shipping.—Part IV. (2.) That immediately after the outbreak of such a war a State insurance office be opened in London for the insurance by the State against King’s enemy risks of cargo starting on a voyage after the outbreak of war. (3.) That the rate of premium charged by the State for covering these risks be a flat one, irrespective of the voyage or the character of the cargo insured. (4.) That the State shall have the right to fix and vary such rates of premiums, within a maximum of 5 per cent, and a minimum of 1 per cent. But a rate agreed for a specific voyage shall hold good, provided the cargo starts on such voyage within 14 days. If, however, the voyage is delayed under the orders of the Admiralty, the assured shall have the option of cancelling the policy and receiving back the premium paid. (5.) That the values of cargo for State insurance shall be the values agreed in the marine insurance policies covering the same cargo. (6.) That these marine insurance policies must be produced at the State office, when the State insurance of war risks is finally arranged. (7.) That the premium for insurance must be paid in cash to the State office when the provisional insurance is effected. (8.) That if, when the marine insurance policies are produced, the values in those policies shall be less than the amount provisionally insured in the State office, the premium on the excess value will be refunded, but no increased value on a shipment will then be accepted. (9.) That marine insurance policies will only be accepted by the State if issued by members of Lloyd’s, British Insurance Companies and other approved Insurance Companies and Underwriters. (10.) That claims under the State insurance policy shall be settled on the basis of the marine insurance policy, but such marine insurance policy shall be deemed to contain such standard clauses (if any) as may be approved by the State in regard to the particular class of cargo insured. (11.) That the State insurance of cargo shall be confined to cargo on vessels insured by the State. (12.) That the State shall be prepared to insure all cargo on such vessels, irrespective of the nationality of the owner of such cargo, except, of course, enemy cargo. (13.) That a Board or Boards of Advisers shall be established to assist the Government both with the administrative work of the State office and with the settlement ­ of claims. (14.) That one of these Boards should be appointed at once with a permanent secretary. Its duties will be :— (a.) To fill in all the details of the organisation of the State office and to revise them from time to time. (b.) To fix and revise from time to time the standard clauses which the State will deem to be in marine insurance policies when it assumes the King’s enemy risks excluded from those policies. (15.) That all claims shall be settled by the Board of Advisers, but in the event of any dispute with the assured as to the proposed settlement, the liability of the State will have to be settled (failing agreement to refer to arbitration) by the Courts of Law. (16.) That payment of all agreed claims be made at once in cash. Concluding Remarks. 93. We further recommend that, if our proposals are approved of, the); shall be made public as soon as possible. This is, in our opinion, essential, not only in order that the necessary changes in the present arrangements for mutual insurance of hulls should be made by the Clubs, but also in order that the details of our proposals for insuring cargoes may be carefully prepared and periodically revised by the Board of Advisers which we recommend should be appointed for the purpose. 94. We have already pointed out that, in the absence of experience of the effect of naval warfare on our oversea trade as it now exists, it is impossible to form any reliable estimate of the liabilities which the State would incur if these proposals are adopted. We have shown, however, in paragraphs 23-27, 34 and 90, that on the assumption that 5 per cent, of all British steamships which on the outbreak of war are at sea or in ports of the enemy are captured, and that during the six months following the outbreak of war Summary. 19 a further 5 per cent, of all British steamships remaining available for foreign trade are captured, the cost to the State would be as follows :— — Total Estimated Loss. State’s Share. 1. 5 per cent. loss of British steamers, homeward and outward bound, employed at the outbreak of war in the foreign trade of the United Kingdom £ 1,450,000 £ 1,160,000 2. 5 per cent, loss of the British steamers employed in the foreign trade of the United Kingdom which are neither homeward nor outward bound, but which may at the outbreak of war be at sea or iu ports of the enemy 1,700,000 1,360,000 3. q per cent, loss of the British steamers employed abroad and not in the foreign trade of the United Kingdom and which may, at the outbreak of war, be at sea or in ports of the enemy 1,175,000 940,000 Total Hull losses incurred by the State without premium 4,325,000 3,460,000 4. 5 per cent, loss during the six months following the outbreak of war of all British steamers remaining available for foreign trade, after deduction of the above losses Total Hull losses incurred by the State against premium 6,133,750 4,907,000 5. Value of. the cargo, carried on the steamers assumed to be lost during the six months following the outbreak of war, but excluding the cargoes carried ou the vessels at sea or in enemies’ ports on the outbreak of war (The basis of this valuation is the average value of the cargoes carried under normal conditions in the foreign trade of the United Kingdom.) Total cargo losses incurred by the State against premium 8,000,000 8,000,000 Grand total (gross) of State’s share of estimated losses on hulls aud cargo in six months (without taking into account any premiums received) • • 16,367,000 On these assumptions the total losses on hulls ins ™^ go^oool^We estimate the 6,133,7501., and the State’s share of those losses would be ^ ^ value of the steamship tonnage remaining availa e o ^ ^ nder normal conditions months following the outbreak ol war at 12 , , • r-r ■+ j Kingdom makes, each vessel in that part of our foreign trade which « withj^e as a on the average, ten voyages each year, counting each out ^rd andl i J id if the separate voyage. If that average can be ta 'en as Ledums at’ the average number of voyages be maintained after the outbrea > } t , be sufficient to rate of 1 per cent, per voyage on the new voyages would in six months cover the whole of the losses on hulls insured agaiins f P re ““ eg that wiU be carried It is more difficult to estimate the total va ue ' ^ Rowing the outbreak m British steamships in our foreign trade during wrm i d on the same basis ns that of war, but if that trade were maintained such va If tbe wbo le of those upon which we have estimated losses, amount to 8 , > • ii be cov ered by cargoes were insured with the State Office the assumed loss would 3 premiums at the rate of 1 per cent, per voyage. . „ ^ D6 r voyage It is, we think, probable, that at average premtums of 1 cTh^red with the the greater part of the hulls would, through the Cluh M1 . g0 at State, but the amount of cargo so insured, an ' er i t, v the insurance the risk of the State, would depend largely on the facilities offered by market. » v 4.1 vfao’fird to the extent of We admit that we are making many assump ions, o i dg . bu ^ when every °ur losses and in regard to the volume and va ue o nearly 10 per cent. allowance is made it will be seen that, even on an assume outbreak of war and of all British steamers employed in our foreign tra e, w ic resnect of hulls and for six months thereafter are at risk, the claim on the State in respe^ cargo would be hut a very small percentage on the tota vo u 20 Report on Insurance of British Shipping.—Part IV. 95. We recognise that there may be other reasons which might tend towards the laying up of ships. For example, in the evidence given before Mr. Austen Chamberlain’s Committee, some stress was laid on the possibility that, “ if the danger of capture, imprisonment, and loss of life were very serious, neither shipowners nor seamen would care to tempt their fate, even if there was a chance of securing insurance.” We are of opinion that the danger of ships being laid up for this reason would be reduced if the rules laid down in the “ Convention (The Hague, 1907) relative to certain Restrictions on the Exercise of the Rights of Capture in Maritime War” (see “Command Paper 1175,” p. 96) were more generally known. These rules are as follows :— “ CHAPTER III.—Regulations regarding the Creivs of Enemy Merchant-ships captured by a Belligerent. “ Article 5. “When an enemy merchant-ship is captured by a belligerent, such of its crew as are subjects or citizens of a neutral State are not made prisoners of war. “ The same principle applies in the case of the captain and officers, likewise subjects or citizens of a neutral State, if they give a formal undertaking in writing not to serve on an enemy ship while the war lasts. “ Article 6. “ The captain, officers, and members of the crew, if subjects or citizens of the enemy State, are not made prisoners of war, provided that they undertake, on the faith of a written promise, not to engage, while hostilities last, in any service connected with the operations of the war. “ Article 7. “ The names of the persons retaining their liberty under the conditions laid down in Article 5, in the second paragraph, and in Article 6, are notified by the belligerent captor to the other belligerent. The latter is forbidden knowingly to employ the said persons. “ Article 8. “ The provisions of the three preceding articles do not apply to ships taking part in hostilities.” We recommend that arrangements should be made by His Majesty’s Government to make these rules known in shipping circles in time of peace, and to draw attention to them in the event of an outbreak of war, in order to allay the misapprehensions which, we believe, are current as to^the extent of the personal danger to be incurred in time of war by the officers and craws of merchant-ships. 96. In accordance with the Terms of Reference we have avoided any expression of opinion on the question of policy, and we now submit the above as an administratively practicable scheme. We believe that it will secure that, in case of war, British steamships ­ will not be generally laid up, and that oversea commerce will not be interrupted by reason of the inability to cover the war risks of ships and cargoes by insurance. Even if the maximum premium of 5 per cent, on ships and of 5 per cent, on cargoes is charged for all voyages, and the whole of this premium is borne by cargoes, the total increased cost of such cargoes, on account of war risk insurance, will not be excessive, and will not, in our opinion, approach the extreme fluctuations in prices of many articles, especially of articles of food, in recent years. FRED HUTH JACKSON {Chairman). INCHCAPE. NORMAN HILL. RAYMOND BECK. ARTHUR LINDLEY. M. P. A. HANKEY {Secretary). 2, Whitehall Gardens, S.IF., April 30, 1914. [Note. Pro forma drafts of the various documents, necessary to carry out the recommendations in the Report, have been prepared, but are not reproduced, j — PRINTED AT THE FOREIGN OFFICE BY C. R. HARRISON.—2/8/1914. The Insurance of Cargoes. 15 iO 5 CV is doubtless the requirement of bankers at the foreign or colonial ports that, before negotiating the drafts drawn against a shipment, they must have documentary proof that the marine insurance on the goods has been properly covered. We have already indicated that the State office must require the production of the marine insurance policy on the goods as evidence of values, and although there will be no necessity to produce this document when the State insurance for war risk is originally arranged, it will probably follow that, as a matter of convenience, most marine policies will, during time of war, be issued in London. How will it then be possible to satisfy the banker at the port of shipment abroad that either the marine insurance or the war insurance has been properly covered ? We admit that this is an administrative difficulty which will in the beginning be the cause of some friction and delay; but we refuse to believe that a satisfactory way out of the difficulty will not be found by the parties concerned. It cannot be expected that everything will run as smoothly immediately after the outbreak of war as it does in times of peace. 83. We may add that, for the protection of bankers and others who may be holders for value of shipping documents, we have inserted in the State policy a provision that a breach of the warranty regarding the movements of the vessel carrying the goods shall only become operative as against the cargo-owner, provided that such bieach has happened with the connivance or assent of the holder for the time being of the State policy, or of the persons seeking to enforce the policy. .84. Mr. Austen Chamberlain’s Committee were much impressed with the administrative difficulties of working the State insurance of cargoes through a single o\ eminent office, and quoted in their report the statement of an underwriter that in —peace time from 50,000 to 100,0u0 policies w ere issued every day in London alone. A e 'eve these figures are very much exaggerated. There are in London some thirty _ 1 m P anies transacting marine insurance business of importance ; and we were told that e average number of policies issued by each of them would be from fifty to a hundred _ay. It we assume much larger figures for Lloyd’s underwriters, it is difficult to .neve that the number of policies issued daily in London can exceed 10,000, and it is a • that a large number of these policies refer to the same shipment, since the ^ -S er ri sks are usually spread through the market. The State war risk policy will - y ei the whole shipment, and therefore the number of policies which the State office >ig t have to issue would probably be substantially less than 10,000, even if the trade r W re country. suffers no diminution in consequence of the war. Nevertheless, the l , in )e , r ,’j^ policies is likely to be a formidable one to contemplate being issued from one ^„ice r auy. e do not indeed wish to minimise the difficulties of establishing and i; f nin |?tenng the State office. We realise that they will be very great; but we are sure that, with the cordial co-operation of the insurance market, they will not prove operable. ’ J * 85. We have already indicated that a Board of Advisers will have to be established assist the Government both with the administrative work of the State office and 'W. . e settlement of claims. We are inclined to think that one board should be cient to deal .with these matters; but it may be found necessary to have two para e. boards with separate functions. In any case, there should be representative ‘ 1 erwri tei s and average adjusters on these boards, together with one or two oiesentatives of the Government. 86. W e recommend that one of these boards should be appointed at once with .permanent secretary. Its first function will be to fill in all the details of the gamsation of the State office, so that it may come into being at once when required. e , Se < j^ ai ^ s will require constant revision, as the personnel from which the staff of the isi] 6 °™ C T w iH ^e selected will be constantly changing. The details of insurance . mess will also change in course of time, and many improvements in organisation may ggest themselves, which it would be wise to adopt. ”u 1 tl important function of this board will be the following: We underf: Kh la ™ er . d are s P ec ial standard clauses in marine policies covering certain articles f p as meat, timber,, wheat, and nitrate of soda, which have been settled after years of penence and negotiation between assurers and assured. These clauses define clearly lintTtf ° ^ , y°y a £ e which the underwriter insures against, and those other risks i ■ av ® nothing to do with the perils of the sea or of war, and which therefore iri m a t ' e nS ^ ^' e cargo-owner. But these and other clauses and conditions in L f P° le J es are constantly being altered ; and it is essential, in our view, that a a / U e y 0 exports should revise these clauses periodically in the interests of the i: , ’ . e fi'°m time to time what the standard clauses are which the State will A 16 ° e deluded in marine policies when it is called upon to cover the war risks [593] £ / °L