Marine Insurance shows why Obamacare won’t Work

Posted by PITHOCRATES - February 22nd, 2014

Week in Review

As ships began to ply the world’s oceans some of them did not make it to their destination.  Instead, they ended up on the ocean floor.  The financial loss for a ship lost at sea was enough to bankrupt a shipper.  Which greatly inhibited early transoceanic trade.  But then the good men at Lloyd’s of London began selling marine insurance out of a London coffee house.  Spreading the risk of a large financial loss across all shippers.  Where each shipper paid a small fee (i.e., an insurance premium) to cover the financial loss for the few ships that sank.  It was an excellent system.  Mitigating the risk of the very risky transoceanic trade.  It worked so well we still use it today (see Ship loses more than 500 containers in heavy seas by Tim Lister posted 2/22/2014 on CNN)

On any day, between 5 million and 6 million containers are on the high seas, carrying everything from potato chips to refrigerators. But not all of them make it to their destination, as the crew of the Svendborg Maersk have just found out.

Their Danish-flagged ship was in the Bay of Biscay last week as hurricane-force winds battered the Atlantic coast of Europe. Amid waves of 30 feet and winds of 60 knots, the Svendborg began losing containers off northern France. After the ship arrived in the Spanish port of Malaga this week, Maersk discovered that about 520 containers were unaccounted for. Stacks of others had collapsed.

It’s the biggest recorded loss of containers overboard in a single incident…

The Through Transport Club, which insures 15 of the top 20 container lines, has put the loss at fewer than 2,000 containers a year. But other industry sources say the number may be as high as 10,000. That would still represent far less than 1% of the containers traversing the world’s oceans. Maersk, one of the world’s largest lines, says that its highest annual loss in the last decade was 59 containers.

If we crunch some numbers we can see how insurance works.  Let’s make some assumptions.  Conservative ones.  Let’s assume the low end of 5 million containers.  And the high end of lost containers (10,000).  This puts the total loss of containers at 0.20% of the total shipped.  Which means that 99.8% of all containers shipped reach their destination.  So the insurance pays for a very small number of lost containers.  Now let’s assume an average value of $250,000 per container.  That makes the value of all containers shipped $1.25 trillion.  And the value of containers lost $2.5 billion.  Or 0.20% of the value shipped.  Which is a small fraction of the total.  If we spread this amount over each container shipped that comes to an insurance premium of $500 per container.  A small price to pay to avoid a $250,000 loss.

This is why marine insurance works.  Because it’s insurance.  Where shippers pay a small premium to insure against a very large possible financial loss.  Which is why Obamacare won’t work.  Because Obamacare isn’t insurance.  Neither was health insurance before Obamacare.  Because people expect a free ride.  If they have ‘insurance’ they don’t want to pay for anything.  Which isn’t how insurance works.  That would be like shippers having someone else pay for their marine insurance.  And then expect to ship things across the ocean for free because they had insurance.  Marine insurance doesn’t work like that.  And neither should health insurance.

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Archimedes’ Principle, Buoyancy, Spar Deck, Freeboard, Green Water, Bulkheads, Watertight Compartments, RMS Titanic and Edmund Fitzgerald

Posted by PITHOCRATES - January 2nd, 2013

Technology 101

(Originally published April 4th, 2012)

The Spar Deck or Weather Deck is Where you Make a Ship Watertight

Let’s do a little experiment.  Fill up your kitchen sink with some water.  (Or simply do this the next time you wash dishes).  Then get a plastic cup.  Force the cup down into the water with the open side up until it rests on the bottom of the sink.  Make sure you have a cup tall enough so the top of it is out of the water when resting on the bottom.  Now let go of the cup.  What happens?  It bobs up out of the water.  And tips over on its side.  Where water can enter the cup.  As it does it weighs down the bottom of the cup and lifts the open end out of the water.  And it floats.  Now repeat this experiment.  Only fill the plastic cup full of water.  What happens when you let go of it when it’s sitting on the bottom of the sink?  It remains sitting on the bottom of the sink.

What you’ve just demonstrated is Archimedes’ principle.  The law of buoyancy.  Which explains why things like ships float in water.  Even ships made out of steel.  And concrete.  The weight of a ship pressing down on the water creates a force pushing up on the ship.  And if the density of the ship is less than the density of the water it will float.  Where the density of the ship includes all the air within the hull.  Ships are buoyant because air is less dense than water.  If water enters the hull it will increase the density of the ship.  Making it heavier.  And less buoyant.  As water enters the hull the ship will settle lower in the water.

The spar deck or weather deck is where you make a ship watertight.  This is where the hatches are on cargo ships.  We call the distance between the surface of the water and the spar deck freeboard.  A light ship doesn’t displace much water and rides higher in the water.  That is, it has greater freeboard.  With less ship in the water there is less resistance to forward propulsion.  Allowing it to travel faster.  However, a ship riding high in the water is much more sensitive to wave action.  And more susceptible to rolling from side to side.  Increasing the chance of rolling all the way over in heavy seas.  (Interestingly, if the ship stays watertight it can still float capsized.)  So ship captains have to watch their freeboard carefully.  If the ship rides too high (like an empty cargo ship) the captain will fill ballast tanks with water to lower the ship in the water.  By decreasing freeboard the ship is less prone to wave action.  But by lowering the spar deck closer to the surface of the water bigger waves can crash over the spar deck.  Flooding the spar deck with ‘green water’.  Common in a storm with high winds creating tall waves.  As long as the spar deck is watertight the ship will stay afloat.  And the solid water that washes over the spar deck will run off the ship and back into the sea.

The Titanic and the Fitzgerald were Near Unsinkable Designs but both lost Buoyancy and Sank

Improvements in ship design have made ships safer.  Steel ships can take a lot of damage and still float.  Ships struck by torpedoes in World War II could still float even with a hole below their waterline thanks to watertight compartments.  Where bulkheads divide a ship’s hull.  Watertight walls that typically run up to the weather deck.  Access though these bulkheads is via watertight doors.  These are the doors that close when a ship begins to take on water and the captain orders, “Close watertight doors.”  This contains the water ingress to one compartment allowing the ship to remain buoyant.  If it pitches down at the bow or lists to either side they can offset this imbalance with their ballast tanks.  Emptying the tanks where the ship is taking on water.  And filling the tanks where it is not.  To level the ship and keep it seaworthy until it reaches a safe harbor to make repairs.

They considered RMS Titanic unsinkable because of these features.  But they didn’t stop her from sinking on a calm night in 1912.  Why?  Two reasons.  The first was the way she struck the iceberg.  She sideswiped the iceberg.  Which cut a gash below the waterline in five of her ‘watertight’ compartments.  Which basically removed the benefit of compartmentalization.  They could not isolate the water ingress to a single compartment.  Or two.  Or three.  Even four.  Which she might have survived and remained afloat.  But water rushing into five compartments was too much.  It pitched the bow down.  And as the bow sank water spilled over the ‘watertight’ bulkheads and began flooding the next compartment.  Even ones the iceberg didn’t slash open.  As water poured over these bulkheads and flooded compartment after compartment the bow sank deeper and deeper into the water.  Until the unsinkable sank.  The Titanic sank slowly enough to rescue everyone on the ship.  She just didn’t carry enough lifeboats.  For they thought she was unsinkable.  Because of this lack of lifeboats 1,517 died.  Of course, having enough lifeboats doesn’t guarantee everyone will survive a sinking ship.

The Edmund Fitzgerald was the biggest ore carrier on the Great Lakes during her heyday.  These ships could take an enormous amount of abuse as the storms on the Great Lakes could be treacherous.  Like the one that fell on the Fitzgerald one November night in 1975.  When 30-foot waves hammered her and her sister ship the Arthur Andersen.  No one knows for sure what happened that night but some of the clues indicate she may have bottomed out on an uncharted shoal.  For she lost her handrails indicating that the ship may have hogged (where the bow and stern bends down from the center of the ship held up by that uncharted shoal).  The handrails were steel cables under tension running around the spar deck.  If the ship hogged this would have stretched the cable until it snapped.  She had green water washing across her deck.  Lost both of her radars.  A vent.  Maybe even a hatch cover.  Whatever happened she was taking on water.  A lot of it.  More than her pumps could keep up with.  Causing a list.  And the bow to settle deeper in the water.  Waves crashed over her bow as well as the Andersen’s.  The ships disappeared under the water.  Then reemerged.  As they design ships to do.  Then two massive waves rocked the Andersen.  She was following the Fitzgerald to help her navigate by the Andersen’s radar.  So these two waves had hit the Fitzgerald first.  The Fitzgerald had by this time taken on so much water that she lost too much freeboard.  When she disappeared under these two waves she never came back up.  It happened so fast there was no distress call.  The ship was longer than the lake was deep.  So her screw was still propelling the ship forward when the bow stuck the bottom.  She had lifeboat capacity for all 29 aboard.  But the ship sank too fast to use them.  Or even for the Andersen to see her as she sailed over her as she came to a rest on the bottom.

Our Ships have never been Safer but Ship Owners and Merchants still need to Protect their Wealth with Marine Insurance

We build bigger and bigger ships.  And it’s amazing what can float considering how heavy these ships can be.  But thanks to Archimedes’ principle all we have to do to make the biggest and heaviest ships float is too keep them watertight.  Keeping them less dense than the water that makes them float.  Even if we fail here due to events beyond our control we can isolate the water rushing in by sealing watertight compartments.  And keep them afloat.  So our ships have never been safer.  In addition we have far more detailed charts.  And satellite navigation to carefully guide us to our destination.  Despite all of this ships still sink.  Proving the need for something that has changed little since 14th century Genoa.  Marine insurance.  Because accidents still happen.  And ship owners and merchants still need to protect their wealth.

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Archimedes’ Principle, Buoyancy, Spar Deck, Freeboard, Green Water, Bulkheads, Watertight Compartments, RMS Titanic and Edmund Fitzgerald

Posted by PITHOCRATES - April 4th, 2012

Technology 101

The Spar Deck or Weather Deck is Where you Make a Ship Watertight

Let’s do a little experiment.  Fill up your kitchen sink with some water.  (Or simply do this the next time you wash dishes).  Then get a plastic cup.  Force the cup down into the water with the open side up until it rests on the bottom of the sink.  Make sure you have a cup tall enough so the top of it is out of the water when resting on the bottom.  Now let go of the cup.  What happens?  It bobs up out of the water.  And tips over on its side.  Where water can enter the cup.  As it does it weighs down the bottom of the cup and lifts the open end out of the water.  And it floats.  Now repeat this experiment.  Only fill the plastic cup full of water.  What happens when you let go of it when it’s sitting on the bottom of the sink?  It remains sitting on the bottom of the sink.

What you’ve just demonstrated is Archimedes’ principle.  The law of buoyancy.  Which explains why things like ships float in water.  Even ships made out of steel.  And concrete.  The weight of a ship pressing down on the water creates a force pushing up on the ship.  And if the density of the ship is less than the density of the water it will float.  Where the density of the ship includes all the air within the hull.  Ships are buoyant because air is less dense than water.  If water enters the hull it will increase the density of the ship.  Making it heavier.  And less buoyant.  As water enters the hull the ship will settle lower in the water.

The spar deck or weather deck is where you make a ship watertight.  This is where the hatches are on cargo ships.  We call the distance between the surface of the water and the spar deck freeboard.  A light ship doesn’t displace much water and rides higher in the water.  That is, it has greater freeboard.  With less ship in the water there is less resistance to forward propulsion.  Allowing it to travel faster.  However, a ship riding high in the water is much more sensitive to wave action.  And more susceptible to rolling from side to side.  Increasing the chance of rolling all the way over in heavy seas.  (Interestingly, if the ship stays watertight it can still float capsized.)  So ship captains have to watch their freeboard carefully.  If the ship rides too high (like an empty cargo ship) the captain will fill ballast tanks with water to lower the ship in the water.  By decreasing freeboard the ship is less prone to wave action.  But by lowering the spar deck closer to the surface of the water bigger waves can crash over the spar deck.  Flooding the spar deck with ‘green water’.  Common in a storm with high winds creating tall waves.  As long as the spar deck is watertight the ship will stay afloat.  And the solid water that washes over the spar deck will run off the ship and back into the sea.

The Titanic and the Fitzgerald were Near Unsinkable Designs but both lost Buoyancy and Sank

Improvements in ship design have made ships safer.  Steel ships can take a lot of damage and still float.  Ships struck by torpedoes in World War II could still float even with a hole below their waterline thanks to watertight compartments.  Where bulkheads divide a ship’s hull.  Watertight walls that typically run up to the weather deck.  Access though these bulkheads is via watertight doors.  These are the doors that close when a ship begins to take on water and the captain orders, “Close watertight doors.”  This contains the water ingress to one compartment allowing the ship to remain buoyant.  If it pitches down at the bow or lists to either side they can offset this imbalance with their ballast tanks.  Emptying the tanks where the ship is taking on water.  And filling the tanks where it is not.  To level the ship and keep it seaworthy until it reaches a safe harbor to make repairs.

They considered RMS Titanic unsinkable because of these features.  But they didn’t stop her from sinking on a calm night in 1912.  Why?  Two reasons.  The first was the way she struck the iceberg.  She sideswiped the iceberg.  Which cut a gash below the waterline in five of her ‘watertight’ compartments.  Which basically removed the benefit of compartmentalization.  They could not isolate the water ingress to a single compartment.  Or two.  Or three.  Even four.  Which she might have survived and remained afloat.  But water rushing into five compartments was too much.  It pitched the bow down.  And as the bow sank water spilled over the ‘watertight’ bulkheads and began flooding the next compartment.  Even ones the iceberg didn’t slash open.  As water poured over these bulkheads and flooded compartment after compartment the bow sank deeper and deeper into the water.  Until the unsinkable sank.  The Titanic sank slowly enough to rescue everyone on the ship.  She just didn’t carry enough lifeboats.  For they thought she was unsinkable.  Because of this lack of lifeboats 1,517 died.  Of course, having enough lifeboats doesn’t guarantee everyone will survive a sinking ship.

The Edmund Fitzgerald was the biggest ore carrier on the Great Lakes during her heyday.  These ships could take an enormous amount of abuse as the storms on the Great Lakes could be treacherous.  Like the one that fell on the Fitzgerald one November night in 1975.  When 30-foot waves hammered her and her sister ship the Arthur Andersen.  No one knows for sure what happened that night but some of the clues indicate she may have bottomed out on an uncharted shoal.  For she lost her handrails indicating that the ship may have hogged (where the bow and stern bends down from the center of the ship held up by that uncharted shoal).  The handrails were steel cables under tension running around the spar deck.  If the ship hogged this would have stretched the cable until it snapped.  She had green water washing across her deck.  Lost both of her radars.  A vent.  Maybe even a hatch cover.  Whatever happened she was taking on water.  A lot of it.  More than her pumps could keep up with.  Causing a list.  And the bow to settle deeper in the water.  Waves crashed over her bow as well as the Andersen’s.  The ships disappeared under the water.  Then reemerged.  As they design ships to do.  Then two massive waves rocked the Andersen.  She was following the Fitzgerald to help her navigate by the Andersen’s radar.  So these two waves had hit the Fitzgerald first.  The Fitzgerald had by this time taken on so much water that she lost too much freeboard.  When she disappeared under these two waves she never came back up.  It happened so fast there was no distress call.  The ship was longer than the lake was deep.  So her screw was still propelling the ship forward when the bow stuck the bottom.  She had lifeboat capacity for all 29 aboard.  But the ship sank too fast to use them.  Or even for the Andersen to see her as she sailed over her as she came to a rest on the bottom.

Our Ships have never been Safer but Ship Owners and Merchants still need to Protect their Wealth with Marine Insurance

We build bigger and bigger ships.  And it’s amazing what can float considering how heavy these ships can be.  But thanks to Archimedes’ principle all we have to do to make the biggest and heaviest ships float is too keep them watertight.  Keeping them less dense than the water that makes them float.  Even if we fail here due to events beyond our control we can isolate the water rushing in by sealing watertight compartments.  And keep them afloat.  So our ships have never been safer.  In addition we have far more detailed charts.  And satellite navigation to carefully guide us to our destination.  Despite all of this ships still sink.  Proving the need for something that has changed little since 14th century Genoa.  Marine insurance.  Because accidents still happen.  And ship owners and merchants still need to protect their wealth.

www.PITHOCRATES.com

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Marine Insurance, General Average, Mesopotamia, Genoa, Middle Class, Capitalism, London Coffeehouses and Lloyd’s of London

Posted by PITHOCRATES - April 3rd, 2012

History 101

It was in Genoa that Marine Insurance became a Standalone Industry

Risk management dates back to the dawn of civilization.  Perhaps the earliest device we used was fire.  Fire lit up the caves we moved into.  And scared the predators out.  As we transitioned from hunting and gathering to farming we gathered and stored food surpluses to help us through less bountiful times.  To avoid famine.  As artisans rose up and created a prosperous middle class we also created defensive military forces.  To protect that prosperous middle class from outsiders looking to plunder it.

As we put valuable cargoes on ships and sent them long distances over the water we encountered a new kind of risk.  The risk that these cargoes wouldn’t make it to their destinations.  So we created marine insurance.  Including something called ‘general average’.  An agreement where the several shippers shared the cost of any loss of cargo.  If they had to jettison some cargo overboard to save the rest of the cargo or to save the ship.  Some of the proceeds from the cargo they delivered paid for the cargo they didn’t deliver.  Some merchants who borrowed money to finance a shipment paid a little extra.  A risk ‘premium’.  Should the shipment not reach its destination the lender would forgive the loan.

So how long has marine insurance been around?  A long time.  Some of these practices were noted in the Code of Hammurabi (circa 1755 B.C.).  For ancient Mesopotamia was a trading civilization.  That shipped on the Tigris and Euphrates and their tributaries.  Out into the Arabian sea.  And beyond.  Following the coasts until advances in navigation and sail power took them farther from land.  The Greeks and Romans insured their valuable cargoes, too.  As did the Italian city-states that followed them.  Who ruled Mediterranean trade.  And it was in Genoa that marine insurance became a standalone industry.  No longer bundled with other contracts for an additional fee.

As the British Maritime Industry took off so did Lloyd’s of London

But the cargoes got larger.  And the voyages went farther.  Until they were crossing the great oceans.  Increasing the chances that this cargo wasn’t going to make it to its destination.  And when they didn’t the financial losses were larger than ever before.  Because the ships were larger than ever before.  So as the center of shipping moved from the Mediterranean to the ocean trade routes plied by the Europeans (Portugal, Spain, France, the Netherlands and England) the insurance industry followed.  And took the concept of risk management to new levels.

With trade came a prosperous middle class.  Where wealth was no longer the privilege of landholders.  Capitalism transferred that wealth to manufacturers, bankers, merchants, ship owners and, of course, insurers.  You didn’t have to own land anymore to be rich.  All you needed was skill, ability and drive.  It was a brave new world.  And these new capitalists gathered together in London coffeehouses to discuss business.  Including one owned by Edward Lloyd.  On Tower Street.  Where those particularly interested in shipping came to learn the latest in this industry.  And it was where shippers and merchants came to find underwriters to insure their ships and cargoes.

This was the birth of Lloyd’s of London.  And as the British maritime industry took off so did Lloyd’s of London.  As the British Empire spread across the globe international trade grew to new heights.  The Royal Navy protected the sea lanes for that trade.  The British Army protected their far-flung empire.  And Lloyd’s of London insured that valuable cargo.  It was a very symbiotic relationship.  All together they made the British Empire rich.  To show their appreciation of the Royal Navy making this possible Lloyd’s set up a fund to provide for those wounded in the service of their county following Lord Nelson’s victory over the combined French and Spanish fleets at the Battle of Trafalgar.  They continue to provide support for veterans today.  In short, Lloyd’s of London was the place to go to meet your global insurance needs.  From marine insurance they branched into providing ‘inland marine’ insurance needs.  Providing risk management to property beyond ships plying the world’s oceans. 

The Purpose of Insurance is to Let Life Go On after Unexpected and Catastrophic Events

Cuthbert Heath led Lloyd’s in the development of the non-marine insurance business.  Underwriting policies for among other things earthquake and hurricane insurance coverage.   And Lloyd’s helped to rebuild San Francisco after the 1906 earthquake.  With Heath ordering that they pay all of their policies in full irrespective of their policy terms.  They could do that because they were profitable.  Which is a good thing.  Insurers need to be profitable to pay these large claims without being forced out of business.  Which is why when the Titanic sunk in 1912 they were able to pay all policies in full.  And to continue on insuring the shippers and merchants that followed Titanic.  To allow life to proceed after these great tragedies.  And they would do it time and again.  Following 9/11.  And Hurricane Katrina.

This is the purpose of insurance.  Risk management.  So unexpected and catastrophic events don’t end life as we know it.  But, instead, it allows us to carry on.  Even after some of the worst disasters.  Because life must go on.  And that’s what insurance does.  Even people who rely on a particular body part for their livelihood have gone to Lloyd’s to buy insurance.  Perhaps the most famous being Betty Grable.  Who insured her legs for $1 million in 1940.  Pittsburgh Steeler Troy Polamalu has a lucrative endorsement with a shampoo company.  And insured his long hair for $1 million.  Rolling Stones guitarist Keith Richards insured his hands for $1.6 million.  America Ferrera (Ugly Betty) has an endorsement deal with a toothpaste company.  And they insured her smile for $10 million.  Even ‘the Boss’ Bruce Springsteen insured his voice for $6 million. 

People hate insurance companies.  Because they don’t understand how insurance works.  For they only know that they pay a lot in premiums and never receive anything in return.  But this is the way risk management is supposed to work.  And we need risk management.  We need insurance companies.  And we need insurance companies to be profitable.  Meaning that most of us will never see anything in return for all of our premium payments.  So these companies can pay for the large losses of the few who sadly do see something in return for all of their payments.  For insurance companies protect our wealth.  And earning potential.  So life can go on.  Whether we’re raising a family and planning for our children’s future.  Or taking precautions for some unforeseen accident to one of our body parts that may limit our future earning potential.

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