UNITED STATES MARITIME COMMISSION

HEARINGS CONDUCTED BY THE SUBCOMMITTEE, MESSRS. EDWARD T. TAYLOR (CHAIRMAN), CLIFTON A. WOODRUM, CLARENCE CANNON, LOUIS LUDLOW, J. BUELL SNYDER, EMMET O'NEAL, GEORGE W. JOHNSON, JOHN TABER, RICHARD B. WIGGLESWORTH, WILLIAM P. LAMBERTSON, AND J. WILLIAM DITTER, OF THE COMMITTEE ON APPROPRIATIONS, HOUSE OF REPRESENTATIVES, IN CHARGE OF DEFICIENCY APPROPRIATIONS, ON THE DAYS FOLLOWING, NAMELY:

MONDAY, JULY 8, 1940.

UNITED STATES MARITIME COMMISSION

STATEMENTS OF REAR ADMIRAL EMORY S. LAND, UNITED STATES NAVY (RETIRED), CHAIRMAN; B. K. OGDEN, DIRECTOR, DIVISION OF INSURANCE; WILLIAM U. KIRSCH, BUDGET OFFICER; AND E. RUSSELL LUTZ, ASSISTANT GENERAL COUNSEL

MARINE AND WAR-RISK INSURANCE FUND

Mr. WOODRUM. Admiral, we have before us, in House Document 851, for the United States Maritime Commission, an item which provides for a marine and war-risk insurance fund, as follows:

Marine and war-risk insurance fund: To establish a marine and war-risk insurance fund, as authorized by and in accordance with the title II of the Merchant Marine Act of 1936, as amended during the third session of the Seventy-sixth Congress, $50,000,000, of which not to exceed $150,000 may be expended by the Commission for personal services in the District of Columbia and elsewhere, traveling expenses, printing and binding, and other necessary administrative expenses: Provided, That expenses incurred in the temporary employment of experts in marine insurance, including attorneys, in connection with the investigation and settlement of claims shall not be considered as administrative expenses hereunder: Provided, further, That such sum shall not become available unless and until H. R. 6572, Seventy-sixth Congress, a bill to authorize the creation of a marine and war-risk insurance fund, is enacted into law.

Will you tell us about that?

GENERAL STATEMENT

Admiral LAND. Mr. Chairman, Public Act, No. 677 (H. R. 6572), approved June 29, 1940, amends title II of the Merchant Marine Act, 1936, as amended, by adding a subtitle which authorizes the Maritime Commission to write marine reinsurance and marine war-risk insurance and reinsurance on American vessels and their cargoes, and insurance on the lives of officers and crews of such vessels. The legislation

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(sec. 221 (b)) provides for the establishment in the Treasury of the United States of a revolving fund to be known as the marine and war-risk insurance fund, and authorizes an appropriation to establish this fund. Payment of return premiums, losses, settlements, judgments, and all liabilities incurred by the United States under the legislation are required to be made from such fund. In order to enable the Commission to write insurance or reinsurance as authorized, an appropriation to that fund is necessary.

The legislation is emergency in nature. Under this law the Commission is authorized to provide insurance only during periods when insurance adequate for the needs of the water-borne commerce of the United States cannot be obtained on reasonable terms and conditions from the American insurance market, and all authority under the legislation expires on March 10, 1942, or sooner under proclamation issued by the President. There is no authority and no intent that the Commission shall enter into the marine-insurance business in competition with private enterprise. The purpose of the legislation is to make sure that American water-borne commerce will be protected and thus kept moving. Under existing war conditions that commerce may be suddenly jeopardized by the inability to secure from the usual sources insurance against marine perils and marine war risks for American ships and their cargoes and the crews thereon. Under present international conditions and the disturbed financial situation in many countries, it is doubtful whether the private insurance market has sufficient capacity adequately to protect the high values which may be exposed to war perils even in the case of neutral merchant fleets. American shipping has been relying on the support of the world insurance market for approximately one-half of the insurance necessary for American vessels and their cargoes. In fact, the American insurance market has been reinsuring in the world market part of the risks assumed by it. While the American marine-insurance market has been strengthened and increased since the World War and particularly since the outbreak of the present European war, nevertheless, the American shipping depends on the world insurance market for a substantial part of its insurance protection. Under these circumstances American commerce could be deprived overnight of part of the protection needed to keep American commerce moving. Mr. TABER. In other words, you only insure ships that are registered under the American flag?

Admiral LAND. Our own ships, our own cargo, and our own people. As you are aware, this is taken from the War Risk Insurance Act that was in effect during the last war, brought up to date, with the help and assistance of the executive departments of the Government involved, including the State Department, the Navy Department, the Treasury Department, the Department of Commerce and ourselves, with modifications, as indicated, to reduce it to a straight American proposition.

The legislation follows the general form of the War Risk Insurance Act of September 2, 1914, as amended and supplemented. From the annual report of the Director of the Veterans' Bureau for 1923, page 675, it appears that the operations under that act showed claims. paid for losses of approximately $30,000,000 and an income from premiums and salvage of approximately $47,500,000, leaving a net operating profit in excess of $17,500,000.

That was our experience during the last war. Of course, I cannot predict what our experience will be now, but this is the only background we have.

Mr. WOODRUM. That was war-risk insurance?

Admiral LAND. Yes, sir.

Mr. WOODRUM. And this is marine insurance?

Admiral LAND. Reinsurance of marine insurance, and insurance of war risks.

At the beginning of the World War in 1914, only about 12 percent of our foreign commerce was carried in American bottoms; now almost 35 percent is carried in American bottoms. Under the present neutrality legislation American vessels are barred from operating through dangerous combat areas and into ports of belligerent countries. While this has reduced to some extent the risks to American flag-vessels from marine perils of war, war-risk insurance is necessarily carried on American ships and cargoes moving to or from ports in countries not included in the combat zones or otherwise prescribed under the neutrality law. The number of new and valuable American flag-vessels is steadily increasing, and these vessels, as well as vessels whose services have been dislocated under the Neutrality Act are moving in other services in American foreign trade in which it is necessary to carry both ordinary marine insurance and war-risk insurance. As a specific example of the need for Government insurance to supplement the private insurance market, there are about 15 vessels under the American flag of such high value that they cannot be insured to their full value by the American insurance market which by itself does not have sufficient capacity nor enough spread of risk to assume the large individual insurance risks involved. Furthermore, the values of cargoes carried on American flag-vessels have been steadily increasing during the present emergency in accord with the increased value of commodities sold in foreign trade.

The President has transmitted (H. Doc. No. 851) an estimate of appropriation to establish the marine and war-risk insurance fund, amounting to $50,000,000, to be immediately available. The President in a prior communication (S. Doc. No. 246) to the President of the Senate, June 20, 1940, urged the prompt enactment of the legislation. The Department of the Treasury, the Department of Commerce, and the Navy Department have emphasized the urgent need of Government insurance protection to meet emergency needs as provided in the legislation. The communications from these Departments are printed in Senate Report No. 1942 on H. R. 6572.

The marine and war-risk insurance fund would constitute a reserve comparable to the insurance reserves established by private insurance companies for the purpose of protecting their obligations to pay promptly, and in a businesslike manner, claims for the losses insured against. All moneys received from premiums or from salvage or other recoveries are to be credited to the fund. However, the building up of the fund through receipt of premiums would necessarily be a very slow process. The Commission is authorized (sec. 226 (c)) to exercise the powers granted by the act in accordance with commercial practice in the marine insurance business. Reserves established solely by the receipt of premiums would not be sufficient to constitute the needed reserve.

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Under the legislation, the Commission is authorized to provide insurance to cover these items:

(1) Reinsurance of marine hull policies issued by the American market. (2) Hull and cargo direct war-risk insurance.

(3) Reinsurance of marine cargo policies issued by the American market. (4) Reinsurance of policies issued by the American market to cover loss of life and personal injury or detention of masters, offieis, and crews of American vessels. (In the remote contingency that this type of insurance cannot be secured through private facilities with the aid of Government reinsurance, direct insurance is authorized in sec. 226.)

REINSURANCE OF MARINE HULL POLICIES

With respect to reinsurance of marine hull policies issued by the American market (item 1 above), the maximum capacity of the underwriters constituting the American market is $1,000,000 per vessel.

That is all the American market will absorb.

Mr. TABER. That is all that the concerns engaged in that business can carry?

Admiral LAND. It is all they are willing to absorb, and that is an increase of about 50 percent. Since the Commission took this matter under its wing, we have increased the American market about 50 percent. That is the limit at the present time.

Take the new America, which is worth about $18,000,000. Something had to be done to take care of the difference between what the American market can insure and the value of the ship. That is one reason why this is an emergency measure. Included in all the American-flag vessels, there are now 15 American-flag vessels the values of which exceed the insuring capacity of the American market unassisted. On these vessels the amount which the unassisted private American market cannot carry ranges up to $14.000,000.

HULL AND CARGO DIRECT WAR-RISK INSURANCE

With respect to direct war-risk insurance on hull and cargo (item 2 above) the present American market capacity is limited to approximately $5,000,000 per vessel for cargo insurance, and approximately $2,500,000 per vessel for hull insurance. Thus, it is evident war-risk underwriting by the Commission would be in larger amounts than for the marine insurance.

REINSURANCE OF MARINE CARGO POLICIES

With respect to reinsurance of marine cargo policies issued by the American market (item 3 above), it is much more difficult to estimate the risks which it may be necessary for the Commission to cover under the legislation. Many American vessels, in addition to the 15 high-valued vessels heretofore referred to, will carry cargoes valued in excess of the American insurance market capacity, which is $5,000,000 on any one vessel. The lower-valued straight cargo vessels have considerably more cargo-carrying capacity than the highervalued vessels which are generally combination passenger-cargo or passenger vessels. For example, hull and machinery insurance on the America will greatly exceed the insurance to be underwritten on hull and machinery of cargo vessels of the C-2 or C-3 type, but the

amount of cargo insurance required on the latter will generally exceed the amount of cargo insurance on a vessel like the America. Commercial cargoes carried in American bottoms today range up to a valuation of approximately $6,000,000, but in some cases have been very much higher. Cargo valuations are constantly increasing. It is entirely possible that the amount of cargo insurance on any one vessel which the unassisted American market would be unable to cover at any one time might run as high as $50,000,000.

REINSURANCE OF POLICIES TO COVER LOSS OF LIFE AND PERSONAL INJURY OR DETENTION OF MASTER, ETC., OF AMERICAN VESSELS

With respect to reinsurance of policies to cover loss of life and personal injury or detention of masters, officers, or crews of American vessels (item 4 above), it is reasonable to expect that most of the settlements would be in rather small amounts. Conservative practice, however, would provide against a total liability in the event of a larger casualty.

A mean average of $2,500 per claim would be a conservative basis for reserves, and the extent of the casualty may conservatively be predicated on the possibility of a single risk involving two larger vessels where the casualty might result in approximately 1,000 claims.

AMOUNT OF RESERVE FUND REQUIRED FOR MARINE AND WAR-RISK INSURANCE

What then are the reasonable and necessary total reserves required under the circumstances? The financial policy of American marine insurance underwriters is to establish a reserve fund at a figure approximately two and one-half times the value of the largest vessel risk assumed. This basis would require that the Commission have a reserve fund for marine insurance of about $35,000,000 based on the underwriting of $14,000,000 (not coverable by the American insurance market) on the America. This does not include reserves for war risks, and the amount of war risk to be underwritten on one vessel will be greater than the ordinary marine insurance on such vessel, largely due to the fact that the capacity of the American insurance market is considerably less in the case of war risks than in the case of ordinary marine risks.

It is proposed that the Commission have a fund to cover both marine and war-risk insurance in an amount equal to twice the largest and the next largest policies expected to be written. These two policies will probably be the marine war risk on the America and the Manhattan or the Washington, in amounts of approximately $16,000,000 and $6,000,000 respectively. This requires a reserve for marine and war risks of at least $44,000,000. A reserve of $4,000,000 to $5,000,000 is necessary for marine and war-risk cargo insurance based on twice the value of the two average cargoes on such vessels, and approximately $2,500,000 is now considered necessary for seamen's insurance. The total amount would be approximately $51,500,000, and it is proposed therefore that an appropriation of $50,000,000 be granted.

During the World War, 1914-18, the total appropriated for the revolving fund for payment of losses under the War Risk Insurance Act of 1914 was $50,000,000. This was returned to the Treasury upon