Most of us live close to water and see the water as recreation. In reality on the seas is a great deal of economic activity particularly the boats that move around. The closest most of us will get on a ship is either taking a ferry or a cruise ship and that is fine. However, if are by the sea, you will likely see ocean tankers moving goods particularly commodities around the world. Shipping is an inexpensive method to move goods from one country to another. The stronger the economy between the two countries, the greater the economies the supply chain relies on to lower costs happen. Within the shipping world, accidents do happen, or ships are lost and most of the time most of us never know. However, there are industries that have developed which handle those concerns. The shipping world and how it handled an accident is the subject of a book called Dead in the Water published by Mathew Campbell and Kit Chellel, published by Portfolio/Penguin, 2022, London UK.

In the Victorian age, the British navy was the most powerful navy in the world and one of the reasons Britain had many colonies around the world. To keep the colonies, the British army and navy were sent to defend the interests of British companies which had set up to export raw materials to Britain and sell British goods to the public. If you are in London, you might notice a very distinction office building where Lloyd’s of London is headquartered. At the center of insurance for ships is Lloyd’s, this has been the reason they came into being and one of the world’s oldest continually running periodicals is called Lloyd’s List – the coming and goings of ships.

Lloyd’s specializes in what no one else will insure: the biggest, the most unusual, the hardest to analyze. The system works is a broker is appointed for a project, who then shops it around to Lloyd’s members who come together in one or more syndicates to insure it. Each member of a syndicate takes on a piece of the liability. After the financial exposure has been successfully divvied up, the company who wishes to do something goes to the bank and the bank approves the loan knowing the insurance companies will pay the bank if something goes bad. If nothing goes bad, the syndicate makes profits.

For cargo ships there tends to be more than one insurance coverage, one for the hull or the ship itself and one for the cargo.

In the Lloyd’s headquarters building is the Underwriting Room where brokers bring deals to other brokers for them to join the partnership. At this level, there is a great deal of trust because the Latin motto of the floor is Uberrima Fides or utmost good faith. The trust extends to the ultimate users of the market, the customers, who can be confident that Lloyd’s members will pay claims quickly and efficiently, no matter how large they are. Every year, Lloyd’s collects $49 billion in premiums.

In the book, the story is about one vessel, a rusting hulk of an oil tanker called the Brillante Virtuoso. It was delivering oil worth $100 million from Ukraine to China. Along the way, in Yemen it was scuttled, or a fire broke out and the ship was considered damage to be out of service. While privates are active in the Yemen area, was this ship’s fire caused by privates or pretend privates who the owners wanted insurance money to be paid out?

Fraud happens but there were reasons why Lloyd’s has been historically slow to tackle maritime fraud. One there has no real financial incentive to do so. Most individuals know if they are involved in an accident with their vehicle, next year premiums increase. The same thing happens with ships, premium rates increase and as long as the insurance company is profitable, it is a price to pay.

The second reason is enforcement. Most frauds occur in international waters and whose owners are registered in Liberia, Panama and so on and when it does come before London courts, there is a high bar for rejecting claims. It addition, often times the insurance company has to claim its own client was at fault.

Linking to dividend paying stocks, when things go smoothly it is entirely possible to make profits on a regular basis and pay dividends. It is when the unexpected costs increases and prices cannot be raised is when companies are pinched. If the companies you invested in can raise their prices and still be profitable, then as an investor that is a good thing.

There are more questions than answers, till the next time – to raising questions.