The American Cargo War Risk Reinsurance Exchange
By Donald H. Chadwick
A unique reinsurance facility was severely tested on September 1, 1939, when thousands of German bombers suddenly rained death and destruction on Poland, followed on September 3 with the torpedoing of the Athenia, causing terrible losses of men, ships, and cargoes in the war at sea. This special facility is a chapter of reinsurance history that is very appropriate to recall in today’s times when reinsurers are also being severely tested.
A Historical Trace
In fact, marine underwriters in the United States had anticipated the need for mutual reinsurance protection before this holocaust, since Hitlers armies had already warned us sufficiently when they dismembered Czechoslovakia.
During the winter and spring of 1939, while Hitler and Tojo were straining toward war, there were many meetings of the organizers of what became The American Cargo War Risk Reinsurance Exchange. Various reinsurance arrangements were considered. In view of the tremendous volume of individual reports of shipments, it was decided that a reciprocal exchange subscribed by the entire American market would be the most efficient form of reinsurance. On April 17,1939, a preliminary agreement for the Exchange was submitted to American companies and foreign companies licensed for business in the U.S.; the final agreement became effective June 10,1939.
June 1939 was three months prior to the shooting war, yet it was apparent der Fuhrer had turned on Poland, demanding the return of Danzig and a zone across the Polish Corridor. But Poland, having witnessed the dismemberment of Czechoslovakia, had attempted arbitration.
Chamberlain responded by declaring “Peace in our time.” Hitler then switched to a peace offensive, being his infamous “war of nerves” technique. By June 1st it appeared Poland must crack under the pressure. On June 10th the Exchange commenced to function.
Such organizations are permitted under Section 29 of the Merchant Marine Act of 1920, enacted after World War I to encourage the formation of Syndicates to provide American insurance for foreign trade and vessels of this county. Section 29 specifically exempts certain reinsurance organizations from the provisions of the Sherman-Clayton Anti-Trust Act.
In spite of the fury at sea, the Exchange functioned as planned. American companies were able throughout the war to continue offering their insureds war risks insurance. Open policies were used because the risk was automatically reinsured through all the companies in the market. Such insurance was effected as published rates available to all; of course, rates fluctuated with the fortunes of war.
The year 1942 was a period of particular crisis. A vicious submarine campaign, extending far beyond our expectations, was waged off the Atlantic coast. The sub sinkings weren’t brought under control until late in the year. During the first 10 months, 550 vessels were sunk in the western Atlantic. War rates advanced rapidly; the highest being 25 percent from New York to Brazil or Argentina.
One result of the high rates was that effective August 1st the War Shipping Administration commenced writing war risk insurance on imports to the United States and exports to U.S. possessions at subsidy rates to preserve “price ceilings”. The companies offered