Insurance markets face an ongoing struggle with information asymmetry. This occurs when one party knows substantially more than the other in a transaction. For marine insurance, this typically means that shipowners or cargo owners understand their specific risks better than the insurers who cover them.
This knowledge gap creates two major problems:
First, there’s adverse selection, which happens before contracts are signed. Since insurers can’t perfectly differentiate high-risk clients from low-risk ones, they often set premiums at a middle ground. These middle-of-the-road rates tend to drive away safer clients while attracting riskier ones. Over time, this skews the client pool toward higher risks, pushing premiums up and potentially drying up coverage for certain segments. When insurers can’t effectively sort diverse risks, especially when offering one-size-fits-all premiums, they leave themselves vulnerable.
Second comes moral hazard, which emerges after insurance is in place. People change their behaviour when they know they’re protected. They might put less effort into preventing losses (ex-ante moral hazard) or become more likely to file claims or inflate them (ex-post moral hazard). In shipping, this might show up as skimping on vessel maintenance or navigating less carefully, while afterward, it could involve submitting claims for damages that barely qualify for coverage. Both types drive up costs for insurers and ultimately for everyone with a policy. The challenge of monitoring precautions or verifying claims only makes this worse.
The marine insurance world faces particularly tough information asymmetry challenges due to several factors: operations spread across the globe, huge differences between vessels and voyages, complex and potentially devastating maritime risks (including long-term liabilities like pollution), and the involvement of numerous parties (owners, charterers, managers, crew) whose actions can all affect risk levels.