The year of 2003 is the 6th year since the Association began to cover hull and machinery risks on mutual basis. During the last few years, the international hull and machinery insurance market has continuously weakened under the shadow of deficit. After the "Sept, 11" event, the premium rates have substantially increased over the international insurance market. The average increase percentage is between 30% - 80%. And the premium rates have increased year by year.

　　The situation of the domestic insurance market has been also serious. The domestic insurance companies have to rely on the international reinsurance market as there lacks an independent reinsurance market. Therefore, the domestic insurance entities have to face and endure the pressure of increasing premium in the international insurance market. The immature condition of the domestic insurance market and the management scheme caused the lack of sound competition in the market. The domestic insurance market has been hovering under the shadow of deficit. Facing this serious situation, the Managers, in addition to the steps taken in respect of the control of underwriting scope and risks covered, took the following necessary and effective measures to keep good control of the operation:

　　(1) standardizing the procedure of handling and settling claims;
　　(2) putting into effect the measures in respect of the improvement of reinsurance arrangement;
　　(3) adjusting the renewal premium rate strictly according to the decisions of the Board;
　　(4) regulating reasonably the underwriting terms and conditions in the light of the insurance market situation.

　　Because of the measures so taken, the deficit was thus under the control.

　　The details on the underwriting in 2002 and 2003 are as follows:

　　Notes:　(1). the figures are calculated as of 31st , December of 2002 and of 2003 respectively;
　　　　　　(2). the insured amounts include those under HM cover (including War cover ) and IV cover .

1. Underwriting

　　By 31 Dec. 2003, 106 ships from 23 Members were covered by the Association under the Hull and Machinery Certificates ( including IV cover ) in 2003 policy year, with the insured amount in aggregate of USD803 million. Compared with the relevant figures of the last year's, an increase of 47.22% in number of ships and 57.45% in insured amount have been gained.

2. Reinsurance

　　Comparatively speaking, the loss ratio of reinsurance for the last five years from 1998 to 2002 is quite high in fact. In addition to this factor, the facts that due to the "Sept. 11" event, the international reinsurance market has been badly dented and seriously affected and the international re-insurers have become less made the terms and conditions for reinsurance very rigorous. Though the Managers did their best to seek to make better reinsurance arrangements, the efforts seemed to be of no substantial effect. Notwithstanding that the reinsurance contracts concluded under such difficult situation were considerably excellent, the premium rate for reinsurance in 2003 was still in a high level. The proportion of the premiums paid for reinsurance to the total incomes of premiums collected by the Association in respect of the Hull and Machinery cover reaches 64.82%.

3. Claims

　　By the end of 2003, the Managers had received, under the cover of Hull and Machinery risks in 2003, 94 claims in total among which 32 claims were finally settled and closed. Compared with last year, the claims in 2003 increased 38 in number and 67.86% in percentage. The total estimated liabilities of the Association for 2003 claims is USD4.2 million, 68.76% higher than that for 2002. There are two big claims which the estimated liabilities for each will exceed USD0.4 million. The brief of the claims is as follows:

　(1) M/V "Tai Hua Hai" - rudder damage in Panama on 23 Jan., 2003

　　The rudder of M/V "Tai Hua Hai" was found to be out of order during the transit of Panama Canal in 2003. A temporary repair was carried out in Panama and then a permanent repair was done in Gibraltar by the Member. The total amount claimed by the Member is about USD0.81 million.

　(2) M/V "Jin Man Yu" - main engine broken down on 18th March, 2003

　　The main engine of M/V "Jin Man Yu" was broken down in the port of Lian Yun Gang in March of 2003. The engine factory suggested to replace a new piece of crankshaft for old. The estimated costs will be more than USD1.5 million. After a through research, the Managers held that the old one can be restored. For the sake of safety, the Managers appointed an engineering expert to supervise the repairing and restoring. Finally, the restoring was successfully done and a big amount of USD1 million was saved.

4. Hull and Machinery Committee

　　The Hull and Machinery Committee held the annual meeting in Nov., 2003. Having debriefed the working report made by the Managers at the meeting, the Committee affirmed satisfactorily the achievements acquired by the Managers in respect of the underwriting and claim handling in 2003, especially in respect of grasping the opportunities of expanding the business of Hull and Machinery cover in the market. The Committee discussed the problems and the serious situation faced by the Association and gave its definite directions and forceful support to the Managers in respect of the underwriting for the policy year of 2004. The Committee also decided the general principles and policies for the future development of Hull & Machinery business. In addition, in order to minimize or eliminate deficits in the future the Committee set down specific improving measures concerning reinsurance and the deficits.

5. The Principle of Mutual Basis

　　The principle, made by the Hull and Machinery Committee in 1998, that the cover of Hull and Machinery risks should be operated under the same principle and for the same purpose as the cover of P&I risks must be applied and implemented thoroughly. Accordingly, differing from the principle carried out by any commercial insurance companies, the cover of Hull and Machinery risks underwritten by the Association should be operated on a mutual and non-profit making basis. Therefore, the terms and conditions regulated in the Rules of the Association in connection with the principle of mutual basis should be applied rigorously to the cover of Hull and Machinery risks. For instance, in case there incurs deficit in the cover, the Board is entitled to levy supplementary calls so as to ensure that the business of the Hull and Machinery cover can develop in a healthy and steady way. And the Association is entitled to levy release calls against any Members whenever they withdraw from the Association.

　　Summing up, the operation of Hull and Machinery cover was still very difficult in the policy year of 2003. The cover was operated however under deficit as a result of the increasing of claims amount in the one hand and increasing costs for reinsurance in the other. Nevertheless, we are fully confident that along with the turning of the domestic market system, heightening of the marketing level and the strengthening and improving of the services provided by the Managers, the business of Hull and Machinery cover of the Association will, under the guidance of the Board and with the full support of the Members, develop further.