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Loss of Hire

Loss of Hire . Anna F. Erlandsen – Norwegian Hull Club Oslo, 8th November 2013. The Nordic Association of Marine Insurers. What we will try to achieve during this session: Introduction to the basic principles of Loss of Hire insurance

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Loss of Hire

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  1. Loss of Hire Anna F. Erlandsen – Norwegian Hull Club Oslo, 8th November 2013 The Nordic Association of Marine Insurers

  2. What we will try to achieve during this session: • Introduction to the basic principles of Loss of Hire insurance • Introduce the special features related to Loss of Hire insurance • Present and discuss some practical examples • Discuss risk assessment for Loss of Hire insurance • Briefly introduce market dynamics • NOT to provide an indepth education in interpretation of Loss of Hire insurance clauses and claims adjusting The Nordic Association of Marine Insurers

  3. The vessel as an insured object • The vessel is an asset - = Risk of loosing monetary (financial) value through physical damage • The vessel is a generator of income – = Risk of loosing income (cash flow) • The vessel is a carrier of goods – = Risk of damage to the cargo The Nordic Association of Marine Insurers

  4. The vessel as an insured object • The vessel is an asset - = Risk of losing monetary (financial) value through physical damage • The vessel is a generator of income – = Risk of losing income (cash flow) • The vessel is a carrier of goods – = Risk of damage to the cargo = Liability exposure The Nordic Association of Marine Insurers

  5. It all started in 1957 with the Suez crisis The Nordic Association of Marine Insurers

  6. The Nordic Association of Marine Insurers

  7. The Nordic Association of Marine Insurers

  8. The effects of the crisis • Soaring freight rates • Demand for protection of high earnings • First Loss of Hire covers developed at Lloyd’s • Immature terms and conditions lead to large losses for underwriters • The Nordic market, lead by Vesta, adapted the product, adjusted the conditions and has a leading position today The Nordic Association of Marine Insurers

  9. What is Loss of Hire Insurance? • Covers loss of income • Indemnity is agreed at a certain amount per day • Covers loss of income due to a claim recoverable under the Hull & Machinery policy • No cover if the vessel is a total loss The Nordic Association of Marine Insurers

  10. What type of damage will trigger a claim? • Loss of time (and) income resulting from a claim recoverable under the Hull & Machinery policy, e.g. • Machinery breakdowns • Stranding / grounding • Collision • Fire • Heavy weather damage • (Special occurences listed in the conditons) ….starting at the time of the incident • Deductible days The Nordic Association of Marine Insurers

  11. What type of damage will NOT trigger a claim? • Total Loss • Actual total loss • Constructive total loss • Compromised total loss • Wear and tear (non-accidential incidents) • Outbreak of war • Detainment, arrest, strike etc. • Ice The Nordic Association of Marine Insurers

  12. The daily indemnity • The amount agreed to be paid per day the vessel is out of service • Earning capacity: • Time charter or unchartered • Daily indemnity adjustable during the policy period, if required The Nordic Association of Marine Insurers

  13. Deductible days • The Assured must assume part of the loss, deductible days • Always the first days of any delay • The deductible days apply to each single casualty (or incident) • The number of deductible days vary (and have an influence on the premium) The Nordic Association of Marine Insurers

  14. Indemnity days • A maximum number of days, stating the days an Assured may claim: • Per claim • Per policy period • Fleet limit The Nordic Association of Marine Insurers

  15. The duties of the Assured • Give notice, for the underwriter to: • Register a potential claim • Arrange for surveys • Provide evidence • T/C: Off-hire certificate • Unchartered: Proof of actual time lost and evidence of freight rates during the period of time lost The Nordic Association of Marine Insurers

  16. Conditions • A B Stewart • Lazard Form • Norwegian / Nordic Marine Insurance Plan – Chapter 16 The Nordic Association of Marine Insurers

  17. Characteristics (the Plan Chapter 16) • Loss of Hire claims: loss of time arising from any damage recoverable under the hull policy as a particular average (§16-1.1) and/or as listed (§16-1.2) • If a vessel is a Total Loss (actual, constructive or compromised), the Loss of Hire insurer is not liable for loss of time (§16-2) • If Hull & Machinery is written on conditions other than the Plan and accepted by the insurer in writing, chapters 10 to 12 are replaced by the actual Hull & Machinery conditions (§16-1) The Nordic Association of Marine Insurers

  18. Characteristics (the Plan Chapter 16) • Loss of Hire claims: loss of time arising from any damage recoverable under the hull policy as a particular average (§16-1.1) and as listed (§16-1.2) • Claims are measured in days, hours and minutes (§16-4.1) • Indemnity is an amount per day (§16-5) • Charter-parties serve as proof of loss (§16-5.1) or average freight rates (§16-5.2) • Daily indemnities may be assessed (§16-6) The Nordic Association of Marine Insurers

  19. Daily Amount • Two systems provided in the Plan: • ’Open policy’ – Ref. § 16-5 • ’Assessed daily amount’ – Ref. § 16-6 • For all practical purposes, policies are written with assessed • Daily Indemnities (d/i’s) – but be aware of §16-14.2 The Nordic Association of Marine Insurers

  20. Characteristics (the Plan Chapter 16) • Loss of Hire claims: loss of time arising from any damage recoverable under the hull policy as a particular average (§16-1.1) and as listed (§16-1.2) • Indemnity is an amount per day (§16-5), - claims are measured in days, hours and minutes (§16-4.1) • Charter-parties serve as proof of loss (§16-5.1) or average freight rates (§16-5.2) • Daily indemnities may be assessed (§16-6) • Deductible in number of days (§16-7) – always the first days of any delay and applied to each single casualty • Specific regulations as to how repairs are carried out (§§16-9 to 16-14) The Nordic Association of Marine Insurers

  21. Basis • The Loss of Hire basis is expressed in (number of) days • Structure: Deductible / Cover per claim / Cover in all • Example: 14 / 90 / 90 Time in days 14 90 The Nordic Association of Marine Insurers

  22. Basis • Structure: Deductible / Cover per claim / Cover in all • Example: 14 / 90 / 90 • Daily Indemnity: USD 10,000 • Cover: USD 900,000 cover per claim • USD 900,000 cover in all per policy period • in excess of 14 deductible days The Nordic Association of Marine Insurers

  23. Features • Automatic Reinstatement Clause • Secures the reinstatement of the total number of days under the policy. • Automatic Reinstatement Clause: All claims for which Underwriters are liable hereunder shall, to the extent thereof, reduce the limit of liability under this policy from the date of damage to the vessel. However, this policy shall after such damage be automatically reinstated back to the original limits of liability at an additional premium of 100% of the annual net premium pertaining to the vessel involved calculated pro rata on the amount reinstated irrespective of time. • What is the rationale behind this clause? The Nordic Association of Marine Insurers

  24. Features • Additional deductibles • AMD – Additional Machinery Deductible • Ice deductible (conditional trading) • Cranes, spare parts, etc. Notation: 14(21)/90/90 Time in days 90 14 7 21 The Nordic Association of Marine Insurers

  25. Examples • 1. Notification for: • 60 days cover any one incident • 60 days cover per policy period • 14 days deductible period • 2. Notification for: • Sum insured USD 3,600,000 • Daily indemnity USD 40,000 • 45 days cover any one incident • 10 days deductible period The Nordic Association of Marine Insurers

  26. Examples • 3. Notification for: • 30 days machinery deductible • 60 days cover any one incident • 60 days cover per policy period • 21 days deductible period The Nordic Association of Marine Insurers

  27. Pricing & Risk assessment The Nordic Association of Marine Insurers

  28. Pricing • The most common way of expressing premium is as a percentage of the sum insured: • (Sum insured = d/i x annual indemnity days) • Sum Insured x % = Premium • Another method is to express the premium in number of (indemnity) days: • Premium / Daily indemnity = Days The Nordic Association of Marine Insurers

  29. Pricing % – LoH Scale The Nordic Association of Marine Insurers

  30. Example • Basis: 14 / 90 / 90 • Daily indemnity: USD 15,000 • Sum insured: USD 15,000 x 90 = USD 1,350,000 • Rate: 3% • Premium: USD 1,350,000 x 3% = USD 40,500 • or • in No. of days: USD 40,500 / USD 15,000 = 2,7 • Case: underwriting The Nordic Association of Marine Insurers

  31. Risk assessment • For the ship owner: • The probability of a claim resulting in loss of earnings. • Expected consequence of a Loss of Hire claim. • Ability and willingness to absorb risk • What are the relevant, unique features of Loss of Hire? The Nordic Association of Marine Insurers

  32. Risk assessment – Probability of a claim • Roughly 1/3 vessels experience a H&M claim each year. • Roughly 1/5 H&M claim results in a LOH claim. • i.e.: Approximately 1/15 vessels experience a LOH incident. • Which conclusions can be made from these observations? The Nordic Association of Marine Insurers

  33. Brief discussion… • You are a shipowner and together with your risk manager you are considering whether or not to take out Loss of Hire insurance for your fleet. Identify various fleet- and market specific factors that you consider relevant to the discussion. The Nordic Association of Marine Insurers

  34. Probability Consequence Risk assessment – Expected consequences (as assessed by the Assured) • Minimize number of days for own account • Maximize number of covered days High • Higher retention (?) • Buy at all? • High retention • Cover the catastrophe • Retention more than 14 days? or • Limit the cover? Low Low High The Nordic Association of Marine Insurers

  35. Risk assessment – Fleet records • What would the underwriter look for? • Burning cost? • Trends? • Clean record? Claims type

  36. Risk assessment – Fleet composition/dynamics H&M quote LOH quote The Nordic Association of Marine Insurers

  37. Market • In terms of premium volume, Loss of Hire is a ”small” line of marine business • The Nordic market has a leading position • Some variations: • Loss of Earnings • Business interuption The Nordic Association of Marine Insurers

  38. Case - Tankship Ltd. The Nordic Association of Marine Insurers

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