Loss of hire
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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

Loss of Hire

Anna F. Erlandsen – Norwegian Hull Club

Oslo, 8th November 2013

The Nordic Association of Marine Insurers


Loss of hire

  • 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


The vessel as an insured object

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


The vessel as an insured object1

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


Loss of hire

It all started in 1957 with the Suez crisis

The Nordic Association of Marine Insurers


Loss of hire

The Nordic Association of Marine Insurers


Loss of hire

The Nordic Association of Marine Insurers


The effects of the crisis

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


What is loss of hire insurance

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


What type of damage will trigger a claim

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


What type of damage will not trigger a claim

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


The daily indemnity

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


Deductible days

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


Indemnity days

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


The duties of the assured

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


Conditions

Conditions

  • A B Stewart

  • Lazard Form

  • Norwegian / Nordic Marine Insurance Plan – Chapter 16

The Nordic Association of Marine Insurers


Characteristics the plan chapter 16

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


Characteristics the plan chapter 161

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


Daily amount

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


Characteristics the plan chapter 162

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


Basis

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


Basis1

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


Features

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


Features1

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


Examples

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


Examples1

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


Pricing risk assessment

Pricing & Risk assessment

The Nordic Association of Marine Insurers


Pricing

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


Pricing loh scale

Pricing % – LoH Scale

The Nordic Association of Marine Insurers


Example

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


Risk assessment

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


Risk assessment probability of a claim

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


Brief discussion

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


Risk assessment expected consequences as assessed by the assured

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


Risk assessment fleet records

Risk assessment – Fleet records

  • What would the underwriter look for?

  • Burning cost?

  • Trends?

  • Clean record?

Claims type


Risk assessment fleet composition dynamics

Risk assessment – Fleet composition/dynamics

H&M quote

LOH quote

The Nordic Association of Marine Insurers


Market

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


Loss of hire

  • Case - Tankship Ltd.

The Nordic Association of Marine Insurers


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