loss of hire anna f. erlandsen – norwegian hull club oslo, 8th november 2013 the nordic...

Loss of HireAnna F. Erlandsen – Norwegian Hull ClubOslo, 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• 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 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 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



It all started in 1957 with the Suez 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


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


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


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 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


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)


Indemnity days

A maximum number of days, stating the days an Assured may claim:

• Per claim

• Per policy period

• Fleet limit


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


Conditions

A B Stewart

Lazard Form

Norwegian / Nordic Marine Insurance 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)



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)


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



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)


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

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


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?


Features

Additional deductibles AMD – Additional Machinery Deductible Ice deductible (conditional trading) Cranes, spare parts, etc.


Time in days

Notation:14(21)/90/90

Examples

1. Notification for:

◦ 60 days cover any one incident

◦ 60 days cover per policy period

◦ 14 days deductible period


◦ Sum insured USD 3,600,000

◦ Daily indemnity USD 40,000




Examples


◦ 30 days machinery deductible


◦ 60 days cover per policy period



Pricing & Risk assessment


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


Pricing % – LoH Scale


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


Risk assessment

For the ship owner:

1. The probability of a claim resulting in loss of earnings.

2. Expected consequence of a Loss of Hire claim.

3. Ability and willingness to absorb risk

What are the relevant, unique features of Loss of Hire?


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?


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.



Probability

Consequence

Higher retention (?)

Retention more than 14 days?

or

Limit the cover?

Buy at all?

High retention

Cover the catastrophe

Minimize number of days for own account

Maximize number of covered days

High

High

Low

Low

Risk assessment – Expected consequences (as assessed by the Assured)

Risk assessment – Fleet records

What would the underwriter look for?

Burning cost?

Trends?

Clean record?

Claims type

Risk assessment – Fleet composition/dynamics


H&M quote

LOH quote

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


Case - Tankship Ltd.


loss of hire anna f. erlandsen – norwegian hull club oslo, 8th november 2013 the nordic...

Documents

requiredthe nordic association

underwritersthe nordic

loss of time

loss of hire insurancepresent

loss of hire insurancebriefly

daycovers loss of income

interpretation of loss

loss of hireanna