P&I Insurance - Underwriting aspects · 4 Marine Insurance: Basic Principles and Features...

P&I Insurance - Underwriting aspects

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Content

Basic principles & featuresP&I clubsThe P&I insurance coverThe P&I insurance contractLooking ahead

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A Shipowner’s main insurances

Hull + Machinery P&I Loss of Hire

(several supplementary insurances; e.g. FD&D, strike -interest insurances, etc.)

War Risks

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Marine Insurance: Basic Principlesand Features

Distinctive Features of Marine Insurance

o Covering ships trading worldwide

o Closely connected to international maritime law

o Financial guarantor behind international liability regimes

o Most business written through four top markets, UK (London), Japan,France and Scandinavia (in particular Norway)

o Limited number of standard terms, such as the London Institute Clausesand the Norwegian Marine Insurance Plan

o Marine liability risks are underwritten on the basis of Club Rules mirroringthe Pooling Agreement (covering 90 % of all ocean-going tonnage)

o Special legislation (English Marine Insurance Act)

o Most of the interested parties operate on a global basis

o Distinction between marine perils and war risk

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P&I Clubs as a Legal Entity

The Corporate Structure of P&I Clubs

o Mutual associations – owned by the members (the insureds) forthe members

o Operated on a not for profit basis meaning in practice that theclaims and operating costs in a policy year shall be covered bythe premium and investment income in that year

o Any surplus will be allocated to the reserves

o No external capital owners involved expecting a return on theirinvestments

o Mutual insurance means insurance at cost – no profit is ceded toexternal capital owners

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Claimsthe claims made by Members

Expensesreinsurance premium &

administration costs

Premium/Callsthe premium paid by Members

Investment incomeearned from the funds

held in trust for the Members

Mutual P&I insurance in a nutshell:

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P&I Club Membership

o Entry of a ship results in membership

o Club Rules– govern the member’s rights as an owner(shareholder) of the Club

— Right to vote at the General Meeting

— Eligible for election to the governing corporate bodies

o Club Rules – the terms of the contract of insurance

— Right to be indemnified for named P&I liabilities

— Policy defences

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P&I Club Committees and Boards

o Ultimate control of the Club rests with the membership throughthe General Meeting

o Responsibility for management of the Club is vested in theBoard of Directors consisting of Club members elected by theGeneral Meeting

o The Board determines key issues such as investment guidelinesfor the management of the funds; decides on possible changesto the Rules; decides on the levy of deferred calls orsupplementary calls, closing of policy years

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Gard P&I Club Management

Employed directly by the Club (the Gard model until 2000)

Management company owned by the Club (Gard AS) operatedon a non-profit basis

Independent management companies (the English model)operated on a for-profit basis

— Thomas Miller P&I Limited (manager of UK P&I Club)

— Tindall Riley (Britannia) Limited (manager of the Britannia Club)

— A Bilbrough & Co Ltd (manager of the London Club)

— Charles Taylor Ltd (manager of the Standard Club)

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Co-operation between P&I Clubs

Background

o London Group of P&I Clubs established in 1899 for thepurpose of agreeing a claims sharing arrangement

o Renamed the International Group when non-English Clubsbecame members

o Collective purchase of market reinsurance since 1951

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The International Group of P&I Clubs (IG) today

The IG consists of 13 Clubs covering 90% of the world’s merchant fleet

o Norway: Gard, Skuld

o UK/Bermuda: UK Club, Britannia, Standard, Steamship,West of E, North of E, London Club,Shipowners

o Sweden: Swedish Club

o Japan: Japan Club

o USA: American Club

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International Group P&I Clubs (all clubs)

Owner Mutual GT as at 20 Feb 2006 – 2010

Source: Miller Insurance Services Ltd.

2%61% 18% 60%78%35% -16% 71% 20% 5% 34% -7% 15%5 YR Growth:

-2%11% 4% 8%17%3% 2% 12% 2% -7% 7% 12% -6%1 YR Growth:

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Market Share International Group ClubsFor selected Clubs (Mutual Owners’ P&I only)

15.3%

12.4%12.0%11.0%

8.3%7.0%

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Competitive positionFree reserves as at 20 Feb each policy year

*For 2009: Change in accounting concept to include budgeted Deferred Calls for next year, the result is anincrease of USD 42.4m in the Balance Sheet.

** For 2009: Including subordinated capital securities amounting to USD 97.9 million

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The IG - functions and legal frameworko Functions

— Claims sharing

— Collective purchase of market re-insurance cover— Pressure group acting on shipowners’ behalf

o Legal Framework— Pooling Agreement (governing claims sharing and purchase of

market re-insurance)

— International Group Agreement (securing the discipline required tooperate the Pool)

o Club Rules— Terms of entry agreed between the P&I Club and the Member;

must include exemptions and exclusions in the Pooling Agreement

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Chartered EntriesOwned Entries

First GeneralExcess

UnlimitedReinstatements

Coi

nsur

ance

25%

Rei

nsur

edby

Hyd

ra

Coi

nsur

ance

25%

Rei

nsur

edby

Hyd

ra

Protection andIndemnity

US$ 1,000m

Collective OverspillProtection

One Reinstatement

Firs

tGen

eral

Exc

ess

Un

limite

dR

ein

stat

eme

nts

US$ 20mUS$ 22mUS$ 8m

Third General ExcessUnlimited

Reinstatements Oil Pollution

Second GeneralExcess


Lower Pool

US$ 35mPrimary Charterers RI

US$ 300m

Protection and Indemnityand Oil Pollution

International Group of P&I AssociationsGeneral Excess of Loss Reinsurance Contract Structure

Owned and Chartered Entries(including Overspill Protection, Hydra Participation, Pooling and

Individual Club Retentions)12 months at Noon GMT 20th February, 2010

Lower Pool

First GeneralExcess


Second GeneralExcess


Coi

nsu

ranc

e2

5%R

ein

sure

db

yH

ydra

Individual Club RetentionLower Pool

Individual Club Retention

First GeneralExcess


Pool

Pool – Reinsured by Hydra

Pool

US$ 3,050m

US$ 2,050m

US$ 1,050m

US$ 550m

US$ 8m

US$ 30 mUS$ 50 m

US$ 1,000m

US$ 500m

US$ 500m

US$ 8mUS$ 8m

US$ 15mUS$ 50m

US$ 350m

US$ 7m

Reinsurance programme 2010

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Outline of the Pooling Agreemento Overall requirement

— The claim has arisen in connection with the operation of the ship

o Contributions factors— Tonnage declared to the Pool

— Premium income

— Loss record in the Pool

o Excluded risks – Appendix IV— War risk

— Nuclear risk (RACE)

— Blockade running

o Excluded losses – Appendix V— A number of exclusions (all included in the Rules for Ships, see Part II,

chapter 2 and Parts V and VI)

o Collective purchase of market reinsurance (clause 12)o Overspill

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Outline of the International Group Agreement (1999)o Function

— To ensure the discipline required to operate the Poolo Main features today

— The quotation procedures designed to protect a club’s existingmembership against unreasonably low premium rates being offered byother Clubs in order to attract new business

o The Quotation Procedures— The 20th of February Procedure – new club required to follow Holding

Club’s premium rate first year— The 30th of September Procedure – if agreement to transfer a ship to a

new Club is made before 30 September – the new Club can offer a newrate provided it is not ”unreasonably low”

— Quotation Procedures for New Vessels – the Holding Club(s) for a newvessel about to become a part of a fleet is the Club(s) insuring that fleet

o The Sanctions— Loss of the collective reinsurance up to USD 150 million for two years

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Owner/Assured– Buzz group break 5 minutes!

• Discuss who are the owners of a mutual P&I Club

• Discuss the benefit of being a member of mutual P&I Club

The Nordic Association of Marine Insurers 20

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Content


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Contents

This introduction to P&Iinsurance is based on the GARDHandbook on P&I Insurance,chapters 6, 7 and 8.

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The P&I insurance cover

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The P&I Insurance Cover

Key features of P&I insurance

o Developed as a direct response to shipowners’ needs

o The cover follows the ship, i.e. the claim must have arisen inconnection with the operation of an insured ship

o Very high limit of cover (sub-limits for oil pollution andpassengers and crew) and additional money available throughmember’s legal obligation to pay overspill call – totalca. USD 5.5 billion

o Indemnity cover – the club is only obliged to indemnify themember when the latter has discharged his liability to a thirdparty (the ”pay to be paid” principle)

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The P&I Insurance Cover

Named risk insurance

In contrast to a general liability insurance, the P&I covercomprises only the categories of liabilities and lossesexpressly named in the Rules, such as:

— Cargo liability

— Pollution liability

— Damage to fixed and floating objects and collision with anothership (save insofar as covered by hull insurer)

— Personal injury and death claims (including passengers and crew)

— Wreck removal liability

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Keep this in mind : The human factorGard - main causes of claims

Eng. Error1.2 %

Officer err.30.9 %

Equipm. Fail16.0 %

Mechan. Fail5.2 %

Struct. Fail14.0 %

Pilot error4.9 %

Shore error6.8 %

Other3.8 %

Under invest0.5 %

Crew error16.8 %

o Human error: Officer,

crew and pilot error -

54%, another 7% from

shore error.

o Technical Malfunction:

Mechanical, structural

and equipment failures.

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Gard P&I Additional Products

Additional liabilityinsurance needs

Core productsStandard

InternationalGroup P&I Cover

ComprehensiveCarriers Liability

Cover

ExtendedCrew Cover

ComprehensiveCharterers’

Cover

Tour-OperatorPassenger

Liability Cover

ExtendedCargo Cover

P&I and CGLcover for MOU

CGL Offshore Cover

Defence cover

Divers’ P&I Cover

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The Club’s role as claims handler

o The Club takes over the handling of claims for the Member,but always in co-operation with the Member.

o International expertise developed over a great many years.

o Use of designated local representatives - often law firms -to assist with claims handling.

o Club may provide a guarantee to prevent the arrest of theship or to have arrest lifted.

– Could be either a Club Letter of Undertaking, which iswidely recognized, or a Bank Guarantee.

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Content


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The P&I Insurance Contract:Formation and Operation

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P&I entryApplicationForm

Application form for Tank/OBO/LPG/LNG Vessel

Kindly register for P&I insurance according to the Statutes and Rules of Assuranceforeningen Gard -gjensidig - or as specially agreed:

Flag:

Specification of tanker: Parcel tanker: SBT (Marpol tanker):

Nationality of crew:

0 RDC: 4/4 RDC:

Yes, we agree to declare US oil trade according to Rule 53.2:No, we will not declare (Consequently the exclusion set out in Rule 53.2 will apply):

Registered Owner's Name and Address:

Registered for VAT – VAT number: Country prefix:

VAT – Name and address of the operating company:

US Oil Pollution Cover (Tankers/OBOs only):

Collision liabilities to be covered under P&I:1/4 RDC: Incl. FFO: Excl. FFO:

Attach or e-mail copy(ies) of or identify the contract(s) of employment:

Number of crew:Number of officers: Nationality of officers:

Give a short description of the vessel; intended trading and cargoes to be carried:

ISM certfied - If yes, please state the certifying organisation:

Name of Assured(s) to be covered - and in what capacity:

Mortgagee(s), Name and City:

Date and hour for attachment of risk:

Port of registry:

Year built: Classification: Call sign:

IMO no:Vessel: GT:

...................................................................................................................……........................Place and date Signature

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Before we move on ...

What do we want to know before this voyage ?

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The P&I Insurance Contract: Formationand Operation

Normal offer and acceptance procedures

o An application will be submitted to the Club

o The Club may reject the application or offer a premium andother terms of cover

o The Club has to consider IGA requirements

o In P&I the ship is entered for her full tonnage (in contrast tohull insurance which is a subscription market with a lead and afollower)

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The Formation of the Contract

Basic information expected to be included in the application(ref. duty of disclosure)o The individuals to be named as assureds or co-assureds

o The name of the ship(s)

o The port of registry and flag of the ship(s)

o The relevant gross tonnage of the ship(s)

o Construction details of the ship(s)

o A detailed description of the ship, including information onpassenger, cargo and tank capacity

o The intended trading areas and planned cargoes

o The number and nationalities of the officers and crew, includinginformation on the terms of employment

o Whether cover is required for collision with other ships and damageto fixed and floating objects

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The role of the broker

o Increasing volume of business through brokers

o The broker is deemed to be the agent of the insured (applicant)

o ”Broker slip” – terms and condition agreed for an entry summarisedby the broker and sent to the insurer for acceptance – bindingcontract when signed by the insurer

o The broker business is governed by special legislation (theInsurance Intermediary Directive)

o The insurer cannot pay a commission to the broker (being theagent of the insured) unless accepted by the insured – fulltransparency required

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The Marine Insurance Contract: Basic Criteria

Duty of Disclosure (Rule 6)— The Club must be able to make an informed decision about whether

to accept the risk

— The prospective Member is under a duty to disclose and represent allfacts that are material to the proposed risk

The Class and Statutory Compliance Warranty (Rule 8)— A promise by the Member that all class and flag state requirements

shall be complied with throughout the period of entry

— If these requirements are not complied with the Club is dischargedfrom all contractual liabilities from the date of the breach

Wilful Misconduct of the Assured (Rule 72)— Claims caused by the Member’s own (i.e. the top management of a

corporation) wilful misconduct or gross negligence are not covered

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Premiums – split in three components

o Estimated total calls (ETC) amounts to the estimated annual premium for aship at the commencement of the policy year

o Only a proportion (80 %) of the ETC premium will be collected during thepolicy year, this is called the “Advance Call”

o The remaining 20% (25% of the first 80%) is named the “Deferred Call”and is left outstanding pending the development of the year

o After the expiry of the year it is considered whether further premium isneeded or not to cover the claims and operating costs of the year

o If the policy year has developed better than forecast, less than theforecasted Deferred Call may be levied

o If a policy year develops worse than expected, premiums in excess of theETC may be levied, in Gard’s terminology the “Supplementary Call”

o The Supplementary Call is determined as a percentage of the AdvanceCall and there is no limit on the amount that can be levied asSupplementary Call

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Co-Assurance – four categories (Rule 78)

Operators, managers, beneficial owners and mortgagees beinginvolved or interested in the operation of the ship (Rule 78.3)

— Covered for P&I liabilities arising out of activities customarily carriedout by or at the risk of shipowners

Associated or affiliated charterers (Rule 78.4)

— Restricted to instances where the owner and charterer are part of thesame group of companies

Protective co-assurance (Rule 78.5)

— Merely an acceptance of contractual terms (”knock for knock”)

Misdirected arrow cover (Rule 78.6)

— Comprises claims which should have been directed against the owner(in theory no increased risk)

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Insurance Contract– Buzz group break 5 minutes!

• Discuss what is :

• Advance Call

Deferred Call

Supplementary Call

Estimated Total Call (ETC)

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The P&I Insurance Contract:Termination andCessation

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The P&I Insurance Contract: Terminationand Cessation

Termination & cesser

Termination by the Member (Rule 23)— At the end of the policy year

Termination by the Club (Rule 24)— At the end of the policy year; and

— in certain other cases where the member normally is in breach ofterms of entry

Cesser (Rule 25)— The entry will cease automatically where; the ship is sold; there is a

change of manager; the ship becomes a CTL; the member goesbankrupt etc

— Common features of some of the cesser grounds are that they willnormally represent an alteration of risk or that there will be a changeof control as to the operation of the ship

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Content


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Wider variety ofrisk transfersolutions andsources of capital

Changing needsfor risk transfer

Globalization of shipping

Increased importance ofsevere claims

Key trends shaping the industry

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Summing up – what do we know aboutthe marine insurance industry

o A long history

o Two very different markets have developed – historical accidentor business logic?

o Client needs are becoming more complex and increasinglyspecialised

o Marine insurance is a small part of the insurance industry andinsurance is a small part of the global financial (risk) industry

o Understand Gard’s position within the marine insurance industry

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Mutual r/iagreement

Ownershipstructure

Gard Marine& Energy Ltd.

Assurance-foreningen

Gard

Gard P&IBermudaLimited

Gard (UK)Limited

Gard(Sweden) AB

Gard (HK)Ltd

Gard(Japan) K.K.

Lingard Ltd Gard AS

Gard(Greece) Ltd

Gard Marine &Energy

Försäkring AB

SafeguardGuarantee

Co. Ltd

The Gard Membership

Service net-work

Direct insurers

Gard Re

Captive reinsurer

Gard (NorthAmerica) Inc.

100%

100%

Oy Gard(Baltic)

AB

P&I Insurance - Underwriting aspects · 4 Marine Insurance: Basic Principles and Features...

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Transcript of P&I Insurance - Underwriting aspects · 4 Marine Insurance: Basic Principles and Features...