Principles of Insurance (1) Total Slides

8/10/2019 Principles of Insurance (1) Total Slides

1/147

CHAPTER I:

BASIC CONCEPTS IN INSURANCE

Pham Thanh Ha (MA) 1


2/147

1.1. Insurance Definition

Insurance is a contract whereby, inreturn for the payment of premium by theinsured, the insurers pay the financiallosses suffered by the insured as a resultof the occurrence of unforeseen events.

1. Insurance



3/147

1. Insurance

1.1. Insurance Definition

A contract between two parties wherebyone party called insurer undertakes inexchange for a fixed sum calledpremiums, to pay the other party calledinsured a fixed amount of money on the

happening of a certain event



4/147

1.2. Nature of insurancei) Insurance provides financial protection against a

loss arising out of happening of an uncertainevent. A person can avail this protection by

paying premium to an insurance company.ii) Insurance is the risk transferring from the

insured to the insureriii) Insurance works on the basic principle of risk-

sharing.iv) The business object in the insurance sector is

risk.

1. Insurance



5/147

Example 1

SUPPOSE Houses in a village = 1000

Value of 1 House = Rs. 40,000/- Houses burning in a yr = 5 Total annual loss due to fire = Rs. 2,00,000/- Contribution of each house owner = Rs. 300/-

UNDERLYING ASSUMPTIONAll 1000 house owners are exposed to a common risk, i.e. fire



6/147

PROCEDURE

All owners contribute Rs. 300/- each as premium to thepool of funds

Total value of the fund = Rs. 3,00,000 (i.e. 1000 houses* Rs. 300)

5 houses get burnt during the year

Insurance company pays Rs. 40,000/- out of the pool to

all 5 house owners whose house got burntEFFECT OF INSURANCERisk of 5 house owners is spread over 1000 house ownersin the village, thus reducing the burden on any one of theowners.



7/147

Example 2

SUPPOSE Number of Persons = 5000 Age and Physical condition = 50 years & Healthy Number of persons dying in a yr = 50 Economic value of loss suffered by family of each dying

person = Rs. 1,00,000/-

Total annual loss due to deaths = Rs. 50,00,000/- Contribution per person = Rs. 1,200/-

UNDERLYING ASSUMPTIONAll 5000 persons are exposed to common risk, i.e. death



8/147

PROCEDUREEverybody contributes Rs. 1200/- each as premium to thepool of fundsTotal value of the fund = Rs. 60,00,000 (i.e. 5000 persons *

Rs. 1,200)50 persons die in a year on an averageInsurance company pays Rs. 1,00,000/- out of the pool tothe family members of all 50 persons dying in a year

EFFECT OF INSURANCERisk of 50 persons is spread over 5000 people, thusreducing the burden on any one person.



9/147

2. Risk

2.1. Concept:The term Risk is used to describe all the accidentalhappenings which produce a monetary loss. For

e.g.: A factory catching fire, a ship sinking etc.



10/147

2. Risk

Risk is defined here as uncertaintyconcerning the occurrence of a loss



11/147

2. Risk

2.2. Chance of loss: is defined as theprobability that an event will occur.



12/147

Methods of handling risk:

Avoidance:

You can avoid the risk of being mugged in a high-crime rate area by staying out of the area

A business firm can avoid the risk of being sued fora defective product by not producing the product

=> However, not all risks should be avoided



13/147


Loss control: consists of certain activities thatreduce both the frequency and severity of losses

Objectives:

Loss prevention: aims at reducing the probability ofloss so that the frequency of losses is reduced: Auto accidents can be reduced if motorists take a safe-

driving course and drive defensively

The number of heart attacks can be reduced if individualscontrol their weight, stop smoking, and eat healthy diets

Loss reduction: reduce the severity of a loss after itoccurrs: A department store can install a sprinkler system so that a

fire will be promptly extinguishedPham Thanh Ha (MA) 13


14/147


Insurance: the most practical method forhandling a major risk

Characteristics:

Risk transfer is used because a pure risk istransferred to the insurer

The pooling technique is used to spread the

losses of the few over the entire group so thataverage loss is substituted for actual loss.



15/147

Practice where an Insurance company(the insurer) transfers a portion of its risksto another (the re-insurer).

Legal right of the policyholders (insureds)are in no way affected by reinsurance, andthe insurer remains liable to the insuredsfor insurance policy benefits and claims.

3. Re- insurance



16/147

4. Double Insurance

Situation in which the same risk is insuredby two overlapping but independentinsurance policy.



17/147

4. Double Insurance

Is it possible to obtain double insuranceand make claim to all insurers?



18/147

4. Double Insurance

YES!

It is lawful to obtain double insurance, andthe insured can make claim toboth insurers in the event of a loss.



19/147

4. Double Insurance

How much money that insured canreceived from all insurers?



20/147

4. Double Insurance

The insured, however,cannot profit (recover more than the losssuffered) from this arrangement because

the insurers are law bound onlyto share the actual loss in thesame proportion they share the

total premium



21/147

4. Double Insurance

Mr A involves in 3 insurance policies forhis car at 3 insurance companies X, Y,and Z with insurance amounts are 300,

400, 500 million VND (insurance forphysical value of car); Assuming that thevalue of the car is 500 million VND. Define

the compensation of each insurer?



22/147

5. Co- Insurance

Insurance held jointly by two or moreinsurers.



23/147

6. Insurer/ Underwriter

The party to an insurance arrangement whoundertakes to indemnity for losses.

.



24/147

7. Insured

an insuredor policyholderis the personor entity buying the insurance andreceiving indemnity on happening of

unforeseen events



25/147

8. Subject /matter insured

The person, group, or property for whichan insurance policy is issued



26/147

The term value refers to the value of theproperty, on the same basis used inindemnifying losses; that basis is usuallyactual cash value or replacement cost.The replacement value of property is equalto the amount it would cost to fully repairor replace the property if it must bereconstructed or purchased new.

9. Insurance Value-V



27/147

10. Insurance Amount-A

a certain amount of insurance coveragethat the insured requires in the insurancepolicy, it can be a part or an entire of

insurance value



28/147

11. Limitation of liability

The largesttotal amount the insurancecompany will pay for covered losses.



29/147

11. Insurance rate

a factor used to determine the amount tobe charged for a certain amount ofinsurance coverage, called the premium.



30/147

12. Insurance Premium

Payments to the insurance company tobuy a policy and to keep it in force.

I = V(A) x R



31/147

Chapter 2

Fundamental Legal Principles


32/147

Outline

Insurance is a repayment of a random loss

Utmost Good Faith

Insurable Interest

Indemnity

Subrogation



33/147

Insurance is a repayment of arandom loss

The timing or occurrence of the loss must beuncertain.

For example, you can't know your house is going tobe destroyed in three weeks by a demolition team

and still get home owner's insurance.

To be able to fully service major claims, small claimsare not covered. This is what the deductible is for.Only damage or loss over the amount of the

deductible is covered by the insurance policy.



34/147

Utmost Good Faith

A higher degree of honesty is imposed onboth parties to an insurance contract thanis imposed on parties to other contract



35/147

Utmost Good Faith

Good faith- Let the buyer beware

Declaration of all material Informationabout the subject mater of insurance



36/147

Material Information is that information

which enables the insurer to decide:a) whether he will accept the risk and;b) if so, at what rate of premium and subject to what

terms and conditions

Breach of duty of utmost good faith arisesin two ways:

Non-disclosure of material facts- oversight,proposer thought its not essential etc.

Misrepresentation- Intentional.



37/147

Insurable Interest The legal right enjoyed by the owner of a

property to insure is called Insurable

Interest. The insurance will become null

and void, without the insurable interest.

Purposes:

To prevent gambling

To reduce moral hazard

To measure the amount of the insureds loss

in property insurance



38/147

Insurable risk:

Capable of financial measurement

A large enough amount of similar risks

Not be against public policy

Reasonable premium



39/147

Insurable interest is where you have a validreason to insure and stand to suffer a directfinancial loss if the event insured against occurs.

Insurable interest exists when an insuredderives a financial or other benefit from thecontinuous existence of an insured object



40/147

Indemnity The principle of Indemnity states that under the policy of

insurance, the insured has to be placed after the loss inthe same financial position in which he was immediatelybefore the loss.

2 fundamental purposes: To prevent the insured from profiting from a loss

To reduce moral hazard



41/147

Indemnity

Applicability:o When the losses suffered by the insured can be

measured in terms of money

o It is practicable to place the insured in the samefinancial position which he occupied before the

loss In Marine Cargo where valued polices are

issued, there is only commercialindemnity- the value declared for

insurance is accepted at the time of loss.



42/147

Subrogation

Transfer of rights and remedies from the insured tothe insurer who has indemnified the insured inrespect of the loss.

The right of an insurer which has paid a claim under

a policy to step into the shoes of the insured so asto exercise in his name all rights he might have withregard to the recovery of the loss which was thesubject of the relevant claim paid under the policy

up to the amount of that paid claim. The insurerssubrogation rights may be qualified in the policy.



43/147

Subrogation

The principle of subrogation stronglysupports the principle of indemnity

The insurer is entitled to recover from anegligent third party any loss paymentmade to the insured



44/147

Subrogation

Purposes:

Prevent the insured from collecting twice forthe same loss

Is used to hold the negligent personresponsible for the loss

Help to hold down insurance rate



45/147

CHAPTER III:

MARINE INSURANCE



46/147

Outline

Introduction

Risk, damage

Marine cargo insurance



47/147

I. Introduction

1. Marine insurance covers the loss ordamage of ships, cargo, terminals, andany transport or property by which cargo

is transferred, acquired, or held betweenthe points of origin and final destination.



48/147

2. Needs for marine insurance

Exporters and importers face all the timeuncertainties of loss of their goods.

Insurance is used to protect their financial

interests against such risks and actuallosses.

Without adequate insurance andprotection of the interests of those withgoods in transit, international trade wouldbe negatively affected.

Liability of carriers to the goods is very

limitedPham Thanh Ha (MA) 48


49/147

3. History of marine insurance

MARINE INSURANCE AS WE KNOW IT TODAY, CANBE DESCRIBED AS MOTHER OF ALL INSURANCES

IT IS BELIEVED TO HAVE ORIGINATED IN

ENGLAND OWING TO THE FREQUENT

MOVEMENT OF SHIPS OVER HIGH SEAS

FOR COMMERCE AND TRADE



50/147

PRIOR TO THE DEVELOPMENT OF MARINE

INSURANCE, THE PEOPLE ACROSS THE

WORLD, HAD A SYSTEM OF: POOLING THEIR CONTRIBUTIONS SO THAT IF ANY ONE

OF THEM SUFFERS LOSS DURING VOYAGE

HE WOULD BE COMPENSATED FROM THEPOOL.

TODAY MARINE INSURANCE HAS ASSUMED AVAST DIMENSIONS DUE TO EVER EXPANDINGTRADE ACROSS THE GLOBE.




51/147

IT INVOLVES LARGE SHIPPING COMPANIES THATREQUIRE PROTECTION:

NOT ONLY FOR THEIR COSTLY FLEET AGAINST THEPERILS OF THE SEA, BUT ALSO

TO THE CARGO BEING CARRIED IN EACH OF THESESHIPS.

THE VALUE OF EACH SHIP AND THE CARGOCARRIED THEREIN, MAY BE COSTING MILLIONS OF

USD TO THE OWNERS.




52/147

Worlds biggest Passenger-ship MS Freedomof the Seas 4300 passenger capacity inside


4 MARINE INSURANCE


53/147

4. MARINE INSURANCEMARKET

LLOYDS, A CORPORATE ESTABLISHED INLONDON, IS THE BIGGEST CENTRE FOR MARINEINSURANCE IN THE WORLD

LLOYDS WAS A COFFEE HOUSE FREQUENTED BYTHE TRADESMEN, SHIPOWNERS AND OTHERS

THE COFFEE HOUSE BECAME THE MEETINGGROUND FOR: BROKERS, INSURERS AND SHIP OWNERS FOR

NEGOTIATING THEIR BUSINESS.



54/147

LLOYDS COFFEE HOUSE

AT THE COFFEE HOUSE THEY WOULD DISCUSSVARIOUS ASPECTS OF THE SHIPPING BUSINESSINCLUDING CARGO AND SHIP INSURANCE AND:

ULTIMATELY IT STARTED TRANSACTING MARINE

INSURANCE IN A BIG WAY. WHEN THE BRITISH OCEAN LINER TITANICWHICH

SANK IN 1912, DURING HER MAIDEN VOYAGE:

WAS INSURED BY LLOYDS WHO PAIDAN

INSURANCE CLAIM OF ONE MILLION US $.



55/147

Titanic Crash


5 Classification


56/147

5. Classification

Marine cargo insurance: covers export- importgoods carriage by sea and related- reasonablecosts

Hull insurance: covers material loss of ordamage to hull and machinery, a portion ofcosts for collision liability, and otherreasonable costs.

Protection and indemnity insurance: providecover to shipowners against third- partiesliabilities in connection with the operation ofvessels



57/147

II.Risk in marine insurance

1. Risk1.1.Definition

Probability or threat of a damage, injury,liability, loss, or other negative occurrence,caused by external or internal vulnerabilities,and which may be neutralized through pre-mediated action.

Marine risks are the risks that occur on thesea/ the risks of the sea/ the risks related to anocean voyage.



58/147


Risks are of many kinds

Different risks mean different losses

And different risks are covered by different

clauses And different insurance clauses mean

different premiums

So we need to have a good understandingof the different risks and losses before weknow how to effect insurance



59/147


1.2. Types of risks1.2.1. Base on the causes

- Acts of God: vile weather, thunderstorm and lightening,tsunami, earthquake, flood, volcanic eruption, etc.

- Perils of the sea: ship striking upon the rocks, shipsinking, ship collision, colliding with iceberg or otherobjects

- Risks caused by Social- political actions: war, SRCC(strikes, riots, civil, commotions)

- Risks caused by particular actions of people: thieve,robber

- Risks caused by other sources



60/147


1.2. Types of risks1.2.2. Base on the insurance techniquea) Insured common perils: the risks that are normal insured in original

insurance clauses: Main risks:

- Stranding: a vessel is stranded when, in consequence of some

accidental or unusual occurrence, she comes in contact with the groundor other obstruction, and remains hard and fast upon it. The vessel needsan external force in order to getting off the stranding.- Sinking- Fire or explosion- Collision

- Jettison: To throw part of the cargo or gear of the vessel overboard tolighten the load and save the vessel. The owner of the jettisoned goods isentitled to a "general average," i.e., the loss is shared by the owners ofthe vessel and the owners of the cargo which was not thrown away.- Missing: British law: 3 times of ships itinerary in normal conditions (nolonger than 6 months, no shorter than 3 months)

* Auxiliary risks: theft, rain, leakage, breakage, dampness, heating, hooking,

rustingPham Thanh Ha (MA) 60

II Risk in marine insurance


61/147


b) Relatively Excluded Perils: risks that are not included in standard

insurance clauses: War, SRCCc) Absolutely Excluded Perils: risks that are not insured in any

circumstances: loss damage or expense attributable to wilful misconduct of the

Assured ordinary leakage, ordinary loss in weight or volume, or ordinary wear

and tear of the subject- matter insured loss damage or expense caused by insufficiency or unsuitability of

packing or preparation of the subject-matter insured loss damage or expense caused by inherent vice or nature of the

subject-matter insured loss damage or expense proximately caused by delay, even though

the delay be caused by a risk insured against loss damage or expense arising from insolvency or financial default

of the owners managers, charterers or operators of the vessel loss damage or expense arising from the use of any weapon of war

employing atomic or nuclear fission and/or fusion or other likereaction or radioactive force or matter.Pham Thanh Ha (MA) 61


62/147

III. Losses

Losses sustained by the insured due to the riskslisted above come from not only the loss of thegoods or the damage dine to the goods, but alsofrom the expenses the insured sustained in

rescuing the goods in danger. The losses and the damages done to the goodscan fall into total loss and partial loss

Total loss includes Actual Loss and ConstructiveTotal Loss

Partial Loss means that the loss or damage dineto the goods is only partial. Partial loss can beeither general average or particular average



63/147

Kinds of marine losses

Differenttypes of

marine losses

Total loss

Actual totalloss

Constructivetotal loss

Partial loss

GeneralAverage Loss

ParticularAverage



64/147

Total Loss

Actual total Loss: meansthe whole lot of theconsignment has beenlost or damaged or foundvalueless upon arrival atthe port of destination

Constructive total loss: isfound in the case wherethe actual loss of theinsured goods isunavoidable, or the shipor the consignment has tobe abandoned becausethe cost of recoverywould exceed the valueof the ship and theconsignment in soundcondition upon the arrivalof the port of destination



65/147

Constructive Total Loss

Notice of abandonment (NOA): is a notice inwhich the insured commits to give up all of hisright related to the subject- matter insured to theinsurer in order to be fully compensated.

Requirements: Where notice of abandonment is accepted theabandonment is irrevocable. The acceptance of thenotice conclusively admits liability for the loss and thesufficiency of the notice.

NOA is unnecessary when the consignments havealready reached final destination and are in actualtotal loss



66/147

Partial Loss

Particular Average: losses of each insuredinterest individually due to acts of God orPerils of the sea

Insurers liability: compensate for both ofthe losses and reasonable costs causedby particular average.

Goods: Reasonable costs are the cost usedfor saving cargo or reducing its damagedmeasurement.



67/147

Partial Loss

General Average: the losses/ damages caused byspecial expenses and sacrifices that intentionally andreasonably conducted to save the vessel, cargo andfreight from a threat in the common ocean voyage.

There is a general average act when, and only when,any extraordinary sacrifice or expenditure is intentionallyand reasonably made or incurred for the common safetyfor the purpose of preserving from peril the property

involved in a common maritime adventure.=> General Average are for the common safety of all of the

interests (cargo, vessel, freight)



68/147

Examples

Cargo, freight:

Jettison from underdeck.

Jettison from on deck.

Water or other means used to extinguish afire on board ship.

Discharge and re-shipment for the purpose of

floating a stranded ship when in a position ofperil



69/147

Examples

Ships materials: Masts, spars, sails or rigging cut away for the

common safety.

Chains and anchors slipped to avert a threateningperil.

Damage to a vessel's machinery, ropes, winches,windlass and other gear sustained in endeavours tofloat a stranded ship when in a position of peril.

Damage done in the efforts to extinguish a fire onboard or in the process of jettisoning cargo.



70/147

Examples

Expenditure: Expenses incurred in floating a stranded ship

in peril.

Inward expenses entering a port of refuge torepair damage to ship.

Cost of discharging cargo at a port of refugefor the purpose of repairing damage to ship.

Cost of warehousing, re-shipment of cargoand outward expenses leaving the port ofrefuge.



71/147

General Average

Essential features: The loss must be voluntary

It must be properly made

It must be extraordinary in its nature

The object of the sacrifice or expenditure must benothing other or less than the common safety of shipand cargo

There must be imminent danger, and the object must

be the attainment of safety The loss must be the direct result or reasonably the

consequence of the act causing it



72/147

General Average

Contents: GA Sacrifices: to sacrifice properties for the rest ones. GA Expenditures: consequent costs of GA act or

expenditures concerning GA act: Salvage cost Temporary repairs cost Cost at port of refuge Wages and maintenance of master, officers and crew

reasonably incurred and fuel and stores consumed during theprolongation of the voyage occasioned by a ship entering a

port or place of refuge or returning to her port or place ofloading Interest of 7% shall be allowed on expenditure, sacrifices and

allowances in general average until three months after thedate of issue of the general average adjustment



73/147

General Average

Ship-owner/ masters liabilities: Form GA Notice

Arrange survey service to assess the measure ofdamage

Send average bond and average guarantee

Arrange GA adjuster

Form Sea Protest (if applicable)

Cargo owners liabilities: Declare value of the goods

Receive average bond and average guarantee



74/147

General Average

Legal issues: York Rules 1864

York- Antwerp 1924

York- Antwerp 1950, 1974, 1990, 1994, 2004



75/147

General Average

Amendments of York- Antwerp Rules 2004: Rule VI: salvage remuneration is not included in GA

Rule XX: A commission of 2 per cent. on GA disbursements,other than the wages and maintenance of masters, officers andcrew and fuel and stores not replaced during the voyage is not

included in GA Rule XXI: Interest shall be allowed on expenditure, sacrifices

and allowances in GA until three months after the date of issueof the general average adjustment. Each year the Assembly ofthe Committee Maritime International shall decide the rate ofinterest which shall apply. This rate shall be used for calculating

interest accruing during the following calendar year. Rule XXIII: limitation of claims: 1 year after the date upon which

GA adjustment was issued or 6 years from the date oftermination of the common maritime adventure. These periodsmay be extended if the parties so agree after the termination of

the common maritime adventurePham Thanh Ha (MA) 75


76/147

General Average

GA adjustmentArrange a GA adjuster

Contributing interests: vessel, cargo, unpaid

freight/freight at risk



77/147

General Average

Calculation:

Step 1:Determine GA value, which consistsof GA sacrifices and expenditures

If goods are sacrificed in GA act, value of thegoods is calculated based on loading/ unloadingvalue or the one in commercial invoice. It includesinsurance premium and freight, except one case

when cargo owner is not liable for paying thefreight.


G


78/147

General Average

Step 2: Determine total value ofcontributing interests: consists of value ofall interests in vessel that were saved by

GA act, including properties sacrificed inGA act.

Those damages belong to particular average

occurred before the GA act are not included incontributing value/ after the GA act areincluded in contributing value


G l A


79/147

General Average

Step 3: Determine contributing rate:Rate = total GA value/ total Contributing

value

Step 4: Determine contributing value of eachinterest

C = Contributing rate X contributing value

Step 5: Determine financial result (actual

income/ expenditure of ship owner/ cargo ownerafter deducting value of the properties orexpenditures spending in GA act


III M i i


80/147

III. Marine cargo insurance

1. Cargo needs to be insured

- High probability of risk occurring invoyage

- Carriers liability is very limited

- Marine cargo insurance is a custom ininternational trade


M i i


81/147

Marine cargo insurance

It provides insurance cover in respect ofloss of or damage to goods during transitby rail, road, sea, or air


2 I li bilit t th d


82/147

2. Insurers liability to the goods

2.1.Introduction of insurance clauses

2.1.1. Definition: Set of terms for cargoinsurance policies voluntarily adopted as

standard terms by many internationalmarine insurance organizations.

2.1.2. Institute Cargo Clauses- ICC: issued

by Technical and Clauses Committee ofInstitute of London Underwriters (ILU)


2 I li bilit t th d


83/147


ICC 1963: FPA- Free from Particular Average

WA- With Particular Average

AR- All Risks

WR- War Risks

SRCC- Strike, Riot, and Civil Commotion


2 I li bilit t th d


84/147


ICC 1982: C

B

A

WR

SRCC


2 I li bilit t th d


85/147


2.1.3. Cargo Clauses of Vietnam

- QTC 1965: FPA, WA, AR

- QTC 1990: C, B, A


2.2. Scope of cover- ICC 1982 &


86/147

2.2. Scope of cover ICC 1982 &QTC 1990

2.2.1. Risks Cover C clause: this insurance covers loss of or damage to the

subject- matter insured reasonably attributable to: Stranding, sinking, fire or explosion, collision

discharge of cargo at a port of distress

overturning or derailment of land conveyance

Sacrifice in and contribution to GA and reasonable expenditures(salvage

Jettison

Missing Such proportion of losses sustained by ship owners as is to bereimbursed by the cargo owners under the contract ofaffreightment Both to blame Collision clause




87/147

2.2. Scope of cover ICC 1982 &QTC 1990

B clause C

earthquake volcanic eruption or lightning

Washing overboard entry of sea, lake or river water into vessel

craft hold conveyance container liftvan orplace of storage

total loss of any package lost overboard ordropped whilst loading on to, or unloadingfrom, vessel or craft.




88/147

pQTC 1990

A Clause: B

Auxiliary risks: theft, rain- water, leakage,

breakage, dampness, heating, hooking,rusting, malicious damage (not by insured),piracy




89/147

pQTC 1990

A, B, C are official clauses Special Clauses: WR, SRCC Exclusions:

Contraband

Willful misconduct of the assured Deviation Delay Inherent vice or nature of subject- matter insured

Unseaworthiness of vessel Insolvency or financial default of the owner or theoperator of the vessel




90/147

pQTC 1990

2.2.2. Duration: Transit Clause from warehouse towarehouse

- Stage from port of discharge to final warehouse:insurance policy terminates either:- On safely delivery to the final warehouse, or

- On the expiry of 60 days after completion of discharge- Departure warehouse: place of storage at the place

named herein for the commencement of the transit- Final warehouse:

- Final warehouse owned or managed by the assured, or

- Store other than in the ordinary course of transit, or- Store using for allocation or distribution, or- Store named in insurance policy


3. Marine cargo insurance


91/147

gpolicy

Who can buy a marine cargo insurancepolicy?

Contract of sale: Legal contract for exchange

of goods, services or property to beexchanged from seller to buyer for an agreedupon value

The contract of sale determines who buy thepolicy

The most common contracts of sale are: FOB,CFR and CIF


Contract of sale


92/147

Contract of sale

FOB: Buyer pays freight, buyer arrangesinsurance

CFR: Seller pays freight, buyer arranges

insurance CIF: Seller pays freight, seller arranges

insurance



93/147

In marine cargo insurance, the personhaving insurable interest at the time of losscan only recover

Marine cargo policy are freely assignable.Unlike other policies, there is no need totake insurance companys consent for

transferring policy to new buyer


Different kinds of marine cargo


94/147

gpolicy

Voyage policy: insurance policy/ insurancecertificate

Open cover policy: large export/import

oriented industry usually prefer open coveragreement as they have to makenumerous regular shipment who would

otherwise find it very inconvenient toobtain insurance cover separately for eachand every shipment



95/147

A marine cargo open cover insurancepolicy is an agreement between amerchant and an insurance company to

insure all goods in transit within theagreement, until either party cancel theagreement


Different kinds of marine cargo


96/147

gpolicy

Valued policy

Unvalued policy


4. Content of marine cargo


97/147

gpolicy

Insurance value

V = C + I + F + (a) = CIF + (a) (1)

I = V x R = CIF x R (2)

Replace (2) to (1)

CIF = C + CIF x R + F

CIF(1-R) = C + FV = CIF = (C+F)/(1-R) (a=0)

V = (C+F)(1+a)/(1-R) (a=10%)Pham Thanh Ha (MA) 97

Content of marine cargo policy


98/147


Insurance amount

A V

A = V = (C+F)/(1-R) (a=0)

A = V = (C+F)(1+a)/(1-R) (a=10%)




99/147


Insurance premium

I = A (V) x R = (C+F) R/(1-R)

I = (C+F)(1+a)R/(1-R)


IV Marine Hull insurance


100/147

IV. Marine Hull insurance

1. Subject- matter insured:a) Hull and machinery insurance is to protectthe shipowners investment in the ship. It is

basically a property insurance which covers theship itself, the machinery and equipment. Theowner will be protected for losses caused byloss of or damage to the ship and its equipment



101/147

b) Furthermore, the insurance covers someliabilities, normally collision liability with anothership (known as RDCRunning Down Clause)

and sometimes also liability for colliding withother objects than another ship (known asFFO - Fixed and Floating Objects).



102/147

c) The third part of the insurance is cover forsalvage and general average contributions.



103/147

Types of vessels General Cargo VesselBuilt for specific purpose like car

carriers, live stock carriers, log carriers, heavy lift

vessels- Liners or Tramps

Dry Bulk carriersHeavy weather damage

Liquid Bulk carriers- shorter life, fire & explosion, risk of

pollution

Passenger vesselsfire damage

Container vesselsloss of containers

Offshore Oil and Gas Exploratory unitsblow out

Fishing vesselsmoral hazard

Other vessels like Tugs, Barges, Supply vessels, Yachats



104/147

Types of Policies Hull and Machinery Policy

Freight Policy

Disbursement and Increased Value Policy

Loss of Hire Policy Builders Risk Policy

Ship Repairers Liability Policy

Charterers Legal Liability Policy

Mortgagee Interest Insurance Policy

Port Package policies

War and strike polices



105/147

2. Typical hull and machinery claims include: Total loss of the ship

Damage to the ship, engines and equipment

Explosions and fires

Groundingsdamage to the ship, salvage of theship and possible contribution in general average

Collisionsdamage sustained to the ship andsometimes also liability towards the other ship (RDC)

Striking other objectsdamage inflicted to own shipand sometimes also liability towards the owners of theother object (FFO)



106/147

The insurers will pay the shipowner for the cost ofrepairs to the ship after the damage has been surveyedand tenders from repair yards submitted.

The shipowner will, however, have an agreed amount

referred to as the deductible which has to be paid byhim before a claim against his insurance policy issubmitted.

For example, if the deductible is USD 100,000 and a

claim for repairs is USD 300,000, the insurers willcompensate the owner for USD 200,000.


Hull insurance market


107/147

Hull insurance market

Hull and machinery cover is often arranged and placed in theinsurance market by a professional insurance broker.

It is quite common that the insurance cover is spread to many

insurers in various countries.

The insurers in the hull and machinery market are either

companies or syndicates. The company or the syndicate willhave an underwriter who signs the policy or the slip produced

by the broker for his share of the cover.

The biggest single market for marine insurance is Lloyds in

London. Lloyds consists of a number of syndicates writing

shares on insurance covers. The company market is dominatedby Norway and Scandinavia, but also insurers in USA, France,

Italy, Japan and Korea are very active in the marine market.


Main Types of Marine Hull Clauses


108/147

ITC Hull 1/10/83 ITC Hull 1995

ITC Hulls Disbursement & Increased Value (

TL including excess liabilities) ITC Hulls TL,GA, 3/4th Collision

ITC Hulls Port Risk 20-7 87

Institute Builders Risk Clauses 1-6-1988 Institute Yacht Clauses


Institute Time clauses 1995


109/147

Institute Time clauses 1995

1. Coverage1.1 This insurance covers total loss (actual or constructive) ofthe subject-matter insured caused by

1.1.1 perils of the seas rivers lakes or other navigable waters

1.1.2 fire, explosion1.1.3 violent theft by persons from outside the Vessel

1.1.4 jettison

1.1.5 piracy

1.1.6 contact with land conveyance, dock or habour equipmentor installation

1.1.7 earthquake volcanic eruption or lightning

1.1.8 accidents in loading discharging or shifting cargo or fuelPham Thanh Ha (MA) 109


110/147

1.2. This insurance covers total loss (actual or constructive) ofthe subject-matter insured caused by

1.2.1 bursting of boilers breakage of shafts or any latent defect inthe machinery or hull

1.2.2 negligence of Master Officers Crew or Pilots1.2.3 negligence of repairers or charterers provided suchrepairers or charterers are not an Assured hereunder

1.2.4 barratry of Master Officers or Crew

1.2.5 contact with aircraft, helicopters or similar objects, orobjects falling therefrom provided that such

loss or damage has not resulted from want of due diligence bythe Assured, Owners, Managers or Superintendents or any oftheir onshore management.


Collision and liabilities of different parties


111/147


TA TB TA TB

HA HB



112/147


TA TB TA TB

HA HB


113/147

This insurance is extended to indemnify theAssured against such proportion of liability underthe contract of affreightment Both to Blame

Collision Clause as is in respect of a loss

recoverable hereunder. In the event of any claimby shipowners under the said Clause the

Assured agree to notify the Underwriters who

shall have the right, at their own cost andexpense, to defend the Assured against suchclaim.


a y o mar ne cargoinsurers
http://www.addthis.com/bookmark.php?v=12&winname=addthis&pub=vinamaso&s=&url=http://www.vinamaso.net/forum/viewtopic.php?f=143&t=643&title=Di%E1%BB%85n%20%C4%91%C3%A0n%20H%C3%A0ng%20H%E1%BA%A3i%20Vi%E1%BB%87t%20Nam%20%E2%80%A2%20Xem%20ch%E1%BB%A7%20%C4%91%E1%BB%81%20-%20Both%20to%20blame%20collision%20Clause%20in%20Shipping%20Insurancehttp://www.addthis.com/bookmark.php?v=12&winname=addthis&pub=vinamaso&s=&url=http://www.vinamaso.net/forum/viewtopic.php?f=143&t=643&title=Di%E1%BB%85n%20%C4%91%C3%A0n%20H%C3%A0ng%20H%E1%BA%A3i%20Vi%E1%BB%87t%20Nam%20%E2%80%A2%20Xem%20ch%E1%BB%A7%20%C4%91%E1%BB%81%20-%20Both%20to%20blame%20collision%20Clause%20in%20Shipping%20Insurance


114/147

insurers

If cargo owner has not receivedcompensation:

Loss/ damage in collide accident

proportion of liability under the contract ofaffreightment Both to Blame Collision Clause

If cargo owner has already received a portionof compensation:

The rest part of Loss/ damage in collide accident proportion of liability under the contract of

affreightment Both to Blame Collision Clause


Liability of marine hull insurers:


115/147

Insured vessel: loss/damage of ship itself,machinery and equipment



116/147

Other vessel: The Underwriters agree to indemnify the Assured forthree-fourths of any sum or sums paid by the Assured to any otherperson or persons by reason of the Assured becoming legally liableby way of damages for:

Loss of/damage to ship itself, machinery and equipment

Loss of/damage to cargo and other property on other vessel delay to or loss of use of any such other vessel or property

thereon

general average of, salvage of, or salvage under contract of, anysuch other vessel or property thereon,

where such payment by the Assured is in consequence of thevessel hereby insured coming into collision with any othervessel.

That above amount of money is not exceeded three- fourthinsurance amount of insured vessel.Pham Thanh Ha (MA) 116


117/147

Provided always that this Clause shall in no case extend toany sum which the Assured shall pay for or in respect of

removal or disposal of obstructions, wrecks, cargoes or anyother thing whatsoever

any real or personal property or thing whatsoever exceptother vessels or property on other vessels

the cargo or other property on, or the engagements of, theinsured vessel

loss of life, personal injury or illness

pollution or contamination of any real or personal property orthing whatsoever (except other vessels with which the insuredvessel is in collision or property on such other vessels).


P&I Insurance


118/147

P&I Insurance

Protection and Indemnity insurance, or P&I as it is usuallycalled, is shipowners insurance cover for legal liabilities to

third parties

Third parties are any person, apart from the shipowner

himself, who may have a legal or contractual claim against the

ship P&I insurance is usually arranged by entering the ship in a

mutual insurance association, usually referred to as a club.

Shipowners are members of such clubs.

Legal liability is decided in accordance with the laws of the

country where an accident takes place The P&I insurance cover for contractual liability is agreed at

the time the owner requests insurance cover from the club and

is usually in accordance with the owners responsibility under

crew contracts or special terms relating to the trading pattern

of the vessel.


Meaning of term P&I


119/147

Meaning of term P&I

Protection: the insurance also covers assistance when a shipis involved in an accident and the shipowner and his Masterneed help

Indemnity: P&I insurance is an indemnity type of insurance, the shipowner (or

member of the club) must demonstrate his loss before the club will payout (or indemnify him) under the terms of the insurance policy

the club never assumes the owners liability, therefore technically the

owner (or member) is always responsible for payments

the club takes over the business of handling claims and ensuring that

payments are correctly made


History of P&I insurance


120/147

History of P&I insurance

Protection & Indemnity Insurance (P&I Insurance) developed fromthe old Hull Clubs in England in the eighteenth century

One century later, With the increase of liabilities arising from

shipping activities which were unfortunately excluded by the hull

clubs, it was the result of an urgent need for shipowners to seek

some new mechanism to protect their potential liabilities in their

business activities

P&I club came into the world in order to dealt with those things

that excluded from Hull insurance: i.e. third party liabilities and the

rest part of collision liabilities

P&I Club has become one kind of mutual insurance with its own

legal capacity

modern P&I Insurance not only covers the part of collision

liabilities which had once been excluded by the hull insurers but

also includes liabilities relating to cargo claims, liabilities relating

to personal injury, oil pollution liabilities, as well as some costs

and expenses arising from the relevant casualties


Mutuality principle of P&Ii


121/147

insurance

In respect of the organization of insurance

Members of P&I Clubs have a dual role as

both assureds and insurers P&I Insurance is not profit-making, all the

money raised is from the members and will beused for the members as well



122/147

It is the members themselves to share the losses The operational principle of P&I Clubs is to balance all the

calls received from the members and the liabilities themembers incur in each policy year

P&I Club would not operate on borrowing, the payment bythe members is very important to P&I Clubs

the clubs also take strict measures to the member: i.e.theclub will refuse to provide guarantee, or decline thesettlement of claim, even more cancel the insurance

contracts in the case that the member fails to pay hismember fee in time



123/147

The fund of the club The club fund plays a very important role in

the operation of P&I Insurance, and it is

usually collected by levying calls from themembers

The calls are used in P&I Insurance instead

of the premiums- an agreement that each

member should bear his aliquot share of thelosses of the year covered by the policy



124/147

Statistical loss records


125/147

S a s ca oss eco ds

A P&I club will keep records for each individual ship entered with theclub.

These records are normally based on the last five insurance years

and provide an accurate record of all payments made by themember in the form of premiums

all monies collected by the member in the form of compensationpaid to him by the club and all other costs.

Over a fi ve-year period records show: / The amount of premiums paid in by the member

/ The amount of money paid out for market reinsurance

/ The amount of money paid back to the owner as compensation / Other costs and the amount estimated for claims not settled


Coverage of P&I insurance


126/147

g

Liability in collision accident: insures forthe rest part of collision liabilities thatexcluded from Hull insurance




127/147

g

LIABILITY FOR DAMAGE TO CARGO




128/147

g

DEATH AND PERSONAL INJURY Any person injured on your shipcrew, stevedores,

pilots or passengers, for example may allege thatyour ship was unsafe. The injured person could

decide to sue the ship and her owners and demandhuge sums of money as compensation

It is necessary for a Master and his senior officers to

have a good idea of what his P&I clubs rules state on

the insurance cover for personal injury, illness andloss of life.




129/147

g

REPATRIATION OF SICK OR INJUREDCREW AND HOSPITAL EXPENSES

P&I insurance also covers a shipowners

liability to pay for the costs of repatriatingcrew members who become sick or areinjured on board. The insurance also coversthe crews hospital bills and costs of sending

replacement personnel to the ship ifnecessary



130/147

LOSS OF CREW MEMBERS PERSONAL EFFECTS P&I insurance also covers the owners liability for loss

of crew belongings in cases of shipwreck or fi re on

board.

The cover only applies to items which are deemed tobe reasonable for any crew member to have with himon board.

A crew member travelling with unusually expensive

items, such as laptop computers, gold watches etcshould make sure that he has such items separatelyinsured.




131/147

g

STOWAWAYS, REFUGEES ANDPERSONS SAVED AT SEA




132/147

g

POLLUTION Oil from your ship which pollutes a harbour,

dock or waterway will have to be cleaned up.

Clean-up costs will be charged to the ship andfines may be imposed on the ship, the Master,and the Chief Engineer. Your ship could bearrested, and the owners required to establish

some form of security acceptable to the portauthorities.




133/147

g

WRECK REMOVAL AND OBSTRUCTION The standard insurance shall cover liability

and costs arising out of the raising, removal,

destruction or marking of the wreck of theentered vessel, her equipment, bunkers orcargo lost as a result of a casualty, in so faras the raising and other operations are

compulsory by law, or necessary to avoid orremove a hazard or obstruction to navigation,or the costs are legally recoverable from themember Pham Thanh Ha (MA) 133



134/147

g

GENERAL AVERAGE CONTRIBUTIONSCARGO

The standard insurance shall cover the

members loss in respect of general averageexpenditure and special charges which shouldbe paid by the cargo interest or some otherparty to the maritime adventure but which are

not legally recoverable solely by reason of abreach of the contract of carriage




135/147

g

FINES Since fines are imposed for breaches of criminal law, they are

generally not covered by insurance. However, P&I clubs doindemnify members for fines imposed in a few very specific cases.

Rule

P&I insurance normally provides cover for fines imposed for breach of immigration laws

inaccuracies in cargo documentation

accidental pollution

smuggling or infringement of customs laws

The club only provides cover for fines imposed on the member, notthe crew. However, the club does have a discretion to cover members

if they pay a fine imposed on the master or crew because they are

legally obliged to do so, or because the club accepts that it was

reasonable to do so Pham Thanh Ha (MA) 135


136/147

CHAPTER 4:

INTRODUCTION TO RISKMANAGEMENT

Meaning of risk management


137/147

g g

Risk management is a process thatidentifies loss exposures faced by anorganization and selects the most

appropriate techniques for treating suchexposures

Riskloss exposure: is any situation or

circumstance in which a loss is possible,regardless of whether a loss occurs


Objective of risk management


138/147

Pre-loss objectives: Economy: the firm should prepare for potential losses

in the most economical way (analysis of the cost ofsafety programs, insurance premium paid, the cost

associated with the different techniques for handlinglosses)

Reduction of anxiety: certain loss exposure can causegreater worry and fear for the risk manager and key

executives Meeting legal obligations: i.e. government regulations

may require a firm to install safety devices to protectworker from harm, to dispose of hazardous waste

materials properly


Objective of risk management


139/147

Post- loss objectives: Survival of the firm: after loss occurs, the firm can

resume at least partial operations within somereasonable time period

continue operating: the ability to continue operatingafter a loss is very important, otherwise, business willbe lost to competitors

Stability of earnings: earning per share can be

maintained if the firm continue to operate Continued growth of the firm

Minimize the effects that a loss will have on otherpersons and on society


Steps in the risk managementprocess


140/147

process

Identify loss exposures Analyze the loss exposures

Select the appropriate technique for

treating loss exposure Risk control: Avoidance, Loss prevention,

Loss reduction

Risk financing: Retention, Noninsurancetransfers, Commercial insurance

Implement and monitor the risk

management program


Identify loss exposures


141/147

This step is to identify all major and minor loss exposures, itinvolves a painstaking analysis of all potential losses:

Property loss exposures

Liability loss exposures

Business income loss exposures Human resources loss exposures

Crime loss exposures

Employee benefits loss exposures

Foreign loss exposures Market reputation and public image of the company

Failure to comply with government laws and regulations


Identify loss exposures


142/147

A risk manager has several sources of information that he canuse to identify the preceding loss exposures:

Risk analysis questionnaires: risk manager has to answer

numerous question that identify major and minor loss

exposures

Physical inspection: a physical inspection of companyplants and operations can identify major loss exposures

Flowcharts: show the flow of production and delivery that

can reveal production bottlenecks where a loss can have

severe financial consequences for the firm

Financial statement: identify major assets that must beprotected, loss of income exposures, and key customers

and suppliers

Historical loss data: historical and departmental loss data

over time can be invaluable in identifying major loss

exposures


Analyze the loss exposures


143/147

This step involves an estimation of the frequency andseverity of loss. Loss frequency refers to the probable

number of losses that may occur during some given time

period. Loss severity refers to the probable size of the

losses that may occur

various loss exposures can be ranked according to theirrelative importance

The risk manager can select the most appropriate

technique, or combination techniques, for handling each

exposure- Maximum possible loss is the worst loss that could

happen to the firm during its lifetime

- Maximum probable loss is the worst loss that is likely tohappen Pham Thanh Ha (MA) 143

Select the appropriate technique fortreating loss exposure


144/147

Risk control: Avoidance: a certain loss exposure is never

acquired, or an existing loss exposure is

abandoned => the firm may not be able to avoid

all losses, it may not feasible or practical to avoidthe exposure

Loss prevention: refers to measures that reduce

the frequency of a particular loss

Loss reduction: refers to measures that reducethe severity of a loss after is occurs




145/147

Risk financing: Retention: the firm retains part or all of the

losses that can result from a given loss,provided that:

No other method of treatment is available

The worst possible loss is not serious

Loss are highly predictable




146/147

Non-insurance transfer: is a method other thaninsurance by which a pure risk and its potential financialconsequences are transferred to another party.

Insurance:

Selection of insurance coverage Selection of insurer

Negotiation of terms

Dissemination of information concerning insurance

coverage Periodic review of the program


Benefits of risk management


147/147

The pre-loss and post- loss risk management objectives are moreeasily attainable

The cost of risk is reduced => increase companys profit (a risk

management tool that measures certain costs- includes premiumspaid, retained losses, loss control expenditures, outside risk

management services, financial guarantees, internal administrationcosts, and taxes, fees, and certain other expenses

A firm may be able to enact an enterprise risk management programthat treat both pure and speculative lloss exposure

Principles of Insurance (1) Total Slides

Documents

Transcript of Principles of Insurance (1) Total Slides