02 January 2020
6879
6879
Marine Hull
Institute Time Clauses – Hulls Disbursement and Increased Value
In Marine Insurance Act section 5, it is stated that anyone has the right to own an insurable interest as long as the parties are part of a maritime adventure and it can be legally proven that they suffer a loss when the insured property loses or damages. It is also common knowledge that in the marine insurance world there are many parties who take part in a maritime adventure, there are ship owners, operators, and cargo owners. Where each of these parties has different interests, for example: When a ship sinks, the ship owner will suffer losses due to loss of property and loss of income, but the operator may experience losses on transportation costs or crew salaries that must be paid even though the ship has sunk. In the market, generally the risks mentioned above are included in hull interest (refer to MIA section 16) but in practice, many people are wrong and assume that the hull interest is Hull & Machinery Value only.
The effect of the practice of determining the hull interest above is that the insured is very limited in obtaining compensation, right? whereas the insured will be faced with several conditions of uncertainty other than shipping risk, such as a decrease in the market value of the ship and fluctuations in bunkering prices, port charges, and so on. It is necessary to first understand that the price of ships is not like the price of ordinary motor vehicles whose prices continue to depreciate. The price of a ship is like a commodity, depending on supply and demand. When the coal industry is increasing, automatically the demand from tugs and barges will also increase, so that with the availability of existing tugs and barges, the prices of these ships will increase. This is in line with macroeconomic principles.
The effect of the practice of determining the hull interest above is that the insured is very limited in obtaining compensation, right? whereas the insured will be faced with several conditions of uncertainty other than shipping risk, such as a decrease in the market value of the ship and fluctuations in bunkering prices, port charges, and so on. It is necessary to first understand that the price of ships is not like the price of ordinary motor vehicles whose prices continue to depreciate. The price of a ship is like a commodity, depending on supply and demand. When the coal industry is increasing, automatically the demand from tugs and barges will also increase, so that with the availability of existing tugs and barges, the prices of these ships will increase. This is in line with macroeconomic principles.
For example, in MIA section 69 paragraph 1 the calculation for a partially damaged ship is the cost of repairs, if the following conditions occur:
- H&M insured value : IDR 10,000,000,000
- H&M market value : IDR 15,000,000,000
- Repair Cost : IDR 12,000,000,000
The insured's liability is only IDR 10,000,000,000 or according to its H&M insured value, in that condition the insured suffers a loss because he does not receive compensation according to his “wealth” condition just before loss, right?
Therefore, the market finally provides space for the insured to get sufficient compensation for the loss suffered by buying an additional cover, namely the Increase Value Policy. The additional cover provided by the Increase Value Policy works when reasonable repair costs exceed the insured value, while the additional Disbursement cover is used to cover freight costs, port charges, crew wages, and other expenses. However, it should be noted that the use of these two additional covers will only be "active" for Total Loss and Constructive Total Loss conditions, in practice the purpose of the insured to use this additional cover is to reduce the premium paid, for example, see the calculation below:
Therefore, the market finally provides space for the insured to get sufficient compensation for the loss suffered by buying an additional cover, namely the Increase Value Policy. The additional cover provided by the Increase Value Policy works when reasonable repair costs exceed the insured value, while the additional Disbursement cover is used to cover freight costs, port charges, crew wages, and other expenses. However, it should be noted that the use of these two additional covers will only be "active" for Total Loss and Constructive Total Loss conditions, in practice the purpose of the insured to use this additional cover is to reduce the premium paid, for example, see the calculation below:
“A 2,000 GT barge ship has an insured value of IDR 10,000,000,000. How to calculate the premium on a market outside Indonesia usually uses the size and probability of TLO, then it is obtained as follows:
- Premium calculation based on size : 2,000 x IDR 3,000 = IDR 6,000,000
"The assumed repair cost per GT is IDR 3,000”
- Premium calculation based on TLO statistics: IDR 10,000,000,000 x 0.2% = IDR 20,000,000
"Assuming the total loss of the ship portfolio in an insurance company is 0.2%"
"Assuming the total loss of the ship portfolio in an insurance company is 0.2%"
The annual premium that must be paid by the insured of IDR 26,000,000. Is the calculation above too high? Most of the insured will be willing to reduce the insured value of their ship in order to get a cheaper premium, they want to reduce the insured value to IDR 7,000,000,000 if seen from the above calculation, becomes:
- Premium calculation based on size : 2,000 x IDR 3,000 = IDR 6,000,000
"The assumed repair cost per GT is IDR 3,000”
"The assumed repair cost per GT is IDR 3,000”
- Premium calculation based on TLO statistics: : IDR 7,000,000,000 x 0.286% = IDR 20,000,000
While the insured value is reduced, how come the premium is still the same? Linearly, if the insured value decreases, the probability of the TLO will be greater because the risk is the same, so that the 0.2% figure in the 1st calculation will be 0.286% in the 2nd calculation.
From the example of premium calculation above, it can be concluded that in a condition where the agreed closing value should be smaller than the sound market value, the rate value will certainly be higher so that the premiums received by the insurance company does not decrease. This is in accordance with what has been explained in the previous paragraph, the magnitude of the probability for Constructive Total Loss will be even greater.
From the example of premium calculation above, it can be concluded that in a condition where the agreed closing value should be smaller than the sound market value, the rate value will certainly be higher so that the premiums received by the insurance company does not decrease. This is in accordance with what has been explained in the previous paragraph, the magnitude of the probability for Constructive Total Loss will be even greater.
Then how is the practice of implementing the Increase Value and Disbursement that occurs in the Indonesian market? From the previous explanation, insurance disbursement and increase in value are anticipatory steps so that the insured does not experience losses in the event of a claim, where there is a possibility that the price of the ship will increase.
The sum insured is 25% of the sound market value at the time of closing with 10% for the Increase value and 15% for the Disbursement. From the previous explanation, it can be concluded that the total coverage value at the time of closing should be 125%, with 100% being the sound market value at closing, plus an Increase value and a Disbursement of 25%. This is where the gap is often used to reduce premiums. The practice that occurs in Indonesia is to cut the sound market value of ships at closing to 75% and increase the value of the increase and disbursement by 25%. The meaning of cutting the sound market value is, if the sound market value is supposed to be IDR 10 billion, then the sum insured value will be changed with the following details:
The sum insured is 25% of the sound market value at the time of closing with 10% for the Increase value and 15% for the Disbursement. From the previous explanation, it can be concluded that the total coverage value at the time of closing should be 125%, with 100% being the sound market value at closing, plus an Increase value and a Disbursement of 25%. This is where the gap is often used to reduce premiums. The practice that occurs in Indonesia is to cut the sound market value of ships at closing to 75% and increase the value of the increase and disbursement by 25%. The meaning of cutting the sound market value is, if the sound market value is supposed to be IDR 10 billion, then the sum insured value will be changed with the following details:
H&M (75%): IDR 7.5M, with rate 0.8%
IV/Disbursement (25%): IDR 2.5M, with rate 0.25%
Premium earned: IDR 7.5M X 0.8% + IDR 2.5M X 0.25% = IDR 66,3 million
However if you only use Hull Machinery insurance, with the same Sound Market Value Price of IDR 10 billion and with the same premium rate (0.8%), the premium calculation should be as follows:
Premium earned: IDR 10M X 0.8% = IDR 80 million
There is a difference of IDR 13.7 million that occurs when using the wrong practice of increased value and disbursement insurance. The calculation of the use of increase in value and disbursement is as follows:
IV/Disbursement (25%): IDR 2.5M, with rate 0.25%
Premium earned: IDR 7.5M X 0.8% + IDR 2.5M X 0.25% = IDR 66,3 million
However if you only use Hull Machinery insurance, with the same Sound Market Value Price of IDR 10 billion and with the same premium rate (0.8%), the premium calculation should be as follows:
Premium earned: IDR 10M X 0.8% = IDR 80 million
There is a difference of IDR 13.7 million that occurs when using the wrong practice of increased value and disbursement insurance. The calculation of the use of increase in value and disbursement is as follows:
H&M (100%): IDR 10M, with rate 0.8%
IV/Disbursement (25%): IDR 2.5M, with rate 0.25%
Premium earned: IDR 10M X 0.8% + IDR 2.5M X 0.25% = IDR 86,3 million
There is a huge difference (IDR 20 million) between the right practices and the wrong practices that occur in Indonesia. The premium received by the insurer is much lower than it should be. It is clear that the use of Increase Value and Disbursement in Indonesia is merely to reduce the premium that must be paid by the insured. This is exacerbated by the "magical" calculation of the Marine Hull premium which is which is different from the ideal calculation based on the Total Loss probability and the size of the ship. If every marine hull insurance closes like this, how long will the marine hull insurance industry in Indonesia last?
IV/Disbursement (25%): IDR 2.5M, with rate 0.25%
Premium earned: IDR 10M X 0.8% + IDR 2.5M X 0.25% = IDR 86,3 million
There is a huge difference (IDR 20 million) between the right practices and the wrong practices that occur in Indonesia. The premium received by the insurer is much lower than it should be. It is clear that the use of Increase Value and Disbursement in Indonesia is merely to reduce the premium that must be paid by the insured. This is exacerbated by the "magical" calculation of the Marine Hull premium which is which is different from the ideal calculation based on the Total Loss probability and the size of the ship. If every marine hull insurance closes like this, how long will the marine hull insurance industry in Indonesia last?
Reference: Brown, H. Robert.1993. Marine Insurance Volume 3 Hull Practice.Edinburgh:Witherby Publishing group.
Image source : securenow.in
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Author
Fahrizal Eka Satriawan, ST.
Email: fahrizal@indonesiare.co.id
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