Hull and Machinery Insurance and Protection and Indemnity Clubs

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Introduction

Marine Hull and Machinery (H&M) insurance covers the damages incurred in fires, explosions, collisions, or earthquakes in the marine cargo transport sector. Piracy is a significant concern in hull and machinery insurance around Asia and Africa. In addition to the natural and unavoidable disasters, the insurance also covers damages caused by staff negligence, cargo movement, or broken machinery. The insured must pay due diligence by ensuring that maintenance is up to date and marine staff operating machinery is well trained. The Hull and Machinery policy provides liability over collision with another ship, although it does not cover collision with other objects. The policy covers additional expenses such as sue and labor costs; however, it does not cover damages caused by nuclear reactions, terrorism, war, or any other malicious acts driven by political motives.

The Protection and Indemnity (P&I) insurance club, which originated in London, covers risks associated with the marine industry in ownership and vessel operations such as pollution or oil spillage, among others. The P&I clubs consist of ship owners, charters, ship operators, warehouse operators, and freight forwarders and protect club members from harm, illness, injury, or death of the ship owners, passengers, or crew. The insurance is mutually beneficial to the members and the P&I as they share information on risk pooling, mitigation, and representation.

Captive Insurance Market

Captive insurances main goal is to protect the owners from risks and its insured profit from underwritings; owned and controlled by the insured clients. The three most critical features of captive insurance include ship owners risking capital to form a new insurance company, achieving risk financial objectives, and working outside the commercial insurance marketplace. The insured clients gain more control and ownership over the company, deeming profitable for the insured consumer, due to the non-existing policyholders. The latter possesses a high percentage of dividends in insurance companies. Ship-owners target to own insurance when risk financing objectives are not met, hence boosting captive insurance development. Control over risk management limits capacity, maintains pricing, customizes insurance plans, and provides cost-efficient risk mechanisms (Gordon, 2019). There are two types of captive insurance; pure captives are wholly owned by clients either directly or indirectly. The sponsored captives are owned by insurers and controlled by unrelated parties to the insured.

Captive insurance is developing at a high rate due to its insured members benefits, providing full control and ownership over the insurance coverage, strategic business purpose, claims administration, and loss control dictates how claims are handled. The tailor-made services are favorable to all the beneficiaries of the captive insurance accommodating individuals. Captive insurance benefits that have helped the industry grow over the recent years include decreased dependency on commercial insurance because of the increase in the surplus (Kunreuther, 2019). Cost reduction in risk management is an added advantage as it minimizes unnecessary costs observed in the conventional market, such as acquisition fees: stabilized pricing, flexible covers, decreased government regulations, control over investments, and tax leeway on underwritings. However, despite the recent increase in captive insurance, the formation of captive insurance was slow as it was associated with a harsh insurance market when risk managers struggle to find affordable capacity. Captive insurance is generally considered a long-term investment and not a short-term strategy due to decreased risk management and the market.

Impact of Captive Insurance on Hull and Machinery Insurance in the UK

Captive insurance companies have significantly influenced the market of H&M insurance in the United Kingdom by forming diverse clients programs in the corporate and premium insurance costs. H&M insurance provides minimum flexibility on the various programs offered to allow consumers to include their preferred coverage on the premium plans (Gürses and Hjalmarsson, 2017). However, the cost of premium insurance has escalated since the traditional method received competition from captive insurance. Captives main aim was to fill the conventional insurance gap by offering third-party insurance to parent companies by focusing on risk management to minimize loss (Seltmann, 2019). H&M Insurance lost investors due to more parent companies opting for captive insurance (Knapp and Heij, 2017). The government majorly regulates H&M, controlling most of the cost of premium policies, insurance limits, commission rates, reserve amounts, tax, and capital funds. Government regulation then increases the cost of premium insurance with limited benefits to the parent company.

Hull and Machinery Insurance and P&I Interface

The P&I interface covers vary based on the insurance claim and the condition of collision, market, and the extent of damages. Both insurances are essential to ship owners since the P&I protects third-party damages while the H&M covers the ship-owners vessels damage. Hull and Machinery and P&I insurance cover complement each other when insurance vessels against collision. Parent companies often find themselves fully protected if a crash or strike occurs, decreasing repair costs (Hartanto, 2020). Claim handlers must comprehend various insurance covers, and the limitation of the report provides a broad scope of understanding to make decisions regarding insurance efficiently. The significant difference between the two insurance companies is the extent of coverage of ship owners and third-party property. However, P&I has included a full range of vessels in the cover policies to favor parent companies.

Risk Management in Insurance

Systematic risk refers to the intrinsic risk factor associated with market instability, also referred to as market risk; it is unpredictable and impossible to avoid. It causes losses in the insurance industry, which cannot lessen the risks effect. Market risks affect the insurance company and its political, economic, and financial factors (Fard and Mali, 2019). For example, the Global Financial Crisis in 2008 resulted from subprime lending, comfortable credit conditions, lack of regulation, and growth of housing investment negatively affecting the global economy. The Global Financial Crisis provoked a series of economic events to reverse market risk (Bartmann and Taylor, 2017). The reduction of lending standards to accommodate individuals with low credit scores is considered extreme risk-taking from banks.

The government responded to the global financial risk by lowering the interest rate to close to zero, financial incentives to the most affected companies, the return of mortgages, and government debt. Insurance was the most affected industry since investors were withdrawing from the market, causing a loss for companies. The Dodd-Frank regulation effect was the formation of comprehensive finance markets, monitoring systemic risks, consolidating regulatory agencies, investor protection, and improving accounting, standards, and credit rating (Akhigbe et al., 2016). The best-suited way to ensure systematic risk solutions over the short, medium, and long term include enacting comprehensive insurance strategies in four processes: risk identification, evaluation, mitigation, and emergency plan.

Risk identification analyzes several potential risks based on previous experiences or sources of the risk, such as financial, weather, political, environmental, cost, schedule, or technical. Risk evaluation examines each risk identified based on the probability of the risk occurrence and the potential damage of the trouble; understanding the impact of risk estimates the damage and cost of repair on a vessel (Georgescu et al., 2018). Potential threats are categorized into impact or likelihood. Risk mitigation aims to decrease the danger by avoidance, sharing, reduction, and transfer of risk. The emergency plan is used as an alternative method in case the mitigation of risk fails. The four processes are carried out systematically in 4 phases: initiation, planning, implementation, and closeout phase. The risk management plan is essential in ensuring threat is prevented and managed in the short, medium, and long term.

The best-suited way to ensure solutions for a systematic risk over the short, medium, and long term is through critical analysis to limit risk and create a solution through risk management of the crisis. Investments in long-term assets such as real estate, bonds, currencies, or commodities, which withstand financial turmoil, balance out the overall performance of returns and profits.

New Policy Draft Insurance Plan

The basis for the new policy draft is the interface between Marine Hull and Machinery, Nordic Marine, and the Institute Time Clauses (Hulls) 1983.

Section I  Policy OutlookRisks

This policy protects all risks associated with physical loss and damage to:

Ship-owners vessel

Essential components of insured vessels such as the propeller, hull, funnel, rudder, power generator, navigation instruments, apparatus, and annexes are guaranteed protection as part of the ship. Other protected features include accommodation sectors of the vessel, store, and mast.

Spare Parts removed from ships

Spare parts temporarily removed from the ship will be covered under this policy for a maximum period of sixty days unless prior communication is provided to the insurance in which additional payment will be required.

Pollution

This insurance covers any damages or loss caused by environmental threats or pollution hazards to the vessel, even if caused by governmental decisions to prevent pollution threats.

Risks Excluded

Exclusions of risks caused by radioactive contamination, chemical, biological and electromagnetic weapons, and war.

Limits of insurers liability

The insurer is responsible for the payment of any injured individuals in the vessel during a collision and the equivalent cost of harm caused while evading further damages to the ship. The insurer is also responsible for any loss caused to the vessel that exceeds the paid insurances total cost.

State of the insurance

The insurance length lasts for twelve months from the time and date of payment activation or any other time agreed between the client and the insurance. The state of the insurance is disqualified if the vessel is:

Damaged during travel before the expiration time

Given that prior notice has been communicated to the insurance, the cover will repair the clients vessel, given that the damage caused is an insured threat.

An additional payment of the premium cover will be required upon the total constructive or actual total cost of loss of vessel during the insurance extension. The insurance extension may last for up to three months or six months, depending on the extent of damages or repair required by the vessel. The insurance does not cover the towing costs of the boat in case of any breakdown while sailing.

Section II  General Provisions

Premium cost

The insured client is liable for the premium fee payment unless otherwise stated by the insurance. Cancelation of the premium package by the insurer is allowed in case payment is not activated upon expiry.

A two-week notice is required before the premium package expiration unless the insurer pays ahead of the time limit expiry.

Premium in the case of total loss

In the event of partial or full loss not covered by the policy, the insurer affects an equal cost of the balance of loss not covered to restore the loss created. The client must cover the difference between the premium cost and the total cost of damages to prevent insurance loss.

Reduction of premium

A reduction in the premium fees total cost is acceptable if the client requests for a shorter time than the indicated twelve months. The client affecting the insurance can be given a lower rate than the actual cost of the premium corresponding to the time requested.

Reduction of the premium cost is granted when threats compromise the vessel

A reduction of the premium cost is granted when the insured clients vessel lies at a specific location and is dormant for at least one month without movement or cargo. The policy can give a reduction, negotiation of premium, or refund of the cost.

Section III  Measure of Indemnity

Accident settlement

During accidents, a settlement fee is made and analyzed separately for each collision.

This policy covers loss or damage to risks during one accident.

When loss or damage occurs between two ports caused by environmental threats, e.g., rainstorms, ice threats, or lightning, the insurance policy should cover damages caused.

New for old

This policy shall make a settlement without regard based on new or old.

Unrepaired Damage

This policy does not cover any unrepaired damage costing higher than the insured value upon the premium accounts termination. During termination of insurance, the insurance shall not cover any damaged vessel or item of the boat that deflated in cost and quality due to negligence of unrepaired damage exceeding more than the price of market value.

Claims of the Third party

Suppose the premium does not cover the client of this policy on any liability limits. In that case, the policys total costs shall not surpass the price payable in case the policy had implemented such liability limits.

Damaged property

The insured clients damaged vessel is proportional to the value contributed to the premium cost of the insurance, and the insurer will be required to cover the cost of the balance of loss. However, the insurers account on this policy states that the client will reimburse the insurance the agreed total value equal to the contributed value.

Indemnity Payment

The premium policy shall refund payment of indemnity for the damage or loss of insured individuals within sixty days after document presentation allowing insurers to continue with payment to the insurance company, the payee, or the guarantor under this policy.

Restoration of insured cost

Payment of insurance after an accident, under this policy, the cost is automatically restored.

Conclusion

In conclusion, Hull and Machinery and Protection and Indemnity insurance policies complement each other, while the captive insurance altogether provides control to ship owners to benefit from insurance indemnity. The premium cost difference in the various insurance policies varies depending on the commission rates, insurance limits, reserve amounts, and government regulations. The captive insurance market covers the majority of the third-party damages incurred during a collision. The Global Financial Crisis in 2008 negatively influenced the global economy, causing an unstable insurance market leading to the loss of investors and insurers. Risk management is a critical element in insurance policies; analysis of risk through identification, evaluation, mitigation, and contingency plan highly minimizes the impact of damages to parent companies.

Reference List

Akhigbe, A., Martin, A.D. and Whyte, A.M. (2016) Dodd-Frank and risk in the financial services industry, Review of Quantitative Finance and Accounting, 47(2), pp. 395-415. Web.

Bartmann, R., and Taylor, P. (2017) Causes and effects of the 2008 financial crisis. Term Paper. HFU Business School, Internationale Betriebswirtschaft.

Fard, HN, and Mali, G. (2019) The impact of risk management on the performance of insurance companies, International Research Journal of Multidisciplinary Studies, 5(10), pp. 10-12.

Georgescu, D.I., Higham, N.J., and Peters, G.W. (2018) Explicit solutions to correlation matrix completion problems, with an application to risk management and insurance, Royal Society Open Science, 5(3), pp. 23-48.

Gordon, M. (2019) The benefits of a group captive, Risk Management, 66(9), pp. 16-17.

Gürses, Ö. and Hjalmarsson, J. (2017) Marine insurance. Abingdon: Routledge.

Hartanto, T.M.B. (2020) Responsibility of the Marine Hull and Machinery Company of insured claims, International Journal of Law and Legal Ethics, 1(2), pp. 85-92. Web.

Knapp, S. and Heij, C. (2017) Evaluation of total risk exposure and insurance premiums in the maritime industry, Transportation Research Part D: Transport and Environment, 54, pp. 321-334.

Kunreuther, H. (2019) The role of insurance in risk management for natural disasters, The Future of Risk Management, pp. 12-14. Web.

Seltmann, A. (2019) Global marine insurance report, 2009. Web.

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