Import - Export Management

IMPORT - EXPORT MANAGEMENT M.Sc.
Uyen NGO
School of
Industrial Engineering and Management
IMPORT EXPORT MARINE INSURANCE April 2021
Source: National Economics University – NEU Distance Education Centre

LEARNING OBJECTIVES Title 1
Section ABC
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Section ABC
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Section ABC
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Section ABC
I M P O RT - MANAGEMEN
E X P O RT T
• Understand concepts relating to marine insurance

• Distinguish types of risks and losses
• Understand classifications of marine insurance
• Settle the claim under Marine Insurance
M.Sc. Uyen NGO School of Industrial Engineering and Management 2

1. UNDERSTANDING MARINE INSURANCE Title 1
Section ABC
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Section ABC
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Section ABC
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E X P O RT T
Definition: The contract of marine insurance is a special (insurance)

contract of indemnity which protects against physical and other losses
to moveable property and associated interests, as well as against
liabilities occurring or arising during the course of a sea voyage.

Title 1 Title 1 Title 1 Title 1
Section ABC Section ABC Section ABC Section ABC
E X P O RT T
TYPES OF MARINE INSURANCE

 Hull insurance: insurance of the vessel with its gear.
 Cargo insurance: insurance of goods carried by sea.
 Insurance against the liability of the carrier: protection and
indemnity (P & I Clubs); compulsory insurance (e.g. CLC 1992, HNS
1996, Bunker 2001, Athens 2002, etc.); voluntary insurance (e.g.
liability for cargo).
 Other types of marine insurance: e.g. freight, salvage expenses,
general average contributions.

E X P O RT T
INSURANCE MARKET – THE PLAYERS

1. The assured/Insured
The buyers of marine cargo insurance are parties who move cargo around the world -
mainly exporters and importers. The assured pays an insurance premium to the insurer,
which provides the right to claim compensation in the event of loss or damage arising
from any of the risks covered by the particular insurance policy.
2. Underwriter
The sellers of marine insurance are the underwriters who may be local company
underwriters if they work for one of the companies active in the marine insurance field.
Marine underwriters are specialists in assessing risks relating to goods in transit. In
return for a premium, the underwriter in effect 'takes over' the whole, or portion, of
the assured's risk.
E X P O RT T
3. Insurance company/Insurer
An insurance company employs underwriters who transact business on behalf of
the company
4. Insurance broker
Insurance business is usually conducted through intermediaries, known as
insurance Brokers – on behalf of the buyer.
5. Claims Adjusters/Surveyors
Loss adjusters are insurance claims specialists, usually engaged by insurance
companies.

E X P O RT T
Why marine cargo insurance is necessary?
By reasons: Natural disasters, Accidents, Human interventions
Risks
By insurance operation: Main risks insured, Miscellaneous risks
possibly insured, Risks insured in special case, Exemption risks
Insured risks must be direct reasons of damage (only damages

derived directly from insured risks are compensated).

E X P O RT T
Risk by reasons Risk by insurance operation

Natural disasters: floods, hurricanes, Main risks insured: risks that are insured
tornadoes, volcanic eruptions, following normal insurance conditions:
earthquakes, tsunamis… crashing, explosion & firing, shallow-
draught, shipwrecked
Accidents: crashing, explosion, shallow- Miscellaneous risks possibly insured: wet
draught… by rain, breaking, flattening, rust, dirty,
thief, robbing,…
Human interventions : thief, war, labor Risks insured in special case: war, strike..
strike.. (extra fee for these risks)
Exemption risks (not insured): smuggle,
unqualified packaging, breaking Im-Ex
rules,..

E X P O RT T
By damage level: Partial loss, Total loss
Loss
By liability: Personal loss, Common loss
 Total loss: This marine loss category shows that the insured goods have
lost 100% or near-100% of their value. The category is further divided into
Actual Total Loss and Constructive Total Loss in Marine Insurance.

E X P O RT T
Actual Total Loss: To get quantified as an actual total loss, one or more of the
following conditions must be met:
•The insured cargo or the goods are entirely damaged or damaged to an extent where they
cannot be repaired.
•The insured cargo or the goods are in a state that the insured business cannot access
altogether.
•The vessel carrying the cargo has gone missing, and there are no reasonable chances of its
retrieval.
Constructive Total Loss in Marine Insurance: This is one of the trickiest marine
losses to understand but can be simplified with an illustration.

E X P O RT T
Example of Constructive Total Loss in Marine Insurance:

Building on the same example – imagine that the cargo carrying your shipment was
abducted by Somalian pirates. They are demanding a ransom of over $6 millions from
the shipping company for releasing the ship. The shipping company understands that
the combined value of goods on board the vessel and the small vessel itself is valued at
not more than $4.8 millions in total, including your vintage furniture.
In this case, if you successfully file a claim for your vintage furniture, the surveyor will
term it as a constructive total loss as the cost of retrieving the goods is more than the
price of the goods itself.

E X P O RT T
 Partial Loss: This type of loss quantification requires discretion and subjective
decision-making at the hands of the surveyor.
Particular Partial Loss: One of the most common forms of marine losses
quantified under this category is Particular Partial Loss. If the goods incurred partial
damage for a reason covered under the marine insurance policy, it will be deemed a
particular partial loss.
General Average Loss: This type of loss is quantified only when the goods were
damaged deliberately to avoid some form of danger.
EX: imagine that you are a supplier of biochemical substances. You had a shipment worth
$2mil exported via a shipping company. On the way, the captain found that $200,000 worth
of boxes had leaked and were contaminating the ship. It had to be thrown away to secure the
rest of the shipment. This would be a General Average Loss. If the entire load was sold for
$1mil to another pharmaceutical manufacturer on the next port, it would have been a case of
Particular Partial Loss.
E X P O RT T
Personal loss: loss to shipment owners

Common loss: on-purpose loss to protect the whole vessel & shipments
on board (must happen offshore).
EX: The captain decides to scarify some containers to avoid the vessel to be shallow-
draught.
Common loss costs are all the fees paying to 3rd party: cost of saving the vessel, costs
paid in the saving port, fuel, loading and unloading cost, food and wages for people
working on board, etc.,
 How to allocate these costs?

E X P O RT T
Step 1: Identify value of loss (

Step 2: Common loss Allocation ratio =
Allocated total value is total value of all the rights before the common
loss happen. Therefore, personal loss is included if it happens after
common loss, excluded if it happens before common loss.
Step 3: Identify contributions of each party

E X P O RT T
EX: Bluesky-07 vessel costs $2,000,000, shipping a $500,000 shipment of

Rivery Co., Ltd. During transportation, Bluesky-07 got shallow-draught. To save
the vessel, the captain decided to throw away some boxes valued $65,000.
Besides, cost of repairing the vessel is $34,600. Miscellaneous costs are $400.
At the POD, the captain asked for common loss contribution.
Situation 1: at POD, due to unloading process, Rivery company loses 10,000$

more.
Situation 2: at POD, Rivery company receives shipment and detect additional
10,000$ loss of their shipment.

E X P O RT T
Value of common loss

Allocation ratio =
Common loss cost of vessel = 2,000,000*4% = 80,000 $

Common loss cost of shipment = 500,000*4%= 20,000 $
Vessel owner has to pay 80,000, but he’s already paid 34600+400  pay 45,000
more.
Shipment owner (Rivery Co.,) has to pay 20,000, but he lost 65000  he would
get 45,000

2. INSURANCE CARGO CLAUSE (ICC)
E X P O RT T
2.1 ICC 1963

 FPA (Free from Particular Average): insurance contract clause that eliminates
an insurer’s liability for partial losses.
 WA (With Particular Average): Including FPA conditions & Partial loss due to
natural disasters, accidents (main risks insured).
 AR (All Risk): Including WA conditions & miscellaneous risks.
 WR: War Risk
 SRCC: Strikes, riots and civil commotion

E X P O RT T
2.2 ICC 1982

 Insurance Cargo Clauses (ICC) (C): The clause provides major casualty coverage
during the land transit and tend to be used for cargoes that are not easily
damaged, e.g. scrap steel, coal, etc. Subject to the policy exclusions and
warranties the covers loss or damage to the subject matter insured reasonably
attributable to:
o Fire or explosion
o Grounding, sinking
o Overturning or derailment
o Collision or contact of vessel
o Discharge of cargo at point of distress

E X P O RT T
 Insurance Cargo Clause (B): Subject to the policy exclusions and warranties, the
(B) clauses provide all the cover under (C) and also cover loss of damage to the
subject matter insured reasonably attributable to:
o Earthquake, volcanic eruption or lightning
o Water damage by entry of sea/ water (excluding rainwater),
o Total loss of package lost overboard
 Institute cargo Clause (A): Subject to the policy exclusions and warranties, the
clause “A” provides the widest of all three covers and generally summed up as ‘all
risk’ of loss or damage to the subject matter insured.
 War Risk
 SRCC (Strikes, riots and civil commotion)

3. SETTLE THE CLAIM
E X P O RT T
 Insurable value is the real value of the subject of insurance and determined as
follows:
1. The insurable value of the seagoing vessel is its total value at the commencement of
the insurance. This value also includes the value of its machinery, equipment, spare
parts and stores plus the whole insurance premium amount. The insurable value of the
seagoing may also include money advanced for crew’s wages and other disbursements
incurred to make the ship fit for the voyage as agreed upon in the policy.
2. The insurable value of the cargo is its value invoiced at the place of loading or its
market value at the place and time of loading plus the insurance premium, the freight
and may include the expected profit;

3. SETTLE THE CLAIM
E X P O RT T
3. The insurable value of the freight is the gross amount of freight plus the insurance
premium. Where the charterer has the freight insured, this amount of freight is included
in the insurable value of the cargo for insurance;
4. The insurable value of any other subject of insurance, except obligations arising under
civil liability, is the value of the subject of insurance at the place and time of the
commencement of the insurance, plus the insurance premium.
 Insured amount: The maximum amount an insurance company will pay if an

insured asset is deemed a total loss. The asset's insured value can either be its
replacement cost or its market value, depending on the insurance policy. Also
known as "insurable value.“
 Insurance Premium: amount of money an individual or business pays for an
insurance policy.
 In practice, we use CIF price to compute insurance premium.
INSURANCE PREMIUM FORMULA
E X P O RT T
 I = CIF x R
 CIF=FOB + F+(CIF x R)  CIF=(FOB+F) / (1-R)
I: insurance premium
C: FOB price
R: insurance premium ratio
F: Shipping freight
With interest rate a, Insured amount = CIF*(1+a) = (FOB+F)(1+a)/(1- (1+a)*R)

CIF = FOB+F+I=FOB+F+CIF*(1+a)*R CIF= (FOB+F)/(1- (1+a)*R)
In other cases if specified, insured amount can be computed using other formula (110%CIF price
or FOB price)

INSURANCE PREMIUM FORMULA
E X P O RT T
Insurance premium:
Or with a is interest rate

E X P O RT T
EXAMPLE
Company A imports 1000 motorbikes from oversea with FOB price is
2000USD/item to Cat Lai port. The shipment bears shipping cost of 20USD/item.
Company A buys ICC A for the shipment with ratio 0.18%, with insured value of
110% CIF price. How much company A has to pay insurance company?
•Insured value:
+ FOB price : FOB = 1000x 2000 USD = 2,000,000 USD
+ Freight cost: 1000x 20 USD = 20,000 USD
+ CIF total price of the shipment:
CIF = ( C + F ) / ( 1 – R ) = ( 2.000.000 +20.000 ) / ( 1 – 0.18% ) = 2.023.643 USD
+ Total insured amount = 110 % x 2.023.643 = 2 226 007 USD
Insurance premium I = CIF*R

E X P O RT T EXERCISE 1
1. Company XYZ imports a shipment of canned tuna from Singapore of 50,000
cans and wheat of 1000 tons, with FOB price of canned tuna 500 USD/can and
freight 10$/can; price of wheat is 150 USD/ton & freight 22$/ton. Calculate
insurance premium company XYZ has to pay and insured amount if interest rate
is 10%. For canned tuna, insurance ratio is 0.32%, and 0.27% for wheat.
2. What if the price above is CFR price?

EXERCISE 2
E X P O RT T
Vessel Pichai values 3.500.000 USD carried 3 shipments A, B, C with values

accordingly 700.000, 600.000, and 500.000 USD CIF price from Thailand to
Vietnam (Hai Phong port). During the journey, the vessel got shallow-draught at
Lam Chabang port area (Thailand). Vessel owner declared common loss & informed
Bao Viet Vietnam – the insurer of these 3 shipments. Cost of salvage charge is
35,000$, service fees collected by Lam Chabang port is 13,000$ and vessel
repairing cost is 25,000$. The shipments were delivered to consignees. After
investigation, it is found that shipment A has a loss of 25% during transportation at
Hai Phong port.
What losses company A (owner of shipment A) has to bear? How much vessel
owner has to pay? How much company A get from Bao Viet if they bought
insurance ICC term B with insured amount of 110%CIF price?
APPENDIX
An introduction to the Lloyd’s Agency Network - YouTube
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IMPORT - EXPORT MANAGEMENT M.Sc.

Source: National Economics University – NEU Distance Education Centre

• Understand concepts relating to marine insurance

M.Sc. Uyen NGO School of Industrial Engineering and Management 2

Definition: The contract of marine insurance is a special (insurance)

M.Sc. Uyen NGO School of Industrial Engineering and Management 3

TYPES OF MARINE INSURANCE

M.Sc. Uyen NGO School of Industrial Engineering and Management 4

INSURANCE MARKET – THE PLAYERS

M.Sc. Uyen NGO School of Industrial Engineering and Management 6

Why marine cargo insurance is necessary?

By reasons: Natural disasters, Accidents, Human interventions

Insured risks must be direct reasons of damage (only damages

M.Sc. Uyen NGO School of Industrial Engineering and Management 7

Risk by reasons Risk by insurance operation

M.Sc. Uyen NGO School of Industrial Engineering and Management 8

By damage level: Partial loss, Total loss

M.Sc. Uyen NGO School of Industrial Engineering and Management 9

M.Sc. Uyen NGO School of Industrial Engineering and Management 10

Example of Constructive Total Loss in Marine Insurance:

M.Sc. Uyen NGO School of Industrial Engineering and Management 11

Personal loss: loss to shipment owners

 How to allocate these costs?

M.Sc. Uyen NGO School of Industrial Engineering and Management 13

Step 1: Identify value of loss (

Step 3: Identify contributions of each party

M.Sc. Uyen NGO School of Industrial Engineering and Management 14

EX: Bluesky-07 vessel costs $2,000,000, shipping a $500,000 shipment of

Situation 1: at POD, due to unloading process, Rivery company loses 10,000$

M.Sc. Uyen NGO School of Industrial Engineering and Management 15

Value of common loss

Common loss cost of vessel = 2,000,000*4% = 80,000 $

M.Sc. Uyen NGO School of Industrial Engineering and Management 16

2.1 ICC 1963

M.Sc. Uyen NGO School of Industrial Engineering and Management 17

2.2 ICC 1982

M.Sc. Uyen NGO School of Industrial Engineering and Management 18

M.Sc. Uyen NGO School of Industrial Engineering and Management 19

M.Sc. Uyen NGO School of Industrial Engineering and Management 20

 Insured amount: The maximum amount an insurance company will pay if an

With interest rate a, Insured amount = CIF*(1+a) = (FOB+F)(1+a)/(1- (1+a)*R)

M.Sc. Uyen NGO School of Industrial Engineering and Management 22

Or with a is interest rate

M.Sc. Uyen NGO School of Industrial Engineering and Management 23

M.Sc. Uyen NGO School of Industrial Engineering and Management 24

M.Sc. Uyen NGO School of Industrial Engineering and Management 25

Vessel Pichai values 3.500.000 USD carried 3 shipments A, B, C with values

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With interest rate a, Insured amount = CIF(1+a) = (FOB+F)(1+a)/(1- (1+a)R)