P&I Insurance Premium Calculation Techniques

3.2.1. Fee calculation principles

The P&I Club's insurance premiums are contributed by members according to the club's operating principle of balancing income and expenditure. Therefore, the insurance premiums contributed by each member are based on the balance of income and expenditure of the club in each period. Before signing an insurance contract, the member and the club must agree on the insurance premium rate. The decision on the insurance premium rate must be based on the estimated level of risk for the insured vessel.

3.2.2. Basis of charging

As we know, insurance premiums are calculated based on the balance of income and expenditure in each period. The association's income includes:

- Insurance premiums paid annually by members;

- Income from idle investment interest has not compensated for losses to members.

The branches of the association include:

- Compensation for losses to other members of the international P&I insurance group;

- Reinsurance expenses;

- Management fee;

- Compensation for losses due to inflation.

Due to the characteristics of P&I insurance, losses occur within the insurance year, but dispute resolution often takes several years. Therefore, each Association often collects an amount of prepaid premium from members to meet the spending needs arising in that year. Thus, in essence, calculating P&I insurance premiums is calculating prepaid and postpaid premiums from members.

3.2.3. Fee calculation method

There are two methods of calculating fees: prepayment method and postpayment method;

a. Prepayment calculation method

There are two methods of calculating prepayment: by compensation rate and by tonnage.

1) Method of calculating fees based on compensation ratio:

Under this method, the average compensation rate of the association for 5 years for each member is calculated as the basis for calculating the rate or net premium. Then, consider the compensation rate in the 5th year, reinsurance costs, group insurance costs, management costs and inflation, etc.

The procedure is as follows:

◊ Calculate the average compensation rate of the association in 5 years

T tb = (Total amount of money the association has paid and will pay in 5 years)/(Total amount of membership fees paid and will pay in 5 years)

◊ Calculate the fee payable in the 5th year

P= Amount of fees paid in advance + Estimated amount of fees to be paid

◊ Calculate reinsurance premiums of association members:

P tb = gQ

In which: P tb is the member's reinsurance premium, g is the insurance premium price on the international market for 1 GRT, Q is the total tonnage of the member's fleet.

◊ Calculate the amount of membership fees paid to the association to compensate other Associations in the International group

P qt =(P 5 - P tb ).y 1

P qt is the compensation fee for the International group, y 1 is the compensation fee rate of the member for the International group

Management cost calculation:

P ql =(P 5 -P tb ).y 2

P ql is the management cost, y 2 is the management cost standard ratio

± Calculate the allowable compensation rate of the business year (next year)

T 6 =(P 5 -P tb -P qt -P ql ).100/P 5

Calculate the difference between the compensation rate of the business year (T 6 ) and the average compensation rate (T tb )

y 3 = T 6 – T tb ≥ Inflation compensation costs. The Association stipulates that dues are paid in US dollars. The inflation rate (y 4 ) is based on the currency market and international payments.

Calculate the insurance premium payable per ton of GRT in year 5

p = (Total premium paid in year 5)/Total tonnage of member's ship

Calculate the prepaid insurance premium of the member for the professional year (next year)

P t =(p – p.(y 3 -y 4 )).Q

P t is the prepayment fee

The method of calculating fees based on compensation rates has the advantage of being quick and neat. But it also has certain limitations. That is, it does not reflect changes in the fleet (buying more or selling). It cannot be applied to members with large losses, loss rates exceeding 100%... To overcome the above disadvantages, prepayment fees can be calculated based on ship tonnage.

2) Method of calculating charges based on ship tonnage

According to this method, the average compensation amount is calculated according to the tonnage of the ship that the member bears in that loss and is considered as the compensation amount of the association. The calculation sequence is as follows:

◊ Calculate the average compensation level for the past 5 years per ton of ship's tonnage:

M tb = (Total amount of compensation paid and to be paid in 5 years / Total tonnage of member's ships in 5 years)

M tb is the average compensation level per ton of load.

According to the convention, when a major loss occurs, the compensation for that loss is only calculated for the part that the ship owner (member) bears, not the part that the association bears.

◊ Calculate reinsurance premium per ton of ship's tonnage according to the reinsurance premium price of the international market (M 1 )

◊ Calculate compensation for international P and I insurance group M 2 = M tb .xy 1

◊ Charge to cover the management costs of the Association M 3 = M tb .xy 2

* Calculate the cost support fee due to inflation M 4 = M tb .xy 4

± Insurance fee calculated for 1 ton of load

f = M tb + M 1 + M 2 + M 3 + M 4

or f = M tb (1 + y 1 + y 2 + y 4 ) + M 1

The insurance premium that members pay to the association will be:

P = fQ

Q = (Total tonnage of member's fleet in 5 years)

It should be noted that in P and I insurance, deductibles are usually applied for each type of risk. Therefore, when calculating insurance premiums, each specific case must be compared.

b. Post-payment calculation method

Each member participating in insurance must pay a certain amount of fees in advance, usually 75% of the annual premium. The fees are used to pay compensation to members, international groups, reinsurance, and association management expenses. During the year, if the fees are not fully paid, they will be put into the association's reserve fund. If there is a shortage, members can request additional payments. Members pay additional payments based on compensation expenses arising during the year that have been resolved or on the exact amount that the association must pay.

Additional fees (post-payment) of each member must be based on the expenses in the business year and the association's revenues for allocation.

- Expenses (a): + compensation for members;

+ compensation for international groups;

+reinsurance costs;

+management fee

- Collecting advance fees from members (b); collecting investment interest (c)

Based on the revenue and expenditure, calculate the following fee rate for each member according to the formula:

t =(abc).100% / b So the fee paid later by each member will be:

P s = P t . t In which:

P s : Post-payment fee; P t : Pre-payment fee;

t: Post-payment fee rate.

3.3.1. General principles

The association only covers the liabilities, losses and expenses incurred by the shipowner arising from incidents occurring during the period of the insurance contract, relating to the shipowner's interests and connected with the operation of the vessel. P&I insurance is in principle liability insurance, but in addition this type of insurance also accepts insurance for many other types of losses.

3.3.2. Liability and loss insured by the Association

a. Responsibility for casualties

The Association insures the insured against liability arising from bodily injury, death and salvage, provided that all such losses occur in direct connection with the operation of the insured vessel. In this case, the liability of the shipowner is insured regardless of where and how the loss occurs or the origin of the loss or accident.

1) Casualties and illnesses of the crew

This section sets out the coverage for seafarers in the event of illness, injury or death, including:

- Responsibility to pay for losses, compensation for damages (except hospital, medicine, funeral) for injuries, illnesses and deaths of crew members whether occurring on board or not.

- Responsibility for paying for hospital fees, medicine, funeral expenses related to injuries, illnesses or deaths of crew members (not including salaries and repatriation or replacement costs).

- Medical examination costs of crew members.

In the event of any liability, costs or expenses arising, the seafarer's charter or any contract of service or employment must have been concluded in advance and the liability shall be deemed not to have arisen in the absence of such contract. In the event of injury to a seafarer on leave, such liability, costs or expenses shall only be covered by the Association if, to the extent that they have been previously approved in writing by the Manager and only if the insured vessel is the last vessel on which he was employed before the injury or loss occurred.

The liability of the shipowner for crew injuries varies according to the laws of each country and varies greatly between countries. The liability of the shipowner for crew injuries is usually governed by the laws of the flag state. However, some countries apply their laws to those working on ships not registered in their country.

2) Casualties of other persons working on board

Includes cases of illness, injury and death of persons other than crew or passengers:

- Liability for payment of damages and compensation for injury, illness and death of any person other than crew or passenger.

- Responsibility to pay for hospital, medical and funeral expenses related to injuries, illnesses and death.

For this group of insurances, some countries have social insurance which reduces the shipowner's liability to some extent, while others have the shipowner assume most or almost all of the liability. Such extensions of the shipowner's liability are only covered when they are considered normal in the trade.

3) Passenger casualties

Liability for injury to insured passengers includes:

- Responsibility to pay for losses and compensation for cases of injury, illness or death of passengers on board and related hospital, medical and funeral expenses;

- Liability for payment of losses and compensation for the cost of transporting passengers to the port of destination, or returning to the port of departure and the cost of caring for passengers on shore arising as a result of an accident occurring to the insured vessel;

- Responsibility to pay or compensate passengers on board affected or impacted.

4) Repatriation and replacement costs

Includes costs of repatriating seafarers and providing replacement crew: Costs of repatriating seafarers who are sick or injured; or whose spouse, children, or parents (in the case of an only child) are dangerously ill and whose presence at home is absolutely necessary; or whose repatriation is required by law.

b. Responsibility for wages and unemployment compensation due to shipwreck

This section provides coverage for payment of wages to seafarers injured or sick while on board and during repatriation in the event of abandonment or loss of ship:

- Responsibility for paying wages to the ship's sailors during treatment in a hospital abroad, or during repatriation due to injury or illness, or for replacements during the waiting period for replacement and repatriation.

- Liability for compensation for loss of employment of seafarers in case these seafarers are working on board the ship, in the process of arriving at the ship or leaving the ship due to actual total loss or estimated total loss of the ship.

c. Property liability

1) Loss of property of sailors or others

Includes liability to pay or compensate for damage or loss to property of:

- Any crew member on board the insured vessel;

- Any other person on board

The Society shall not indemnify against claims relating to money, negotiable instruments, precious metals or stones, valuables or objects of natural value. In the event of loss or damage to property, articles which the manager considers unfit for the use of seamen shall not be indemnified.

2) Loss of property on board

The Association is responsible for indemnifying third party claims for loss or damage to property on board the insured vessel. Property here includes any containers, equipment, fuel or other property on board the insured vessel (other than cargo and personal property).

The liability under this section does not include loss or damage to property which is part of the vessel or which is owned or leased to the member or to a partnership or jointly managed by the member.

3) Loss of machine or other property damage

When a ship is traveling in a channel, entering or leaving a bridge or anchoring, it can cause damage to locks, wharves, structures as well as other fixed and floating objects.

The Association shall be liable to pay for losses or compensation for loss or damage to property, whether on land or in water, movable or immovable.

If the insured vessel causes loss or damage to property or interests belonging wholly or partly to the member, the member shall have the same right of recourse against the association as if such property or interests belonged wholly to other owners.

d. Liability for collision accidents

The Company insures against liability arising out of collision between the insured vessel and any other vessel, but provided and to the extent that such liability is not subject to the collision liability provisions of the hull insurance policy. This liability includes:

- 1/4 collision liability or such other proportion as may be agreed in writing by the manager (other than the liabilities listed below);

- 4/4 collision liability arising from collision accident or related to:

+ The removal or clearance of wrecks, cargo or any other obstructions;

+ Any personal property, real estate or anything else (except another vessel or property on another vessel);

+ Goods and assets on board the ship are insured, contributing to general average, special expenses or salvage fees that the cargo owner or property owner must bear;

+ Loss of life, injury or illness;

+ Pollution or damage to personal property, real estate or any other objects (except pollution or damage to another vessel or property on another vessel).

- The member's liability arising from collision accidents (not including the liabilities mentioned above) exceeds the amount of compensation just paid under the hull insurance policy of the insured vessel.