Research on factors affecting efficiency of hull insurance in petrolimex joint stock insurance corporation pjico

Cohort 2016 – 2017 MASTER THESIS RESEARCH ON FACTORS AFFECTING EFFICIENCY OF HULL INSURANCE IN PETROLIMEX JOINT STOCK INSURANCE CORPORATION PJICO Author : Ngo Thi Nhi Thuy Advisor : Ng

Cohort 2016 – 2017

MASTER THESIS

RESEARCH ON FACTORS AFFECTING EFFICIENCY OF HULL INSURANCE IN PETROLIMEX JOINT STOCK

INSURANCE CORPORATION (PJICO)

Author : Ngo Thi Nhi Thuy Advisor : Nguyen Thi Hai Duong, PhD

Hanoi, June 2017

TABLE OF CONTENTS

LIST OF TABLE iii

LIST OF FIGURES iv

INTRODUCTION 1

CHAPTER I: INTRODUCTION TO PETROLIMEX JOINT-STOCK INSURANCE CORPORATION AND HULL INSURANCE MARKET 4

1.1 Introduction to Petrolimex Joint-Stock Insurance Corporation (PJICO) 4

1.2 Introduction to Hull Insurance Market 8

1.2.1 Hull Insurance History 8

1.2.2 Ship Insurance in PJICO 11

CHAPTER II: HULL INSURANCE AND THEORITICAL FRAMEWORK 21

2.1 Concepts in Hull Insurance 21

2.2 Claim Settlement 24

2.2.1 Types of Losses in Hull Insurance 24

2.2.2 Loss Adjustment 25

2.2.3 Principles of Claim Settlement in Hull Insurance 25

2.2.4 Exclusion in Hull Insurance 25

2.3.5 Reduction in Indemnity 26

2.3 Theoritical Framework 27

2.3.1 Factors Affecting Hull Insurance Efficiency 27

2.3.2 Data 29

CHAPTER III: ANALYSZE AFFECTING OF FACTORS TO HULL INSURANCE OF PETROLIMEX JOINT-STOCK INSURANCE CORPORATION 31

3.1 Descriptive statistics 31

3.1.1 Affect of PJICO’s trademark 31

3.1.2 Affect of PJICO’s financial capacity 32

3.1.3 What do you think about Ship Insurance Product of PJICO? 33

3.1.4 Affecting of Service Quality on Hull Insurance of PJICO 39

3.1.5 Factors are need to focus 45

4.2 Assessment and Evaluation of Interviewed Experts 47

CHAPTER IV: RECOMMENDATIONS AND SOLUTIONS TO IMPROVE HULL INSURANCE EFFICIENCY OF PETROLIMEX JOINT-STOCK INSURANCE CORPORATION 49

4.1 Recommendations 49

4.2 Solution 50

4.2.1 Improving Service to Take Care of Clients 51

4.2.2 Well Carrying out the Claim Adjustment 51

4.2.3 Enhancing Competitiveness and Image of PJICO 54

CONCLUSION 56

REFERENCES 57

APPENDIX 59

LIST OF TABLE

Table 1.1 Brief financial reports 2013 – 2016 6

Table 3.1 Evaluation affecting of PJICO’s trademark 31

Table 3.2 Evaluation affecting of PJICO’s financial capacity 32

Table 3.3 Evaluation affecting of PJICO’s product diversification 34

Table 3.4 Evaluation affecting of PJICO’s product coverage 35

Table 3.5 Evaluation affecting of PJICO’s product endorsements 36

Table 3.6 Evaluation affecting of PJICO’s product premium 37

Table 3.7 Evaluation affecting of PJICO’s product terms and conditions 38

Table 3.8 Evaluation affecting of PJICO’s information provision 40

Table 3.9 Evaluation affecting of PJICO’s professionalism 40

Table 3.10 Evaluation affecting of PJICO’s professional knowledge 41

Table 3.11 Evaluation affecting of PJICO’s supporting and guiding clients 42

Table 3.12 Evaluation affecting of PJICO’s supporting in claim settlement 42

Table 3.13 Evaluation affecting of PJICO’s taking care of clients after issuing policies 43

Table 3.14 Evaluation affecting of PJICO’s insurance procedure 44

Table 3.15 Evaluation affecting of PJICO’s claim settlement procedure 44

Table 3.16 Evaluations of PJICO’s Specialists 46

Table 4.1 Result of Hull Insurance Business of PJICO (2013-2016) 49

LIST OF FIGURES

Figure 1.1 Organizational Structure of PJICO 7

Figure 1.2 Premium Revenue Structure of PJICO in 2016 11

Figure 1.3: Revenue share of non-life insurance market in 2016 12

Figure 2.1 Factors effect Hull Insurance Efficiency 28

Figure 3.1 Evaluation of PJICO’s trademark 32

Figure 3.2: Evaluation of financial capacity of PJICO 33

Figure 3.3: Evaluation of the diversification of products in PJICO 34

Figure 3.4: Evaluation of coverage in PJICO 35

Figure 3.5: Evaluation of Endorsements in PJICO 36

Figure 3.6: Evaluation of premium in PJICO 38

Figure 4.7: Evaluation of terms and conditions of PJICO 39

Figure 3.8: Evaluation of service quality of PJICO 45

Figure 3.9: Aspects that PJICO should pay attention to improve the company's capabilities 46

INTRODUCTION

1 Rationales

Accident and risk are factors always existing in people lives Those accidents and risks can occur due to objective conflict between people and nature

or known as natural disasters Also, risks can arise from manufacture activities

In term of marine industry, a vessel carrying cargo from this port to another may face a lot of risks such as stranding, collision, fire, wet cargo due to storms, accident and/or sickness of crew… These risks can cause other risks, leading to serious losses The companies that suffers the losses is affected It may have to bear small losses making the business and manufacture interrupt while big losses can make the companies going bankrupt totally

In order to face unforeseen losses, the best way is using Insurance It means that the Insured transfer their risks to insurance companies (Insurer)

Because of that, insurance has been appeared Insurance demand has been increasing when economy and living standards improve Thank to economic as well as cultural exchange among countries in the world, the insurance has been developed and expanded rapidly

―Insurance is a guaranty of the insurer to compensate to the insured in case

of loss under scope of cover provided the Insured pay expenses for himself or the Third party‖

"Insurance is an activity whereby the insurer makes a statutory obligation to pay indemnity for the insured in the event of the insured event provided that the other party pays a premium to the insurer‖

In the insurance contract, the insured is responsible for paying premium and the insurer is responsible for settling claim in case of loss

Through underwriting hull insurance, there have been many advantages, helping Ocean transportation companies/Owners of ships to keep calm and stabilizing finance after the loss This contributes to the general development of

economy The service quality has contributed considerably to the growth and efficiency of insurance industry In comparison with other types of industries, insurance is still young industry but it has full potential to develop further During the implementation of insurance, there are still lots of challenges and difficulities that need more researches

In many consecutive years, hull insurance was not profitable due to economi crisis in general as well as the downsizing of Vietnam shipping industry

in particular However, by the end of 2016, the hull insurance has been carried out by 29 non-life insurance companies During implementing this line of insurance, new companies always would like to attract clients with their policies such as reducing premium or increasing bonus to their clients

Insured objects of this line of insurance often have big value which is up to hundreds of billions Only some clients participate under compulsory aspect Normally, all clients are aware fully the benefit and necessity of insurance They would like to recieve support for their business after the loss In addition, they look forward to receiving necessary consulting opinions from insurers for their business The clients would like to renew the contract with insurers based on service quality besides premium rate and bonus/expenses

For all above reasons, during my internship in Hull and P&I Department of

PJICO, I decide to choose the topic “Research on factors affecting Efficiency of

Hull Insurance in Petrolimex Joint Stock Insurance Corporation (PJICO)” for

3 Subject and Scope of Research

Subject of research: service quality and affecting of factors on the service quality in hull insurance of PJICO

Scope of research: the scope concentrates on the hull insurance of PJICO during period of 2013 to 2016

Author make interviews persons who are representatives of ocean transportation companies, owners of ships in some provinces of Vietnam who have been using Hull insurance products of PJICO

4 Research methodology

The research methodology applied in the thesis are qualitative analysis, survey (investigating, interviewing) and statistics analysis to make clear the objectives of the research

However, the research is carried out on small number of clients (not all) of PJICO Therefore, results of investigation/interview reports have not shown fully and objectively It will be difficult to examine the variable corelation It may not show fully all the issues raised in the research

6 Thesis Structure

Chapter I: Introduction to Petrolimex Joint-Stock Insurance Corporation

and Hull Insurance Market

Chapter II: Hull Insurance and Theoritital Framework

Chapter III: Analyze Affecting of Factors to Hull Insurance of Petrolimex Joint-Stock Insurance Corporation

Chapter IV: Recommendation and Solution to Improve Hull Insurance Efficiency of Petrolimex Joint-Stock Insurance Corporation

CHAPTER I INTRODUCTION TO PETROLIMEX JOINT-STOCK INSURANCE

CORPORATION AND HULL INSURANCE MARKET

1.1 Introduction to Petrolimex Joint-Stock Insurance Corporation (PJICO)

Petrolimex Joint-Stock Insurance Corporation (PJICO) is the first Joint Stock Insurance Company in Vietnam insurance market PJICO is the combination of strong prestigious State Corporations such as Petrolimex Group (Petrolimex), Vietnam Steel Corporation (Vinasteel), Vietnam National Reinsurance Corporation (Vinare), Vietnam Foreign Trade Bank (Vietcombank), Hanoi Hanel Electronic Company (Hanel)

PJICO is established under the License No 1873/GP-UB dated 8th June,

1995 issued by Chairman of Hanoi People Committee Until now, PJICO has been operating over 25 years from 1995 with charter capital of 53 billion dong The development of PJICO can be summerized as follows:

Period from 1995 to 2002:

The beginning period is the period of stable, effective and persistant development of the company PJICO focused on some lines of retail insurance such as motor vehicle, health (personal accident) PJICO was one of leading insurers with good quality That was the important stage and is the premise for the next spectacular developed period

Period from 2002 to 2005:

That was the most spectacular development period with the highest growth

in domestic insurance market The average growth rate was 60% per year With the market share of 5.7% in 2002, PJICO occupied 13% insurance market in

2005, ranked 3rd in domestic non-life insurance market and narrowed the gap

a lot in developing trademark and it was the most successful trademark in the market Expanding hull insurance market was one of reasons contribute to the success of this period

Period from 2005 to 2012:

PJICO redefined its policy as ―Stabilization, safety and efficiency‖ to create

a momentum for sustainable development in the future This was a right direction and brough certain success and strenghtened the developemnt of PJICO in the upcoming years

Period from 2013 up to now:

PJICO has been consistent with its business direction of stabilization, safety and efficiency since 2013 The business results have proved the correctness of this direction

Over past years, PJICO has developed rapidly and created the image in the domestic and international market through povide insurance for nation - wide major infrastructure projects With its stable financial capacity, long lasting relationship with leading insurance corporations in the world as well as nationwide branches system, PJICO has met all requirements of clients concerning claim settlement PJICO’s image has been highly appreciated in supporting stable finance for clients in case of loss

In the difficult economic situation, PJICO has kept the stable position concerning the market share and turnover in Vietnamese general insurance market With the strong finance capacity, professional and active staffs, high client service quality and multi insurance products, PJICO has achieved good business results

In 2016, Vietnamese economy faced many difficulties Non-life insurance market has faced many challenges, especially the competition among both domestic and foreign insurance companies to occupy the market share by reducing premium rate and changing terms, conditions applied to insurance products in the market Overcoming all these difficulties, PJICO has achieved

good business results with total revenue of 2,220.8 billion VND, increased 9% in comparison to that in year 2015 Profit before tax is over 125 billion VND

Table 1.1 Brief financial reports 2013 – 2016

Unit: VND

Premium

Revenue 1,752,265,889,122 1,745,391,442,021 1,896,564,438,596 2,066,758,581,415 Total revenue 1,889,331,305,630 1,874,779,107,412 2,032,191,885,627 2,220,865,321,133 Profit before tax 85,410,598,472 110,144,866,400 119,815,545,263 125,394,945,643

Profit after tax 65,883,962,691 88,199,214,051 96,891,431,208 101,971,022,860

Source: PJICO (2014, 2015, 2016, 2017)

Thanks to the potential development of business and the support from State Authorities as well as effective business management, attractive marketing policies, professional staffs, PJICO has been highly evaluated and believed by many clients PJICO has re-set up the structure to be more suitable with general market trend PJICO has also paid attention to serve our customers in the most efficient way and always satisfy customers This is also the important duty for PJICO in the future At the present, Board of Management, Board of Directors and staffs are trying the best the deserve the trust of customers

Tổng Giám Đốc

Phó Tổng Giám Đốc

Phó Tổng Giám Đốc

Phó Tổng Giám Đốc

P BH Hàng hóa

P BH Tàu

Thủy

P BH Phi Hàng Hải

P BH Xe cơ giới

P BH Tài sản

Kỹ thuật

P BH Con người

P BH Dự Án

P Q.Lý và P.triển Đại lý

P Tổ chức P Tổng hợp P TCKT P CNTT

P BH Đầu tư

và TTCK

P D.Vụ và CSKH

P Tái Bảo Hiểm

P T.Tra Pháp Chế

Hội Đồng Quản Trị

Ban Kiểm soát

Đại hội đồng cổ đông

Ban Tổng hợp HĐQT

Ban Kiểm toán

P.Kiểm toán

nội bộ

Các Công ty thành viên

Tổng đại lý

và đại lý

Các Văn phòng đại diện

P Công tác Đảng bộ

Figure 1.1 Organizational Structure of PJICO

Source: PJICO (2016)

1.2 Introduction to Hull Insurance Market

1.2.1 Hull Insurance History

First of all, in 5th century BC, people sought way to minimize total loss of cargo shipment by dividing it into small ones That was the way to disperse the risks and loss and can be considered as the primary form of insurance After that,

in order to face all serious losses, ―marine loan‖ was appeared It means that in the even of loss of cargo during transit, the borrower will be exempt from repayment of both the loan and interest Conversely, they had to pay very high interest if their cargo was safely arrived It could be understood that high interest was in fact insurance premium However, the number of loss was increasing, making creditors be in very dangerous situation Instead of that, insurance was

appeared

In XIV century, the first marine insurance contracts were appeared in Floren, Genoa of Italy Under those contracts, the insurer committed to compensate for loss/damage concerning the property, which were suffered by the insured in the event of loss at sea Also, the insured had to pay amount of premium to the insurer The oldest contract was found dated 22/04/1329, and still kept in Floren up to now Then, along with the discovery of Indian Ocean and America, the maritime industry in general and the marine insurance in particular had grown rapidly In term of the legal basis, law document Barcelona in 1435 was the first one of insurance industry, then Decree of Philippe de Bourgogne in

1458, Decrees of Brugos in 1537, Fiville in 1552 and Amsterdam in 1558 In addition, there was the Decree of Finland in 1563 concerning marine cargo insurance contract However, it was not until XVI - XVII centuries that insurance activities strongly developed and became more and more widespread in many areas of socio-economic life, especially when capitalist production was appeared The opening point of that was the Laws 1601 of United Kingdom under Elisabeth Queen regime, then Royal decree 1681 of France written by Colbert and issued

by Louis XIV King Those were the very first laws for marine insurance industry

In the XVII century, United Kingdom occupied the leading rank in trade and international marine, and London was the most thriving center All ships from Asia, Europe, America, and Africa landed on Thames river of London Cafes were the place where all traders, bank owners, transporters, insurers… met each other, carried out all transactions, exchanged information and directly discussed with each other Edward Lloyd’s was retired Captain He opened his cafe in Great Tower of London in 1692 Traders, bank owners, transporters, insurers … always came there to exchange information of ocean going vessels , cargo on ships, safety and incidents on seas … Besides the café management, in

1696, Edward Lloyd’s established newspaper with all news about ships situations, other matters to provide information to his clients However, his main duty was providing the place for meetings and transactions for his clients After Edward Lloyd’s died, there was a need for a same place for marine insurers to gather to implement their transactions In 1770, ―Society of Lloyd’s‖ as the volunteer organization was established and it arranged a venue at Pope’s Head Alley for their members Then it moved to Royal Exchange and stayed there untill 1828 when they moved to their private house in Leaden Hall That organization operated as the private orgainization until 1871 when they was incorporated under laws of Parliament It then became Lloyd’s Committe and was the biggest insurance form and center of insurance in the world After marine insurance, the fire insurance was appeared It was marked with the serious fire in London, United Kingdom on 2/9/1666 There were 13,000 destroyed houses including over 100 churches The fire lasted within 04 days without any rescue for damages Then, all businessmen came up with the idea of sharing the fire risks with establishment of Fire insurance companies such as: " Fire Office" (in 1667), "Friendly Society" (in 1684), "Hand and Hand" (in 1696),

"Lom Bard House" (in 1704) At that time, Lloyds Insurance company was established and specialized in marine only It was not uniill XX century that Lloyds was switched to both domestic insurance and reinsurance Under the effect of fire in London, in 1786 the first Fire Insurance company was appeared

in France named ―Company L'assurance Centree L'incendie‖ and ―Company Royade‖ (in 1788) The event worthy to pass through generations at that time and

in the history of insurance was mathematic work of Pascal about "Geometry of Insurance " (Lageometric Du Hasard) in 1654 It was mathematical probability It was a statistical basic for serving insurance activities Up to now, it has been the basic technique of insurance

When the insurance was appeared in Vietnam? There have no documents to show exactly that It was conjectured in 1880 when foreign insurers from England, France, Switzerland, and USA… paid attention to Indochina They opened their insurance representative offices in Vietnam as trade companies

In 1926, the first branch of Franco – Asietique Company was opened In

1929, the first Vietnam Insurance Company was opened with Head Office located in Saigon However, it was specialized in car insurance From 1952, insurance activities were expanded with multi types and transactions with the operations of both domestic and foreign insurers

On 15/01/1965 Vietnam Insurance Company (As Bao Viet) started their official operation in the North of Vietnam In the early years, Bao Viet was specialized in marine insurance such as import-export cargo, ocean going vessels

…

At the beginning, Ship insurance was belonging to of marine insurance With the increase of quality and quantity, the revenue was increased accordingly Under the requirements of management, some big insurance companies such as Bao Viet, PVI, PJICO, and Baominh have divided marine insurance into marine cargo insurance and hull insurance

Figure 1.2 Premium Revenue Structure of PJICO in 2016

Source: PJICO (2016)

From the establishment date (1995), PJICO has paid attention to develop marine insurance In 2007, Ship Department was officially set up After 20 years of development, Ship insurance has played important role in PJICO in term of revenue operating market in comparison to other leading insurance companies This type of insurance helps PJICO to build up the image and trademark to their clients This has kept the growth rate even the whole market has faced the difficulties of economic integration Ship insurance has created lot of works for hundreds of staffs and their agents The revenue of ship insurance in 2016 reached VND 436.5 billions (accounted for 17.62% of total premium revenue in PJICO in 2016)

1.2.2 Ship Insurance in PJICO

1.2.2.1 Products

As the other local non-life insurance companies, since the first day of establishment, PJICO has determined Ship insurance as one of the first and

traditional insurance types – the first step for the market insurance integration and affirming the trade mark

After 20 years of development, Ship insurance has kept the important role

in term of revenue as well as net of operation in comparison to other local leading insurance companies This insurance product has supported PJICO to build up the image and trademark for the clients with stable growth rate even in case of difficulties in economic integration Ship insurance has created lot of jods for hundreds of staffs and agents The revenue from ship insurance in 2016 was 436.5 billion VND (accounted for 17.62% of preium revenue of PJICO in 2016)

Total revenue of non-life insurance in 2016 was 36,652 billion VND With the premium of 2,066 billions VND (accounting for 7% of market share), PJICO and PVI, Baoviet, Baominh and PTI are top 5 leading non-life insurance companies in Vietnamese market

Figure 1.3: Revenue share of non-life insurance market in 2016

Source: Vietnam Insurance Supervisory Authority, 2016

PJICO has been considered as one of the top professional ship insurers in Vietnam Client service center is always 24/24 to support and settle all accidents

in all international and nationwide places It is easy to understand because PJICO has wide net of branches in all 54 provinces In addition, PJICO has cooperated with overseas partners (International P&I Correspondence of W.O.E, LSSO, SOP, KOREA P&I; Independent survey companies such as ATLANTIS, ISS P&I JAPAN, SPARK INTERNATIONAL COMPANY, GAC; International Laws consultants such as LLOYDS, C SOLUTION, INCE & CO

All ships including ocean vessels, domestic inland vessels, passenger ships, boats…can buy insurance at PJICO Besides, PJICO is responsible for other types of insurance such as Ship Builder’s Risks Insurance, Containers Insurance, Kidnap and Ransom Insurance

The insured objects include hull, machines, marine equipment (including finsing nets, fishing equipment) and ship owner’s liability (including liability for collision, cargo, crew and related third parties)

* Hull Insurance

Hull insurance is voluntary It usualy have high loss rate (all big insurance companies have been lost in continuous years) This must also be a warning of risks From 2013 backwards, the growth rate of revenue of hull insurance was low due to the fact that transportation industry was in crisis It can be seen that premium from new ships is difficult to increase because the budget for new vessels is zero Concerning existing vessels, some owners went bankruptcy, and value of vessels was reduced, premium was also reduced accordingly The competition among 29 insurers was intense, especially for newly estabilished and small insurers

The financial crisis has also affected considerably the financial system, banks, credit organizations, hence the investments in marine industry has been reduced strongly The freight is reduced, fuel costs increased in 2012 and some regulations from State authorities (Maritime Bureau; Domestic water inland

transportation bureau; Sea products, Insurance Supervisory Authority….) have made insurance companies and Owners be difficult in maintaining and developing fleet of vessels

Although the post selling service of PJICO has been improved, there have been still some disadvantages that are necessary to change, improve and upgrade

to meet all requirements and interest of clients

As mentioned previously, due to economic difficulties, some owners have to cut their expenses for maintenance, salaries and wages of crew The decreasing trend of salaries of the crews had caused numbers of human –related losses (lack of experience, negligence, carelessness and faults in marine equipment…) Due to the climate change, acts of god (storm, thunderstorm) have been abnormally increased, and hence loss ratios have been increased (about 60-70%)

Hull insurance market is mainly located in Hai Phong, Quang Ninh, Nam Dinh, Thai Binh, Hanoi, Da Nang, Ho Chi Minh City, Vung Tau, Can Tho and Kien Giang

From 2014, along with positive change of Vietnamese economy, revenue from hull insurance has been developed rapidly

* Ship owner’s liability insurance

Up to now, this compulsory insurance has applied to ships carrying explosive cargo and passenger Ship owner’s liability insurance always relates to the third parties such as liability arised from collision, cargo, crew/passenger and other relating parties This is quite complicated and sometimes it relates to legal aspects such as arresting, accidents, death… The claim amounts sometimes are very big (up to 1 billion USD in respect of oil pollution and unlimited to risks under international ship owner’s liability articles.)

In fact, PJICO can provide insrance with very high liability limit for all vessels operating in Vietnam, but only for big transportation companies/owners

small owners (inland transportation and fishing vessels), they normally buy insurance with very low limit of liability

Due to financial difficulties, some ship’s owners buy liability insurance for only short-term when they delivery cargo or they only pay the first installment of premium in order to show it to their partners to sign delivery contracts

Protection and Indemnity (P&I) depend totally on International P&I Associations (W.O.E, LSSO, SOP, KOREA P&I) in term of premium level, deductibles and limits of some clauses One of disadvantages for marine transportation companies in general, for PJICO in particular is an increase of P&I premium (due to higher loss ratio of the whole Vietnamese fleet than P&I average loss ratio) This is also one of the reasons for the premium debts

* Ship Builder’s risks Insurance

This type of insurance appreared due to the developemnt of ship building industry This protects ship builders during the period of the building ships, testing, commissioning, handing over, liability to pollution, design fault, collision, general salvage and rescue

However, due to ecnomic crisis as well as the re-structure of ship building industry, the expenses for this type is limited Therefore, ship builders often buy insurance only for launching and testing period This is a potentialy risky period, however the premium is not enough to arrange with foreign and domestic reinsurers

*Containers insurance

This type of insurance has appreared a long time ago in the world The traditional clients are ship/container firms This has been developed thanks to the development of containers ships (cargo in containers) However, this type of insurance has not developed in Vietnam because the domestic container fleet is not sufficiently stocked and they are incompetent to compete with the foreign fleet of containers

* Kidnap and Ransom

Kidnap and Ransom (K&R) is designed to protect shipowners against the risks of kidnap and ransom of piracy This situation has happened increasingly in the world

The main objects are protected through this type of insurance:

+ Cover for amount of ransom;

+ Cover for crew accidents during kidnap;

+ Cover for some expenses: consultants for negotiations, salary of crew during kidnap …

Some sea areas are at high risks: Mexico, Venezuela, Haiti, Nigeria, some countries in Latin Africa

Majority of ship owners are not aware of the risk Additionaly, due to the financial difficulties, the shipowners are usually not willing to buy this type of insurance In Vietnam, there are some cases of K&R: Hoang Son Sun vessel was kidnapped in 2011 with the ransom amount of 5 million USD (however the owner has not participated K&R cover)

Up to now, PJICO has arranged some K&R insurance for several vessels of some big shipping companies

1.2.2.2 Distribution Channels

For insurance companies, the service distribution are carried out throughout the process from choosing and developing distribution channel system A large distribution channel, in which all staffs run the business professionally and effectively to bring the best services to the clients, will take the benefits to the enterprise Moreover, they will enhance the image of the enterprise in the market

In particular, with PJICO - one of the leading corporations of quality and efficiency, a good distribution channel plays important role

With the target to sell in retail products, PJICO has chosen the following

* Direct distribution channel

The direct distribution channel is non-level channel With this channel, the enterprise directly sells the products to clients without any intermediaries For PJICO, members of this channel are:

 Underwriting department in head office

At the present, there are 02 underwriting departments in Head office : Project Insurance, Non-marine Department and 5 management and underwriting departments : Property; Ship; Cargo; Motor Vehicle and Personal All departments in Head office are focused on their field under the functions according to name of department In addition to general policies of the Corporation, other types of insurance have been encouraged to carry out Hence, besides the ship insurance, this department also implements other types in the package

 Member companies

Under this way, the selling and managing the contracts are carried out by the member companies Number of member companies have been increasingly in recent years This is also the favorable condition for developing the channel In

2013, PJICO has total 54 member companies nationwide

 Regional Offices

These offices carry out the dependent business accounts under the levels They are under management of member companies They are main point of transaction for member companies Up to now, PJICO have 190 offices in 54 provinces, cities nationwide In Hanoi, there are 14 offices With the neat structure, this is very effective channel because they easily contact the market

and bring services to their clients

* Indirect distribution channels

This is called multi-level channel In this channel, PJICO do not directly provide services All transactions with clients are through middle parties The

indirect distribution channel in marine insurance of PJICO is brokers

Insurance brokers are middle parties who always consult their clients (insurance participants) and arrange the insurance for customers Brokers understand well about terms and conditions, especially the market information They are connecting point between demand and supply of insurance At the same time, they also can improve the image of products as well as insurers

Normally, premium of hull insurance via brokers are from inurance contract having loans in financial and credit organizations or from brokers working in marine field Therefore, the revenue via this channel is not considerable

 Staffs from other insurance companies: They have knowledge about

insurance, market experience and existing clients Due to some personal reasons, they would like to move This main human source can help PJICO in increasing revenue in all types of insurance

 Staffs from companies of Petrolimex: The majority of them do not have

much knowledge about insurance, however they have good relationship and communication ability These are chances to connect with the clients Understanding this, PJICO focuses on training and providing them underwriting knowledge, cooperating with old staffs to work effectively

 New staffs: PJICO as non-life insurance company has young and active

staffs with average age of 31 Young staffs are enthusiasm, active and flexible in thinking, settling the situation and having good health This is an advantage for insurance industry, especially for ship insurance, which asks for high qualification, underwriting knowledge and service quality

 Staffs from agents: Agents of PJICO does not always have high

qualifications as well as insurance knowledge However, via their works and training courses organized by PJICO, some of them have shown their ability and they are employed as official staffs This creates motivation for them to more actively work and be close to PJICO They are also the next staffs for the whole system of PJICO member companies

1.2.2.4 Promotions for the Development of Hull Insurance

*Applying technology and science

Now, the Head office of PJICO is well equipped with technology to serve the works: using the mails system, software, convenient store of documents… The high Internet speed, software for declaration records, statistics of accounts arising liabilities for motor vehicle via message of telephone, modern backup … make the whole system of PJICO control and manage underwriting data, statistics for each type of insurance It also help PJICO to share and arrange effectively insurance

However, technology applied to management in PJICO has some disadvantages Using internal telephone system through the general port for minimizing the costs is not so effective The general infrastructure of information techonology in member companies are not synchronous These do not meet the

requirements in management and contacts

*Program for enhancing service quality

Ship insurance is renewed every year One factor helping the Owners to continue buying insurance from PJICO is through service quality post selling insurance including claim settlement Up to now, PJICO has carried out the following tasks:

 Often contact owners to update/advise policies/new documents of State authorities in respect of ship insurance;

 Explain in details in respect of confuse and suitable requests from Owners;

 Service for claim settlement 24/24 for receiving and consulting clients when problem occurs; quickly sending staffs to site or appointing independent inspection companies (under the list approved by the Board of Directors every year) to solve problems

 Often check and upgrade time, progress/procedure for claim settlement/compensation to create the highest benefits for owners when the owners carry out correctly all instructions of PJICO;

 In order to support owners to rapidly overcome the big problems happened to their vessel, PJICO will consider and pay in advance part for costs under insurance liability;

 Open periodically training courses of underwriting to upgrade qualifications as well as behavior of PJICO’s staffs;

 Check and sign contracts with cooperative partners in ship insurance industry such as survey companies, laws firms and evaluation firms…

 Meet periodically owners in some major areas such as Hai Phong, Thai Binh, Nam Dinh, Ho Chi Minh city… in order to advertise and answer outstanding questions

1.2.2.5 Others

To support for insurance business in general, hull insurance in particular, PJICO has been improving Corporation’s trademark, financial capacity competence, risk assessment competence

CHAPTER II HULL INSURANCE AND THEORITICAL FRAMEWORK

2.1 Concepts in Hull Insurance

*The Insurer

The insurer accepts to insure under the proposal of client The Insurer has the right to collect premium and has the responsibilty to pay losses in coverage For example, Petrolimex Joint Stock Insurance Corporation (PJICO) is a insurer

* The Insured

The insured is a person or an organization who has property, liability or life under the coverage The insured is responsible for paying premium and asking

for compensation for damages under the scope of coverage

The participant of insurance contract is a person who has direct relationship with the insurer in the signing the insurance contracts

The person appointed to receive the compensation is the insured

* The Reinsurer

The reinsurer is a person who insures the insurer

* The Reinsured

The reinsured is a person who shares the risks from persons having objects

to other insurance organizations

*Insurable value

Insurable value is actual value of insured object agreed by both parties under the insurance contract This definition is appeared in property insurance The value of ship insurance is total value of the ship at the time of insurance commencement The value includes machines, equipments, reserved tools of ship and total insurance premium The value of ship includes total salary in advance

to crews and costs/expenses for the voyage which is agreed in the contract The value of cargo is total value stated in the invoice at loading port or market value at the place of loading time plus insurance premium, freight and estimated interest

* Sum insured

Sum insured is the value of insured object under the proposal of the participant of insurance and the insurer accepts this amount It can be equal to or smaller insurable value

*Premium rate

It is a percentage stated in the insurance contract This is paid by the insured

to the insurer annualy

*Premium

It is an amount stated in the insurance contract This is the amount which the insured must pay to the insurer The annual premium is sum insured multiplies with premium rate

* Deductible

The deductible can be expresse in amount of money or the proportion of sum insured If the loss amount is smaller than the deductible, the insurer is not responsible for compensation to the insured

The use of deductible has many advantages as follows:

 Minimizing small payments

 Reducing premium for the insured

 Transfering a part of liability of insurer to insured

There are two types of deductible:

 Franchise is applied to the case where loss value is over the deductible, the insurer will compensate 100% loss value If the loss value is lower, the insurer will not pay

 Deductible is applied to the case when the loss value is bigger than

deductible, the insurer will pay with the part excess the deductible

The insured objects are divided into three groups as bellows :

 Property such as ships, cargo

 Health status and life of person

Liability Shipowner’s liability

* Insured risks

The insured risks are all incidents causing damages to the insured objects Marine risks are ones relating to the safety of the ship

Based on the origin, marine risks are divided into two types as follows :

 Act of gods : rough sea, whirlwind, thunder, bad weather

 Unexpected accidents : strending, sinking, fire, collison

* Marine insurance contract and marine insurance policy

Marine insurance contract: this is applied to compensate the loss concerning the marine In other words, this is a contract under that the insurer has right to collect the premium and compensate for losses of the insured objects stated in the scope of coverage during the sea voyage

Marine insurance policy: this is a proof document signed for the specific insured object This is also the document on which the Insured asks for the claim

* Insurance terms and conditions

The terms and conditions state which risks under the coverage The insurer will pay for all losses caused to the insured objects under the scope of coverage Each insurance term and condition will mention the interest of compensation for the insured For convenience, the standard terms and conditions are issued Up to now, all standard marine terms and conditions are writen by UK insurance This

is used popularly all over the world

* Abandoning the property ownership

In marine insurance, there are some cases in which the insured has the right

to abandon their insured assets and move the ownership to the insurer At that time, the insurer will pay total loss

2.2 Claim Settlement

2.2.1 Types of Losses in Hull Insurance

Loss is damage, broken status happened to the insured objects under the risks In the marine insurance, there are two following loss types:

 Based on loss severity: Two types

 Partial loss: damage to a part of insured objects

 Total loss: damage to the total value of insured objects

Total loss inludes two types:

Actual total loss: the insured obejcts are under total lost or damaged

Contructive total loss: the insured objects are seriously damaged but it is not total loss It is estimated to be equal total loss or all costs to rescue, repair to

recover the value of the insured objects is higher than the insured value and not economical

- Based on liability classification

In special cases, the Insurer can not appoint their adjuster to the site, the insured is allowed to invite the adjustesr in the area of accident provided these adjusters are accepted by the State authorities

2.2.3 Principles of Claim Settlement in Hull Insurance

Claim settlement amount of insurer is limited within sum insured

Special cases are ones when the total cost of minimizing and protecting costs, adjustment cost, fees for General Average under the coverage are higher than the sum insured In this case, the insurer will pay all

Claim amount will be paid by money, not in kind The type of currency applied for claim settlement is currency used to collect premium

When the insurer compensate, the insurer has the right to deduct sum of money collected by the insureds when the insureds settle the remaining property

or get recover from the third party

After paying the claim amount, the insurer has the right to collect money from the third party for the liability to compensate for the loss within the amount paid

2.2.4 Exclusion in Hull Insurance

a Losses of insured objects which are not covered

b The insurer is not responsible for loss caused from intentional acts or too careless actions of insured However, the Insurer is responsible for loss caused from negligence or errors of the captain, crews or navigator during the process of management and control of ships

c when insuring for ships and freight, the insurer is not responsible for the following losses :

The ship is not have full safety condition at the time of departure, except for the case when the ship has inside defects eventhough the insured has paid due attention

Cargo on board is flammable and explosive or has other dangerous stuffs which is not suitable with regulations for carrying These types of cargo are not advised to the Insurer

e If there is no other agreement in the insurance contract, the insurer is not responsible for loss due to war or army activities, strike, riot, requisition, confiscation, arresting, destroying or under the order of army force or under the

decision of State authorities

2.3.5 Reduction in Indemnity

* The reduction of claim amount is applied to refuse the indemnity with the amount appointed under the percentage in total claim amount The reduction of claim amount includes two types:

- Franchise: when the loss happens, the loss extend reaches the regulated percentage, the Insurer has to pay all

- Deductible: The Insurer will deduct the fixed percentage for the loss over the regulated extend

* The target:

- The Insurer will not pay for too small losses in comparison to total insured value The loss amount is not equivalent to claim settlement based on time and

- There is a part of rate from sum loss amount for the Insured It means the Insured bears a part of liability in loss

At the time being, due to the high competition in the market, insurance companies rarely apply the reduction of loss in order to hold clients This will be applied to special cargo and high loss frequency

2.3 Theoritical Framework

2.3.1 Factors Affecting Hull Insurance Efficiency

There are factors effecting hull insurance efficiency, including both objective and subjective factors Objective factors are the economic growth rate, inflation, the development of marine transportation, the development of import and export activities, international and local regulations Subjective factors are trademark, financial capacity, risk assessment competence, products, distribution channels, service quality

The research concentrates to subjective factors, those may be improving by insurer

- Rating and trademark of company: insurance business is a financial service, so that, it’s development is much depend on the reputation of the insurance company or insurer’s trademark and rating The trademark and rating

is good, it is advantage for the development of the business, on the contrary, the rating is low, it is disadvantage for the development of the business

- Financial capacity of insurer: this factor affects to the insurance capacity and retention of an insurer The financial capacity is high, the insurance capacity and retention may increase

- Risk assessment and management competence: this factor affecting to the quality of insured risks and affects to the lost ratio of insurer

- Product: this factor includes sub-factors such as the diversification of product, coverage, endorsements, premium, terms and conditions

- Service quality: information about products, professional behavior,