28 INSURANCE 3 February 2017

Marvic bids to turn

marine market on to
residual value cover
Start-up insurer to focus on ‘workhorses of the seas’
Jim Mulrenan London
A move to cover a notable shipping
industry risk that insurers have
shown little appetite for so far is
to be made by a group of industry
veterans.
They aim to offer insurance cov-
er for the risk that a ship will be
worth less than a defined amount
some years in the future.
Insuring the residual value of a
vessel allows a shipowner to bring
more certainty to their capital po-
sition and potentially improves
cash flow.
But it also gives comfort to lend-
ers, enabling a ship to be financed
on better terms and may make
previously uneconomic loan or
chartering transactions viable.
Residual value insurance (RVI)
is an established product in the
aviation industry, for leased fac-
tory equipment and vehicle fleets.
But it is a niche offering virtually
unknown in shipping.
The new venture, Marine Resid-
ual Value Insurance Co (Marvic),
is a Guernsey-authorised under-
writer that is still working on its
reinsurance arrangements. There
are some reinsurers lined up but
RVI in the marine world is a bit
of a step into the unknown, so the
multi-layer excess-of-loss pro-
gramme is not yet completed.
“We want to have the reinsur-
ance fully in place before we press
the green button,” said Marvic
chief executive Alan Scattergood.
stream before and occasional mar-
ket gossip of bespoke policies be-
ing drawn up for some specialised
high-value vessels, such as LNG
carriers and cruiseships.
Marvic’s plan is to avoid high-
value or specialist tonnage, or any-
thing at the cutting edge of inno-
vation. This strategy excludes not
only cruiseships and LNG carriers
but also mega containerships.
“I am not brave or stupid enough
to say what a 20,000-teu boxship
is going to be worth 10 years from
now,” Scattergood admitted.
He says the target is the “work-
horses of the seas” — handysize
and panamax bulkers, products
carriers and smaller tankers, LPG
carriers and offshore vessels.
A feature of the target tonnage
is that there is data and an estab-
lished secondhand market for
these ships, so it is possible to look
at newbuilding and scrapping lev-
els over the next five or 10 years,
how the age profile will develop
and take a stab at how supply and
demand will work out.
Limited markets mean other
tonnage, such as fishing boats and
super-yachts, will be excluded, al-
though their vessel values might
otherwise qualify.
The target is to offer a maximum
of $14m of RVI cover per ship, with
the duration of policies running
at least five years — and not more
than 10 — during the company’s
early years.
The RVI might cover two-thirds
the market will decide the size of
the portfolio.
“Are we going to write 45 ships
in our first year or are we going to
write 65? The honest answer is I
don’t know,” Scattergood said.
He says the approach will be
rather like that of a building soci-
ety to a housebuyer.
“If we think a vessel is going to
be worth $10m at the end of eight
years and the owner wants $9.5m
insured, the answer is no thanks,”
he said. “But if he wants $7.5m or is
content to ask for $4m, the answer
is probably yes.
“We will always offer cover for
a percentage of what we think
the probable market value will be,
with the premium depending on
how close the sum insured is to
that value.”
The premium is also crucially
influenced by the amount of eq-
uity an owner has in a ship, as this
distances Marvic from a potential
claim.
If a ship is sold or scrapped
within the RVI policy period, the
cover is terminated. If there is a
total loss, there is nothing left in
RVI terms but the hull insurer pre-
sumably pays.
The market reputation of the
shipowner is a key component
in the RVI underwriting assess-
ment.
“There are good owners, well
recognised around the world who
have superb reputations for look-
ing after their vessels and we

“
There have been attempts to of the predicted value of the vessel, recognise that keeps values up,”
bring RVI into the marine main- with Scattergood indicating that Scattergood said.

Marvic chief executive Alan Scattergood: We

will always offer cover for a percentage of what
we think the probable market value will be, with
the premium depending on how close the sum
insured is to that value.

RETIREMENT-AGE TRIO LAUNCHES UNDERWRITING

The London-based trio heading Marine Re-
sidual Value Insurance Co (Marvic) are “third
age” entrepreneurs, even though setting up
a residual value insurance (RVI) company is
a long-term challenge.
The team is headed by veteran insurance
broker Alan Scattergood, with solicitor Keith
Bentley and accountant Jonathan Beauclair
also onboard.
Scattergood, 74, has held senior roles in
various broking concerns during his long
career, while Bentley, 69, has worked for
a Greek shipping concern as an in-house
lawyer and in private practice, and Beauclair,
who has various insurance and shipping con-
nections, is pushing retirement age at 64.
Marvic has appointed Artex Risk Solu-
tions in Guernsey — a recognised insurance
management company that is involved in
running captives, risk retention groups and
various other operations — to provide back
office and provide support services, while
underwriting and claims settling authority
remains with Marvic.
It will be five years or more between Mar-
vic writing its first policies and any claims
arising, so what happens if any of them, or
to be more macabre, all of them die in the
interim?
And could Marvic, as a start-up business
focused on a sector where long-term finan-
cial security is a core proposition, go bust in
the interval between premiums being paid
and claims developing?
Their answer is that they are planning
to recruit a cadre of younger successors
to carry the business forward and the
structure of Marvic and its reinsurance
programme would be a further obstacle to
a failure.
“We can’t go bust because we can’t have
a claim in the first five years,” Scattergood
said. “We will have reinsurance to protect
us beyond that and any catastrophes that
might occur.
CONTINGENCY PLAN
“If we were all on the same aeroplane that
crashed and we all died and there’s nobody
around to underwrite and direct the com-
pany, Artex would manage the run off and
collect the reinsurance. The reinsurance
premium will be paid out as we receive it so
the contract will be enforceable.”
As well as the founding trio, there is also
a handful of other participants in the project.
The chairman is Steve Hogg, a retired HSBC
area manager, a director from Artex and a
retired insurance administrator, who — to
meet local director requirements — are all
Guernsey residents. Others involved are a
marine engineer, a surveyor and a shipping-
industry professional expert witness.
“Somebody asked me, ‘why didn’t you do
this when you were 50?’ The short answer
is that I didn’t know what I know now back
then,” Scattergood said.
Marvic in Guernsey is owned by a sister
holding company in the Isle of Man but there
is no “Mr Big” or financial institution helping
get the venture afloat.
Scattergood says the start-up’s funding
3 February 2017 INSURANCE 29

HOW RVI CAN TURN

WELL VERSED: (From
left) Marvic’s veteran
team of accountant
Jonathan Beauclair,
insurance broker and
chief executive Alan
Scattergood, and
solicitor Keith Bentley.
Photo: JIM MULRENAN
NEGATIVE CASH
FLOW TO POSITIVE
Potential benefits for both own-
ers and banks could be achieved
through the use of residual
value insurance (RVI) but it
remains to be seen whether it
could become part of the ma-
rine insurance products range.
Owners can improve cash
flow while the risk of a loan
default may be cut for lenders.
The problem with RVI cover
for shipping assets is that ves-
sels are not a homogenous
product, unlike a Boeing 737
or a motor fleet, while even
an industrial production line is
likely to comprise a sequence of
standardised machines.
So valuation is less straight-
forward, with shipping a volatile
industry, where a vessel today
may be worth a fraction of what
it would have made at the peak
of the freight market in 2008.
A capesize bulker or VLCC
that might have had a valuation
of $160m in 2008 could be a
respective $10m or $20m today,
with the plunge also holding
true for smaller vessels, such as
a handysize bulker, that might
now be worth a tenth of its peak
price of around $60m.
The vessels in question are
now eight years older than they
were at peak value, so this is not
a like-for-like comparison as de-
preciation has played a role. But
it provides an idea of how vessel
valuations have changed.
“If you look at Boeing or Air-
bus, they have several models
and there are comparatively few
variations on that,” said Marine
Residual Value Insurance Co
(Marvic) boss Alan Scattergood.
“But even if we take a
straightforward panamax bulk-
er, there are lots of variations. Is
it geared? Strengthened for ice?
Can it take heavy cargo? Has
it got the capability of loading
and unloading containers? Is it
a hull with multiple rather than
a single use? What is going to
enhance or degrade that value?
That’s our judgement call.”
Aviation RVI premiums might
be around 5% of the insured
amount paid as a single upfront
sum. But figures prepared by
Marvic suggest a premium that
could be as high as $1.5m for
an insured sum of $6m on a
vessel bought for $18.5m. This
amounts to more than 8% in
terms of the ship value, or 25%
against the sum insured. How-
ever, this is before an estimated
$400,000 no-claims rebate.
The Marvic illustration relates
to a ship bought for $18.5m, with
eight years to run on a 10-year
charter. An owner’s equity is
20% and the estimated market
value in eight years time is $9m.
A key difference between the
financial figures of a vessel with
RVI and one without is the stag-
ing of the capital repayments
— a flat annual figure of $1.9m
without RVI and a yearly sum of
$1.3m but with a final-year bal-
loon payment of $6m with RVI.
RVI helps make balloon
financing work and has the
effect of turning the cash flow
positive for a ship purchase and
chartering project through the
crucial early years that would
otherwise be in deficit.
RVI cover is bought by the
shipowner to protect his finan-
cial position. The owner remains
liable to repay a loan used to
buy a ship and RVI does not take
on risk from the bank.
So RVI is not providing a fi-
nancial guarantee to the lender,
although the bank might feel
happier that the owner was in
a stronger financial position to
meet his obligations.
“We will not cover physical
loss or damage of the vessel, or
the liabilities of the shipowner,”
Scattergood said. “There are
perfectly good markets for this.
We cannot and wouldn’t do
financial guarantee. Our licence
does not permit us to do this
even if we wanted to do it.”
Longer term, the plan is that
Marvic will stay focused on RVI
and build this as a recognised
class of marine insurance.

VENTURE WITH SOUND ROADMAP FOR THE FUTURE

needs are limited as premium will be a one-
off, upfront payment, with reinsurers paid in
the same way and 50% of premium put into
a claims reserve.
There are going to be no dividends or bo-
nuses for at least five years to allow Marvic
to build capital and become established.
The Marvic business plan aims at a
first-year premium income of about $50m
and, presumably, there would be growth in
subsequent years. So, by the time the first
claims are made, there should be a lot of
money — potentially hundreds of millions —
in the kitty.
Scattergood says the 50% claims reserve
is well in excess of the claims that might be
expected, based on ship-value data going
back more than 50 years.
But what about the risk of an economic
crisis or some other catastrophe undermin-
ing ship values in a dramatic and sustained
way?
Scattergood says there has never been
a very protracted general slump in ship
values, so having a spread of risk through a
balanced book, in terms of ship types, ves-
sel age and policy maturities, should protect
the claims record.
“History teaches us that if we do have a
problem with tankers, we’re unlikely to have
a problem with bulkers at the same time,”
he said.
Scattergood also appears not to be too
worried at the risk of an economic catas-
trophe, such as a slump in China, Brexit
sparking trade wars or Russian president
Vladimir Putin and US counterpart Donald
Trump going berserk.
“If there is Armageddon, TradeWinds
won’t be printing newspapers and we won’t
be sitting around here talking about residual
values,” Scattergood noted.
IN-DEPTH MARKET RESEARCH
Marvic is not partnering with a shipbroker or
other expert on ship valuations, as Scat-
tergood and his colleagues have been re-
searching the market for years, going back
to the days of coal-fired steamers, World
War One and the Great Depression, to build
a database and test how their underwriting
methodology holds up.
Scattergood says Marvic, as a project,
has been on the drawing board for a decade
but the current period of low ship values
reduces the RVI exposure and creates a
generally more conducive environment for
the launch of the company.
He says it was clear that ship values were
inflated some years ago so he knew they
were going to drop.
“I’m not going to tell you we were smart
enough to predict the month it would hap-
pen but we saw the market was completely
unsustainable,” Scattergood said.
“Values in many cases today are almost
at scrap level so it is almost inconceivable
they will fall.
However, Scattergood indicates that
Marvic may seek a view on ship values from
leading shipbrokers if a bank requires it and
it helps get a deal signed off.