An introduction to non-payment insurance in the shipping industry
“Lenders acting in this industry are increasingly looking to such insurance policies as strategic tools for credit risk mitigation.”
Insurers will generally not provide funding themselves but will bear the risk of non-payment default by providing coverage to lenders, who are expected to rely on the credit of the insurers.
Such products are now well-identified and commonly used in the of aircraft finance sector, where standardised insurance products, such as AFIC, Balthazar Finance and SAAFI non-payment insurances brokered by various market participants including Marsh, Itasca, Gallagher and others, offer insurance policy, for the benefit of the lender(s), against the risk of non-payment by an airline.
Until recently, such practices were not common in the maritime finance sector. However, lenders acting in this industry are increasingly looking to such insurance policies as strategic tools for credit risk mitigation. In response to this need, several insurance groups have developed non-payment solutions, such as Marsh with its ‘Marine Supported Finance’ (“MSF”), designed specifically to support financing arrangements in the maritime sector.
Non-payment Insurance Policy
Non-payment insurance (such as the MSF non-payment insurance) protects lenders against the risk of a counterparty failing to meet its financial obligations. In the context of vessel financing, this typically means safeguarding the financier against the shipowner’s repayment default, once delivery of the ship has occurred.
The subscriber of the non-payment insurance policy would generally be the borrower (or the lessee) who will be liable for the payment of the premium (payment being a condition to the effectiveness of the policy). The premium itself may be financed by way of a drawdown under the loan.
Among others, the following conditions would typically be set out in the insurance policy:
- percentage of the loan covered by the non-payment insurance policy – where the cover does not extend to the entirety of the loan/outstanding amounts, part of the risk will remain with the lenders;
- the waiting period, being the period that must elapse from the date of loss, or of first loss (i.e. the date of payment default) and the date on which the insurers will cover such payment; and
- exclusions (generally limited, and in line with aircraft finance non-payment insurance policies), where the loss of the insured will not be covered by the insurers.
Financing structure – a flexible and adaptative product
Non-payment insurance such as the MSF non-payment insurance will be tailored to the financing structure and will therefore cover loans (covering the borrower’s/shipowner’s default) or finance lease structures (covering, in the same way, the lessee’s/shipowner’s default), whatever the underlying structure.
Depending on the product, the structuring and financing documentation may be led by a primary shipping bank or by the insurers, being the parties principally taking the non-payment risk.
Where the documentation is led by the primary shipping bank, insurers (such as the MSF insurers) will generally only perform a red-flag review of the financing documentation, relying on the lenders’ or facility agent’s (and their advisors’) expertise in the sector. In such cases, the insurers will expect banks with experience of shipping finance as their counterparts.
Insurers will generally expect a “standard” ship finance security package, which, for a delivered vessel, will typically include, inter alios, a mortgage over the ship, insurances assignment and earnings assignment.
Legal and Regulatory Framework
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