Residual Value Insurance (RVI) helps:

• companies by managing asset value risk by guaranteeing that if a properly maintained core asset cannot be sold for at least a specified sum (the RVI Sum Insured) at a future point of time, the policy will respond by either buying the asset for the RVI Sum Insured or by paying the gap between the RVI Sum Insured and the best sale price that can be achieved. It is an enormously flexible tool with benefits which range from asset risk mitigation to complex financial objectives related to accounting treatment, capital optimization and cashflow  improvement; and

• enables a lessor to offer operating lease solutions to their clients where they are not willing or unable to take any or all of the asset part of the transaction. Instead, the lessor buys RVI which underwrites this risk

Types of assets that RVI can be applied to include:

• Commercial vessels;
• Helicopters;
• Fixed Wing Aircraft;
• Heavy Plant and Equipment (Yellow Goods/Construction Equipment/Mining Equipment);
• Rolling Stock - Regional  Passenger Trains and Freight Cars; 
• Other transportation such as Trams, Buses, Coaches and Trucks
• Certain types of commercial property in established Financial Centers (Hubs)

It is important to distinguish that residual value insurance covers a clearly defined risk of a loss of an underlying asset's value at the end of a lease contract due to unforeseen  market fluctuation.

There are a range of exposures RVI does not cover which includes:

• Asset Loss caused by accident or damage
• Bankruptcy coverage - Early liquidation
• Excessive use breaking the residual value agreement
• A lease agreement extension between the lessor and lessee without first notifying the insurer. If it is agreeable an additional premium will be chargeable, but only if that assets have worthwhile remaining period of their lifecycle
• Assets which don't have a recognizable secondary market
• Almost assets Assets deemed to be consumer assets

Cover periods can range up to 5 to 12 years. As it is deemed appropriate for the asset to have a secondary market, a predetermined remarketing period and remarketing process must be set together with a comprehensive and will documented claims management process which will cover aspects of asset ownership, cash settlement and asset disposal.

As each case or opportunity requiring RVI is generally unique the Underwriting Process can become cumbersome and intensive. Opportunities should only be considered where the:

• Client can determine a willingness to seek RVI, rather than mere window shopping. To this end the Client must include transaction cash flows, asset performance history etc.,
• A willingness to engage lawyers for policy negotiation and preparation
• Final Lawyer review of lease documentation and final value information - both parties

If the client has genuine interest to progress with an RVI Enquiry typically the Underwriter will charge a minimum and deposit premium which will be offset from the overall risk premium if the risk proceeds.

For further information contact Mark Standen, Mocden Insurance Services:

+315 359 6005

+44 (0)1322 476 276

+61 3 638 77 044

Mob: +44 (0)7472 628 886

Mob: +61 (0)490 056 472

Email: mstanden@mocden.co.uk

www.mocden.co.uk