Having been introduced several years ago, residual value insurance (RVI) has become a major talking point in the insurance market.

The potential benefits of RVI are regularly discussed in any industry with significant physical assets.

One of the main concerns to an organisation, be it an airline, shipowner, rolling stock operator, energy concern, power plant operator, automobile manufacturer, real estate / plant & machinery owner or a financier, is the value of its physical assets. Ensuring that the value is quantifiable at defined points during an asset's working life, such as the end of a particular finance or charter period, can deliver an attractive element of certainty to an organisation's bottom line.

RVI offers a way of insuring for the event of the future value of an asset falling below a specified level.  It can be used to reduce leasing and finance costs by minimising the amount of amortised capital repayments.

RVI can be very useful in transactions where the final payment at the end of a financing period, often known as a balloon payment, is feared to exceed the value of the actual asset.  Equally, even if there is no financing involved, it can simply insure against an asset having a lower than originally anticipated value at a specified future date.

As a result, the benefits of residual value can be significant. Alternative risk transfer methods such as RVI make projects possible because without insurance they would be considered too risky to undertake.  RVI can be used to provide insurance capacity that might not otherwise have been available.

Despite the obvious benefits of the product for an asset hungry organisation, it is difficult to implement without significant expertise.

Lenders tend to be unwilling to take residual value risk themselves because of the level of risk, while manufacturers are not prepared to offer residual value guarantees because any claim could have a significant but non-quantifiable impact on their balance sheets.

RVI can be used to support both long and short-term projects and can improve the level of certainty when looking at the long-term value of physical assets, and is now also increasingly used in the automobile and real estate industry.

The tenure of RVI usually runs for several years and the sums insured are substantial. It is therefore of vital importance for an insured to not only have his insurance covered by a first class underwriter who has an excellent standing in his class of business, it is also equally important that the placing insurance broker has a very good financial standing and is likely to still be in existence for any assistance if a claim arises in the future.  Furthermore, and as is the case with any high volume insurance placement, for example in the areas of aviation or ship finance, the importance of errors and omissions (E&O) cover and indeed of the financial background of the insurance broker involved should be closely scrutinised.

Last updated on 16 November 2007

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