The thirteen principal underwriting member clubs of the International Group of P&I Clubs are taking breath after an exiting[ds_preview] turmoil that has been shaking up the shipping industry during the previous period. The rather unexpected rapid recovery of the markets also affected the general mood within the Group’s member clubs with a tendency of reaching new benchmarks. Renewals were back below 5% for P&I with FD&D levelling at 15%. Although some voices are still warning of a possible »double dip recession« most Clubs meanwhile re-entered the equity market despite the clear signal during the recent bump of having been over-positioned in equities.
Having seen a vivid period of record highs and lows in the recent past the industry may now rather be longing for a passage in calmer waters. Time is passing fast and the next renewal is not far away. However, members are not too much excited about the forthcoming increase of premiums by their P&I Club.
General Excess of Loss Reincurance
In January 2010 arrangements for renewal of the International Group General Excess of Loss reinsurance contract and Hydra reinsurance programme for 2010/2011 had been finalized.
For 2010 rate reductions for tankers and passenger vessels have been agreed and a modest increase in the rate for dry cargo vessels. Hugo Wynn-Williams, Chairman of the International Group Reinsurance Sub-Committee, stated that notwithstanding some further claims deterioration on the 2006 and 2007 policy years, the claims picture for 2008 and 2009 is looking more positive and is reflected in the terms negotiated with the Group’s reinsurers. The Hydra reinsurance of the Group US$ 20m xs US$ 30m pool layer has been renewed on more favourable terms than for 2009, and the improved claims picture for 2008 and 2009 will positively impact on Hydra’s financial position and future development.
International Group General Excess of Loss Reinsurance Contract Renewal 2010/2011
The International Group RI rates (per GT) including Hydra premium, Collective Overspill Cover and excess war risk P & I for the year commencing 20 February 2010 are as seen in table 2.
For chartered tankers, reinsurers costs including $ 0.0038 per GT for excess war risks will be $ 0.1873, and for chartered dries $ 0.0912.
International Group under
EC investigation
Following a recent announcement by the European Commission that it had opened an investigation into certain aspects of the International Group’s pooling and reinsurance arrangements, there have been several press comments and articles which inferred a lack of activity and engagement on the part of the Group with the competition regulators in Brussels, the Group`s Chairman, Peter Spendlove, emphasized. »The International Group’s engagement with the commission concerns matters relating not only to competition but also to the unique role which the International Group Club system plays in ensuring prompt and effective compensation to public and private interests adversely affected by maritime incidents in Europe and worldwide. The International Group is confident of the full support of its shipowner members and of states around the world that they rely on the unparalleled limits and extent of cover which the International Group system delivers on a not for profit basis. The International Group will continue to work with the commission as it carries out its current review« Peter Spendlove commented an article raising certain shortcomings of cooperating with Brussel.
In August 2010 the European had announced that following the expiry of the second 10 year exemption for the International Group Agreement, it would be carrying out a review and making inquiries into certain aspects of the Group’s claims-sharing and reinsurance arrangements. It was not open to the Group to seek a further individual exemption for the IGA following procedural reforms to the competition law rules in 2004. An exemption now applies »automatically« to any agreement that meets the criteria of Article 101(3) of the Treaty on the Functioning of the European Union, without the need for notification to, or decision by, the Commission. The Commission had informed the International Group that this review was not prompted by a complaint about the Group’s arrangements. It is normal practice for the European Commission to review the position on expiry of an individual exemption. In relation to the aspects of the International Group’s arrangements which the European Commission is reviewing, there have been no relevant or material changes to the arrangements or in the market for P&I cover since those arrangements were approved in the Commission’s 1999 decision, with which the Group has continued to comply. The International Group therefore takes the view that the Commission’s careful analysis of the Group’s arrangements as set out in the 1999 decision remains valid. Pending the outcome of the Commission’s review, the Group’s arrangements remain unaffected. The Group provides the Commission with reports on its arrangements and the market each year and is working closely with DG Competition in its review.
The Club Members – summary of developments and results
American Steamship Owners Mutual
The American Club reported an excellent progress during 2009 and into the first half of 2010 at the annual meeting of its members which took place earlier today in New York. The progress was marked by increased tonnage and base premium. In particular, growth in Asian markets had been strong, with members in this region now representing nearly 25% of entered tonnage.
Despite a global slump which lingered into the early part of 2009, the club experienced a very good year, welcoming 2010 with a larger membership and significantly increased free reserves. The club’s policy of careful risk selection and loss control continued to bear fruit over the period. This, in combination with much improved investment earnings, gave the club increased traction in strengthening its finances and expanding its tonnage and premium base.
Against a volatile economic background, the American Club posted an investment return for 2009 of 12.4 %. This was a result of the club’s commitment to the equity markets (to the extent of approximately 30 % of total funds invested on average throughout the year), and its taking advantage of a favourable municipal bond performance.
Members heard that while investment prospects remained uncertain, and volatility was likely to persist, the club’s strategy reinforced its overall results, contributing to a sharp rise in the value of its contingency fund during 2009. This increased by about 140 % from $14.6 million to $ 35.1 million over the period.
There was also positive news at the operating level. While net premium earnings reduced compared with the prior year – mainly as a result of the absence of any unforecast supplementary call for 2009 – incurred claims remained broadly constant at $76 million (2008: $ 72 million) while operating expenses reduced by 7.5 % during the period.
Net interest and dividend income grew slightly, but unrealised gains on investments were approximately $ 17.6 million, against a loss the previous year of $ 19.3 million.
Overall, the club’s free reserves rose by 36 % from $ 35.7 million at year-end 2008 to $ 48.3 million at December 31, 2009, a notable result given the difficult economic conditions which prevailed throughout the year.
Reviewing the year, the club’s chairman, Arnold Witte of Donjon Marine Co., Inc., said: »2009 was another challenging year, but a significant improvement in the club’s fortunes was achieved. The progress which has been made by the American Club during 2009 points to an encouraging future, built on a solid foundation of much hard work in the recent past.«
Joe Hughes, chairman and ceo of the American Club’s managers, SCB Inc., echoed Mr. Witte’s remarks: »Notwithstanding a continuingly difficult business climate, and the fragile recovery of the last 12 months, 2009 was a good year for the club. Its underlying claims exposures continued to improve, its investments performed well, its tonnage grew and its free reserves increased.«
He said: »These trends have continued into 2010 following a renewal season in which the club benefited from a quickening momentum of organic growth towards the end of 2009. During the year, total tonnage entered for P&I increased by about 19 %, while FD&D entries expanded by over 30 %. Growth in the Asian sector was particularly significant, and owners from this region now account for nearly 25 % of the club’s entered tonnage, up from 18 % a year earlier.
»Moreover, it has been very encouraging to see a further increase in the club’s free reserves during the first quarter of 2010. A record figure of some $ 59 million was recorded at March 31, 2010, 22 % higher than the figure of only three months earlier.«
Mr. Hughes concluded »The progress made during 2009, and into the early stages of the current year, provides an excellent platform for future development. The club’s technical fundamentals are sound, its core business is performing well, its operational capabilities are at the leading edge of market practice, and its global reach is second to none. Having achieved much in recent years, the American Club is well positioned to exploit the many opportunities which lie ahead.«
The Britannia Steam Ship Insurance Association Limited
Nigel Palmer OBE, Chairman, stated in the Annual Report 2010 of the Club: »As we enter a new decade, it is natural to think in terms of a new beginning coupled perhaps with a sense of optimism for the future. However, it is impossible to ignore the events of the last two years and any optimism we feel as we begin 2010 must be tempered by a sense of realism. The world economy is still fragile and the shipping industry, in particular, is struggling to cope with stubbornly low freight rates, large new-build programmes, dramatically reduced asset values, and a liquidity crunch which makes financing difficult. It is therefore with some pleasure that I am able to report a good result for Britannia in 2009/10.The Association is still in sound financial health and, despite a challenging environment, I believe that it can face the immediate future with confidence. In such difficult times it is, more than ever, the role of the Club to provide its Members with stability and security and to be a refuge from the volatility that affects other aspects of a shipowner’s business. It was therefore satisfying to be able to restrict the general call rate increase to a relatively modest 5 % at this February’s renewal. This is consistent with our policy of setting appropriate and prudent rates to ensure the long-term viability of the Association without the need to make unbudgeted calls on our Members. The Association’s owned tonnage increased by 5.2 m gt during the course of the last year. As has been the pattern in recent years, most of this was organic growth from new tonnage entered by existing Members during the course of the year, with only 1m gt being added at renewal in February. Although Britannia does not seek growth as an end in itself, it is pleasing to see our Members having the confidence to place their ships with the Association. Despite fears to the contrary, charterers’ business entered in the Association has stood up remarkably well, with very little change in volume over the course of the year. Claims levels have moderated when compared to recent years, particularly those within the Club retention. Interestingly however, there has been only a small reduction in the total cost of claims below US$ 1m – the band where the majority of claims occur. These ‘attritional’ claims had been expected to fall in line with the reduction in trade volumes caused by the worldwide economic downturn; it remains to be seen whether they will reduce with the passage of time. Larger claims are more random in occurrence and therefore it is difficult to draw any conclusions from the reduction in claims between US$ 1m and US$ 7m. Disappointingly, the projected cost of claims on the Group Pool (excess of US$ 7m) is much higher than last year, although still not as high as the peak years of 2006/07 and 2007/08. The recovery in the investment markets over the past 12 months has boosted the Association’s finances, and its overall resources sit well within the range set by the Committee. Following a lengthy and thorough review of the Association’s asset allocation strategy, the Committee has responded to the increased volatility in global markets by reducing the Association’s equity exposure from that maintained over the past decade. While providing greater stability, this reduction is likely to lead to reduced returns over the long term. Having agreed the new asset allocation strategy the Committee will now be able to concentrate more time on claims and general strategy. FD&D (Class 6) claims have followed a different pattern to P&I claims. As referred to in my statement last year, one of the effects of the collapse in freight markets was a dramatic increase in the number of FD&D disputes notified to the Club. Although the level of notifications is still high, the predicted reduction has started to manifest itself and it is hoped that this trend will continue throughout the current policy year. During the year, we were pleased to welcome Mr B Chiu and Mr S-M Kim as new Committee Members. We live in difficult and uncertain times and it would be unwise to predict the future. However, the Club is here to serve its Members and help them, as best it can, in troubled times such as these. The Committee will do everything possible to ensure that the Association stays in good financial shape, to enable it to provide the stability and level of service that its Members rightly expect.«
Assuranceforeningen Gard Gjensidig
Stephen Pan, Chairman of Gard, stated in the 2010 Annual Report of the Club:
»There has been much commentary on the state of the global economy and its effects on the shipping industry, and little can be added from an insurance perspective that has not been well-covered in many other places. However, it is worth examining some aspects of the last 12 months because they are very pertinent to some of the changes being made at Gard.
The Platou Report 2010 estimates that tonnage demand fell by 3.3 per cent in 2009 – a more moderate fall than many would expect given the IMF’s estimate of an almost 12 per cent fall in world trade. Part of this was driven by the ongoing demand for raw materials from emerging economies, especially China. Utilisation rates, when taking into account the newbuildings entering service, however fell from 90 per cent in 2008 to 81 per cent last year. Promising signs of economic revival are now very much tempered by the financial problems facing the Euro and the fiscal and financial crises in several European countries. Sustainable economic growth may require the wide-ranging government stimulus programmes to be replaced by private sector consumption and investment.
Last year saw the group make a number of changes to its corporate structure. The overarching strategic imperative was to create a more linear model by shifting the centre of gravity for capital and governance to Bermuda, while retaining our Norwegian traditions of technical and professional expertise. Gard Bermuda has become the parent company of the group and a legal platform has been established for presenting consolidated accounts for the whole group including the results of both Gard Bermuda and Assuranceforeningen Gard – gjensidig (Gard Norway).
Previously Gard Norway insured the bulk of the P&I business with 85 % of its retained risk then ceded to Gard Bermuda under a quota share reinsurance agreement. The Members of Gard Norway are automatically Members of Gard Bermuda, thus making the two associations ›sisters‹. At the meetings held in Athens in October 2009 the boards of directors of the two Clubs agreed to transfer a major part of the direct P&I business from Gard Norway to Gard Bermuda, with effect from the beginning of the 2010 policy year.
The principal reason for the change is to create a structure that better utilises the combined financial resources of the companies within the group to the benefit of Members and clients, and the effect of this shift is to bring a larger proportion of the policy holders closer to the financial centre of gravity in the group. Gard Bermuda now writes the bulk of what was Gard Norway’s direct business through a Norwegian branch. In addition, on 22 February we completed the incorporation of Gard Re in Bermuda, a captive that reinsures both Gard P&I and Gard M&E.
A changing legislative environment
In addition to the difficult economic climate, the shipping industry also faces legislative changes that create ongoing uncertainty. It is likely that new regulations will be introduced for CO2 emissions from ships in the near future, despite the lack of formal agreements being adopted in Copenhagen in December 2009.
Of more immediate concern is pending legislation in the United States under which sanctions could be imposed against both domestic and foreign entities »underwriting or otherwise providing insurance or reinsurance…« for »any activity that could contribute to the enhancement of Iran’s ability to import refined petroleum resources«. The effect could be to prohibit insurance cover for any vessel(s), regardless of country of flag, registry or beneficial ownership, trading refined products into Iran. Sanctions could be imposed against individuals and companies, as well as officers and directors of companies involved in prohibited activities.
In anticipation of possibly widespread problems arising from this legislation, we felt it necessary to amend the Rules of the Associations to broaden the current termination of cover provisions. The overriding objective is to protect the Club from being caught by the proposed sanctions, if and when they come into force. The consequences of being subject to the sanctions may be serious and may affect the quality and efficiency of the services we are offering our Members. Shipping is an international business and Gard’s aim is to provide cost effective risk management and insurance cover for the industry within the national and supranational legal framework with which Gard must comply.
Piracy generally, and especially off the coast of Somalia, continues to be a cause for concern. The major industry organisations, including the International Group of P&I Clubs, have in consultation with supra-national naval forces, produced a »Best Management Practice« to deter piracy off the coast of Somalia and the Arabian Sea Area. Providing guidance to shipowners, masters and seafarers intending to pass through these sea areas, it is updated as and when appropriate. Despite some encouraging signs of a greater willingness to detain and prosecute pirates, the continuing lack of the consistent application of the existing international jurisdictional framework to deal with piracy often leaves ship owners whose vessels have been hijacked with no alternative but to pay a ransom to secure the safe return of the crew, ship and property on board. Although after the end of our financial year, the US Executive Order of 13 April could affect the legality of ransom payments under US law in certain circumstances. Although this is not its prime intention, the impact of the order remains unclear. Gard continues to assist our Members in their efforts to deter piracy and to protect the life and safety of crew where possible.
As we mark a decade since we began to operate as a provider of multi-product risk management products to the maritime industry, I would like to pay particular thanks to all of the members of our committees and boards for the contribution they have made to this transformation of Gard. The passage of time makes one forget how bold it seemed to take control of both the underwriting capital and the service company. As our knowledge and experience have grown, they give us confidence to take control of many activities that had previously been furnished by third party providers; whether that was reinsurance purchasing, the Common Contractual Fund or managing our Bermudan entities.
Achieving the right results has given Members confidence in the group’s ability to deliver. Good ideas have been given support and the group has been given the leeway to develop. I know that I also speak for all of our Members and clients when I pay tribute to the hard work of the management and staff which has been vital to the group’s development. Looking forward, our core purpose remains to help our Members and clients to mange risk and its consequence, and over the next ten years we can only hope to continue this track record of stability and success.«
Japan P & I Club
In his statement in the 2010 Annual Report of the Japan P&I Club Chairman Kenichi Kuroya said: »For many years, the shipping industry enjoyed buoyant growth. However, global business conditions suddenly deteriorated following the aftermath of the collapse of Lehman Brothers Bank in 2008. This caused a sharp drop of cargo movements worldwide and led to a decline in general trade and the shipping market. This resulted in many countries entering a period of economic recession.
Recently, the world economy has been steadily recovering driven by the growth in trade with many developing countries, and from the effects which resulted from the implementation of the emergency economic plans which were introduced in many developed countries. However, due to the recent financial deterioration of several major economies and the resulting fluctuations of both exchange and interest rates, we are less optimistic for the future of the world economy. Unfortunately, this uncertainty has been reinforced by the fact that the volume of cargo movements has not returned to the same level as before the collapse of Lehman Brothers Bank.
The effect on the insurance industry, in Europe and the United States of America has resulted in several companies, such as AIG having to be injected with large sums of public money and massive restructuring in order to prevent a deeper financial crisis. In Japan, there has been a significant restructuring and consolidation of both property and casualty insurance companies. This has resulted in their recapitalization as a countermeasure to the increased level of risks. In addition, there has also been intense-competition within the P&I insurance sector.
However, even under these very difficult trading conditions, on 31 March, 2010, the overall volume of tonnage entered with our Association increased to more than 92 million tons. This increase reflects a continuing increase in the number of new building ocean-going vessel entries and which enabled us to improve on the previous year’s record figure. I further appreciate that Members have a high level of expectations in respect of the provision of our services and would like to express my sincere gratitude to our Members for their continued support.
Since 2004, the significant increase in the volume of maritime trade has also been mirrored by the number of worldwide maritime accidents of both a diverse and expensive nature. This has led to an increase in the level of claims payments which has affected the level of insurance performance of the Association. Our experience has been similar to the situations faced by other members of the International Group of P&I Clubs (the »IG«).
Unfortunately, despite the decrease in world trade and shipping movements since the collapse of Lehman Brothers Bank, the size and frequency of claims has shown no sign of improvement.
It is therefore most important for both our Members and the Association that we continue to improve our insurance performance through the use of Loss Prevention activities. In this respect, we have concentrated much more on Loss Prevention issues in order to cooperate with our Members so as to ensure the safe navigation of their vessels.
Further, as the rules and policies which affect the pollution of the environment have become more complicated in almost every country, the roles and responsibilities of P&I insurance and the Association, have become increasingly important. As one of the13 members of the IG it has proved to be a very useful source of information and suggestions, which we have been able to assist our Members in their Loss Prevention measures.
2 October, 2010, will be an auspicious date as it will be 60 years since the foundation of the Association.
In an increasingly adverse and complex world, all the staff of the Association will continue to ensure their best efforts to improve and accomplish the business performance of the Association to the satisfaction of our Members.«
London P & I Club
Chairman John M. Lyras in the Club’s 2010 Annual Report stated: »I am glad to report that the Association achieved a very positive result for the year, producing an overall surplus of US$ 25.9 m and raising free reserves by just over 20 % to US$ 141m. Claims and investment performance were the main factors in producing that outcome. The P&I industry had anticipated that depressed freight markets may lead to a moderation of claims and, indeed, we saw a significant reduction in the aggregate cost of our attritional claims in 2009. As our Managers report in their review, we also experienced a ›cluster‹ of larger claims during the first six months of the year, and this placed an unusual strain on the underwriting result. However, as I noted last year, the Association’s premium income has been increasing and with the implementation of other measures, including the adjustment of deductible levels, long term technical performance should steadily strengthen.
Since the Association’s exposure to claims from our Members, as well as claims brought on the Pool by other Clubs, influence our performance, it is an aspect of the business which the Committee takes much interest in. In addition to the reports on substantial case settlements that we consider at our quarterly Meetings, we also receive information on significant new claims that have been incurred, as well as emerging trends and patterns and, increasingly, loss prevention issues. The Committee pays considerable attention to the work of the Group secretariat and various sub-committees and working groups – and in the context of claims, we take a keen interest in the work of the Claims Co-operation Sub-Committee, on which our Managers are represented and on which they also report in their review.
Investment performance is also a key component of the Association’s financial year result. In strong contrast to the fall in the value of the portfolio of the Association’s quota share reinsurer in Bermuda in 2008, investment income of US$ 42.7m has contributed to the surplus in 2009, a particular highlight of which was the strong performance relative to benchmark of the fixed income assets. This turnaround in performance is pleasing, but significant challenges and uncertainties remain ahead. As I also noted last year, the Board in Bermuda reduced the allocation to equities during 2008 – and it continues to follow a cautious and vigilant approach.
Of course, the management of risk in the context of underwriting and claims as well as financial decision making is something which the Committee is giving careful attention to, as part of our preparation for the increased emphasis on the Association’s governance framework under Solvency II. The thrust of the Directive towards strong risk and capital management means that the Committee is focusing increasingly on its understanding of risk appetite, measurement and modelling, along with management information. Since the scope of the Directive’s quantitative, supervisory and disclosure-related requirements are far reaching I am reassured that there is cooperation amongst the Group over aspects of the forthcoming regulation that the industry can influence. The Committee therefore also follows with interest the work of the Group’s Capital Adequacy Sub-Committee as part of the considerable time we are spending on the various issues involving regulatory and capital requirements, as well as corporate governance.
The Committee also gives keen consideration to other issues of either direct or indirect interest to the Association and its Members. Sadly, the blight of piracy continues to afflict the shipping industry. Our Managers through their participation on the Group’s Maritime Security Sub-Committee have worked with other industry organisations on the development and promulgation of practical guidance to reduce the dangers to shipping. The industry debate over the deployment of properly trained military guards also continues. While there seems to be growing recognition that the use of such personnel may be warranted, especially for more vulnerable ships, concern remains over the risks which could arise from an exchange of fire and the escalation of force that this could lead to. The merits of crew retreating to a pre-prepared secure location onboard in the event of a successful boarding by pirates is also an issue. It presents difficulties in terms of leaving ships unmanned and may expose crew to greater danger as the pirates attempt to break-in. However, in two instances their use seems to have encouraged military intervention, leading to the safe release of the crew and the ship. But whatever the procedures and operational steps put in place, while the lawlessness which exists in certain parts of the world continues to foster the criminals engaged in acts of piracy, it seems impossible to guarantee that seafarers and shipping will not be exposed to further attacks. Indeed, during 2009, some 5 of our Members’ ships were seized by pirates in the Gulf of Aden and Indian Ocean.
In addition to work on the sort of practical matters referred to above, close attention is also paid to a wide variety of legislative developments, at an international or regional level, of potential concern to Members. Last year, I highlighted the efforts of the Group secretariat and sub-committees in connection with the Maritime Labour Convention and the European Union’s Third Maritime Safety Package – and the encouraging developments which followed. The need for similar detailed work has continued in a number of areas, most recently as a result of a US Executive Order which seems to have the potential to impact on ransom payments in some piracy cases. Although P&I is not directly involved in the paying of ransoms, this legislative intervention is plainly of concern to our Members: and the Group is therefore involved with the ongoing efforts being made to clarify the uncertainties attached to the scope and impact of the Order.
During the year we saw a number of changes in the Membership of the Committee. Theodore Veniamis of Golden Union Shipping Co SA, Friedrich Detjen of Norddeutsche Reederei H Schuldt GmbH & Co, Dimitris Procopiou of Centrofin Management Inc and Dato’ Shamsul Azhar Abbas of AET Tanker Holdings have stepped down. We thank them for their years of service and wish them all good fortune in the future. Meanwhile, we have been very glad to welcome new Committee Members, Markus Hempel of Norddeutsche and Captain Rajalingam Subramaniam of MISC Berhad.«
Further club reports will follow.
