Whither 2012 and beyond? as uncertainty builds up

For a start the P&I clubs, like their commercial marine insurance peers, will be anxiously watching to see if the shipping crisis deepens or whether some grass roots of optimism spring up for better times ahead from 2013 on. Most shipowners would like to know the answer too.

Cancellation or deferment of shipbuilding orders is rife, ship finance is fast drying up, and ship arrests are increasing as owners strive to stay afloat. This is the depressing background for marine insurers of whatever hue.

On top of this, the 13 mutuals which are members of the International Group are facing increasing competition from the growing number of fixed-premium insurers, now around the 20 mark, and the prospect of escalating high-value claims.

There is also the dark shadow of the European Commission’s reopened investigation into the IG system of mutual insurance. It was in August 2010 that the EC commenced its review of claim sharing and joint reinsurance calls between members of the IG, and some judgements from Brussels may well have surfaced by the time this appears in print, otherwise it’s expected to be quite soon.

Finally, there is the spectre of Solvency ll hanging over the whole insurance market, including the mutuals. Now expected to come into force by early 2014, the fear is that insurance companies – like banks – may need to raise more capital to comply with the new regulations. This is why it has been revealed that some IG clubs are starting to quietly go about the business of restructuring their operations.

For example, specialist P&I broker A.J. Gallagher in discussing the UK Club’s examination of its corporate structure says the aim is to look at reducing the number of regulated entities within the group, so as to streamline governance, reduce compliance costs and manage its solvency capital utilisation more efficiently.

Referring to the winding-up of the South of England mutual, which is not a member of the IG, at the end of 2011, Gallagher argues that the troubled club could be of interest to the EC team of investigators. The broker states: “The continuing difficulties of an independent P&I mutual could be attributed to excessive protectionism by the IG. Alternatively, the (club’s) difficulties may point to the greater dangers of opening the market up to smaller entities with less critical mass, technical knowledge and experience. Indeed, perhaps it is further evidence of just how important the IG is in providing a safe and secure underwriting service to shipowners.”

However, some observers think the SoE saga has some way to run, and there has been muted criticism of the Bermudan regulatory authorities in hastening the winding-up order since the club had been in discussions with the Bermuda Monetary Authority for many months. Further, there may be a feeling of unease among the several IG clubs which are domiciled in Bermuda, not least because this type of offshore set-up could enter into the Solvency ll equation.

Meanwhile, members of the SoE club, which concentrated on big, older ships, are left to seek coverage elsewhere before the February 20 renewal deadline.

And apropos the 2012 renewal, the majority of clubs have opted for low general increases, both for P&I and freight, demurrage and defence classes, with eight of the 13 IG clubs setting a 5% target at the time of writing.

This comes after two years of comparatively benign claims experience. “But it is unlikely that this environment will continue without interruption,” says Joe Hughes, CEO of the American Club’s managers, “and clubs must be cautious in allowing for claims deterioration in their rating models for the future.” There seems to be agreement among managers that the underlying trend in P&I is for increased claims costs, and there has been an unusual number of expensive casualty cases in 2011, particularly where cargo has been involved.

As a final comment, and quite apart from any apprehension about the future claims graphline, the modest 2012 general increases could also reflect the clubs’ sensitivity over the problems besetting their members. Dino Caroussis, chairman of the board at the UK Club, which has announced a 3% general increase, put it like this: “The general increase is linked to claims inflation, which would be around 5% for us, but going forward it isn’t possible to be certain what it will be. We were determined to strike a balance between ensuring our premium does not fall behind claims inflation, while at the same time doing all we could to limit the impact of the increase on our shipowner members.”