Time for P&I club compassion / Tradewinds

Omni warns there is no case for parroting old arguments in favour of general increases

October 23rd, 2015 00:00 GMT  by Jim Mulrenan London

Published in WEEKLY

Modest general increases are expected at the forthcoming renewal of protection-and-indemnity (P&I) cover by the Omni insurance broking group.

The broker says it is abundantly clear that the major P&I clubs are in better financial shape than many of their members but suggests this is unlikely to result in a year without general increases.

Omni’s annual report on the state of the P&I market — illustrated with a parrot — tells club underwriters to stop repeating the old arguments that Solvency II, claims, investment income and rating-agency assessments require a general increase.

Increases not justified

The Istanbul-based broker notes that the clubs’ favourable results and a modest level of claims do not justify the general increases of previous years.

“Freight markets still show little sign of improving, apart from the tanker sector, so the time must come for the financially sound insurers to show some compassion for their members and clients,” declared Omni.

“In the past we have seen shipowners move away from a club because of unsatisfactory renewal terms, only for that same club to express disappointment and regret at losing a valued member,” daid Omni. “Let this not happen again in the 2016/2017 renewal season.”

Omni says it is time for the clubs to return money to their shipowner members and suggests some may reduce forecast supplementary calls, or give a return in some other way. “The increases that were charged in the last couple of years, with the contention that the pool claims were high, should in one way or the other be reimbursed to the members,” the broker added.

Omni is also hopeful that if the current benign claims run continues there will be a reduction in reinsurance costs, directly charged to shipowners through a tonnage-related levy.

The report warns that “churn”, the practice of clubs insuring new tonnage at much lower rates than vessels scrapped or sold, is having a detrimental effect on premium levels and questions the logic of this.

Churn is usually seen as a consequence of the agreement between the 13 International Group clubs to not undercut each other’s renewal quotations, which leads to intensified competition for tonnage new to the market, so not covered by the deal.

But Omni also highlights that this discrimination jars with the current reality, where the overall insured fleet is quite young and human error, rather than the age of a ship, is a key cause of most casualties.

“Is age so important for P&I insurers?” asked the broker.

Omni describes differing views between the clubs about the merits of providing fixed premium, in addition to mutual cover, as “rather a storm in a tea cup”.

The broker notes that diversification has become the name of the game for many International Group clubs, attracted to widening their risk profiles while bringing in additional income.

With clubs interested in fixed-premium business, and fixed-premium schemes competing in traditional club territory — by offering up to a $1bn of cover for ships of as much as 40,000 gross tons (gt) — there is an element of convergence.

Omni predicts that the London Club will be next in line to set up a fixed-premium facility.

With so many clubs now offering a fixed-premium option, Omni views this as a trend unlikely to change but observes that, for many owners, going fixed is not a realistic option.

“Although we welcome competition, the number of fixed premium facilities is really too many,” said Omni.

The broker also doubts that P&I clubs moving into the hull and machinery market makes much business sense.

“We think that it will be very difficult to make a profit in this soft market and potential new players, for this reason, will think twice before they move into the market,” says the Omni report.

The broker also has reservations about the impact diversification could have on the International Group claims pooling system, as profitable new lines could allow clubs to subsidise P&I premiums.

‘Adverse effect’

“With lower premium levels, a club’s contribution to pool claims can be reduced and this can have an adverse effect on the successful pooling and sharing system,” warns Omni. “Going forward, the group needs to closely monitor the impact of diversification activities to preserve this system.”

Omni is also concerned that the divergent strategies of the clubs could prove harmful. “Because group clubs share claims through the pooling system, they have a common interest in loss prevention and control, and in the maintenance of quality standards throughout the membership,” noted the broker.