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The EU ETS is limited by a 'cap' on the number of emission allowances. Within the cap, companies receive or buy emission allowances, which they can trade as needed. The cap decreases every year, ensuring that total emissions fall.
Each allowance gives the holder the right to emit:
There are a number of great resources on the regulatory and practical aspects of the system – none better than the EU’s own:
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02003L0087-20230605
https://climate.ec.europa.eu/eu-action/transport/reducing-emissions-shipping-sector_en
https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/what-eu-ets_en
A review of the most significant challenges facing the P&I industry
Lockton Global Marine during the autumn held a series of discussions in Bergen, Oslo and Copenhagen. Attendees included many shipowners as well as representatives from the legal and banking community. Each meeting included a Q&A session on the pressing topics in the P&I sector. The subjects of our interview sessions included Audun Pettersen – Chief Underwriting Officer Gard, Greg Thomas – Chief Business Development Officer Skuld, Paul Jennings and Jeremy Grose – Joint Managing Directors at NorthStandard.
Ahead of each meeting the sources quoted below had received Lockton’s questions and had an opportunity to prepare. Although the executives were interviewed separately and in different locations, the questions were fundamentally the same. In this and subsequent articles we shall be sharing the comments provided to Lockton questions.
It should be noted that the three clubs interviewed are respectively number 1, 2 and 4 in the International Group measured in revenue. As such the view expressed are significantly made from a large club perspective. By the same measure the three clubs simultaneously represent 48.5% of the International Group membership.
The interviewer was Lockton’s Stephen Hawke, Managing Director Lockton PL Ferrari, London.
Stephen Hawke (Lockton) “What are the biggest challenges that you face over the next three to five years?”
We have to staff up [and] scale up…
Greg Thomas “As an industry, the past couple of years have been a significant challenge not just with increasing pool claims and costs but also the consequences of the Russian Ukrainian war. Then there is how we deal with the question of sustainability and how that fits in with our agenda and our strategy going forward. So, I think those will still be big issues. The regulatory oversight burden is a challenge for all clubs and insurers. We have to staff up, scale up, to deal with the consequences of what's going on politically around the world. These will be the main challenges that we as a business and the industry have to face.”
sanctions are definitely creating a challenging system…
Audun Pettersen “Global politics have been discussed a lot lately and we touched upon it earlier today, and sanctions are definitely there creating a challenging system when it comes to insurance. That is definitely a big issue.” (Audience: insurance has become a weapon of war, hasn’t it?). “That is definitely what has happened, and it has never been a successful and good thing for the world. “
“I could also mention greedy authorities, but maybe better phrased as unreasonable authorities; what authorities around the world are actually requiring on claims is an issue. For instance with wreck removal the things that they require are extremely expensive and these costs are of course paid for by the club, and ultimately, they are paid by the shipowners. They pay all these costs and the Costa Concordia costs were substantial largely because authorities were coming up with requirements which made this horrendously expensive. They also had a big influence on the Golden Ray in the United States which became massive and not only on the wreck removal side. We had the California oil pollution legislation which came into force a couple of years back, it alarmed everybody. It basically means that you can have a bunker claim from a cargo ship and you could almost blow the total limit of the International Group reinsurance cover. Which is horrendous, if they actually do what they have the possibility to do. That is definitely a huge cost driver. “
Stephen Hawke (Lockton) “So the influence of authorities is a major risk. Since Gard and the other clubs formally and informally act as a lobby group, is there anything you can do about this? Like informing local legislators that imposing these rules and requirements are antithetical to the whole concept of free trade. Is there anything clubs can do in this regard?”
we have a lot more connections to politicians now…
Audun Pettersen “Clubs are probably doing as much as they can. The International Group has been doing this over the years, and it is a different organisation from what it used to be. We are doing more than before collectively. I think individual clubs are probably also doing more. In Gard we have a lot more connections to politicians now than we used to in the past. Because we see that this is very fruitful to be able to sit down and explain what these actions means. If you are a politician and come up with legislation it is probably very hard for them to fully understand what will be the result of its implementation.”
Stephen Hawke(Lockton) “OK so authority creep is a clear challenge. Others?
Audun Pettersen “Climate change clearly.”
…get people trained up and retain them…
Jeremy Grose “Two would be reinsurance, and I think our people.” “A challenge for everybody in our industry, is continuing to get people trained up and retain them as they build their knowledge. And I talked a little bit earlier on about developing new knowledge, new skills for new problems that arise. You know, we spend a lot of time developing people, and then often they are seduced into working for brokers or for ship owners!”
…the challenge for the group and the clubs is to remain relevant.
Paul Jennings “I don't think this is a fourth challenge, necessarily, but I think the challenge for the group and the clubs is to remain relevant. You know, we are all very proud of the fact we've been around 160 - 170 years, but what we were doing then is not directly relevant to what we're doing now.”
“You know the mutual spirit and collective was great. And the fact that that survived is as you said, unique to this industry, long may that continue. But we need to be relevant to the problems that our members are facing, and just being around dealing with low level claims is not. I would suggest the raison d'etre of P&I clubs going forward is providing more, and more service than that.”
“If I was going to add a fifth one then it’s something that that we've talked about at NorthStandard a lot. It is actually making sure as part of that relevancy that our voice on behalf of shipowners is not only heard by regulators, aka governments, but it's actually also heard by people who are making regulations and making the law. And I think we feel part of the scale we've got now at North Standard allows us to actually have that voice. And with the talent we've got within the combined club, to actually give that voice strength and be a voice on behalf of ship owners as well.”
In order to gain some perspective on the discussion we have tried to present the challenges graphically in frequency of key groups, with descriptive language attached.
Interestingly, climate change and how the P&I industry must respond to its consequences or even participate in the necessary transition that follows from this is seen as one of the key challenges. With COP28’s closing statement to “transition away from fossil fuels” on 12 December the subject further increases in relevancy. For further background to the club’s discussion on this particular subject please refer to our article “ESG – more expected of P&I Clubs”.
Right at the top is also regulatory risks where politicians around the world are passing costs to shipowners sometimes without fully understanding their consequences. This risk is closely linked to the next two on the list, “Geopolitics” and “Claims inflation”.
There is an awareness that the clubs needs to evolve with the changing times, and that what was good yesterday is not good enough tomorrow. The leveraging of the P&I Clubs as an united front for shipowners across the world on regulatory and geopolitical issues appear to be of particular relevance.
Challenges related to reinsurance can probably be understood to be two. Firstly, the potential future requirements imposed by reinsurers or their underlying capital (e.g. the green transition see again the foregoing artile) and secondly, the increased requirement for reinsurance capital and cover that might come from governments around the world making adverse changes to the liability regime.
Lockton Global Marine has also recently published the 2023 P&I Market Review. For further information, please visit the Lockton Protection & Indemnity page, or contact:
