P&I clubs urged to reduce insurance costs for ship owners

The shipping industry is in torrid times, suffering massive overcapacity, plunging freight rates and falling values. Just how precarious a state the shipping industry finds itself in was highlighted by the collapse of Korean container operator Hanjin in September, which continues to see billions of dollars in cargo stranded at sea and in ports. In contrast to ship owners, the mutual P&I sector has cash to spare, resulting in calls from brokers to help members by reducing the cost of insurance. "I call on the clubs to display generous spirits at the forthcoming renewal. There appears to be no need for a general increase and in several cases there seem to be good justification for returning funds to members," said Malcolm Godfrey, executive director in the marine division of Arthur J Gallagher. "I recognise the continued volatile operating environment but now is the time to think outside the box and consider the needs of the members," he said in the broker's recent annual P&I review.hideP&I clubs are in rude health. Arthur J Gallagher noted that mutual P&I clubs returned $50m of planned premium to members and reported a $408m underwriting surplus for 2015-16. This is the third consecutive year in which clubs added between $215m and $270m towards free reserves. According to Arthur J Gallagher, clubs are benefiting from the positive development of prior years. It calculated that clubs were making $1m every day during 2015/16 from positive runoff of just two closed years. In its P&I review, JLT also noted that clubs' balance sheets had benefited from benign claims, which may be more than just luck. "As we look back over the post-boom shipping market, it is now clear that there is a new, lower claims reality, seemingly a natural result of reduced vessel utilisation and slow steaming," JLT said in its 2016 P&I club review. The London-based broker also believes that club finances have benefited from a "cautious approach" towards capital adequacy and past P&I claims trends. "Hindsight now reveals this was overdone in both respects and, as a result, the clubs have accumulated far more capital than they need," JLT said. Like Arthur J Gallagher, JLT believes P&I clubs could use this surplus to help ship owners. "P&I club members need all the help they can get in such challenging shipping markets. The 'fairness' principle requires that the clubs should do their bit," it said. This is most likely to be achieved by returning money to members through cancelling all or part of forecast supplementary calls, or by discounting deferred instalments of mutual premium, according to JLT. In November, one of the biggest P&I clubs, the UK P&I Club, announced a 3% reduction on the total mutual call for the 2015 policy year. Announcing the premium reduction, UK P&I said: "In the current shipping environment, the UK Club board has decided it is prudent to revise the club's approach to the general increase. For the 2017 renewal, the Club will not be seeking a standardised general increase." However, brokers call on clubs to use the surplus to reduce upfront costs and reduce rates in coming years. JLT suggests that clubs could afford to give members a 10% overall general decrease in rates, with only a "neutral effect" on balance sheets. However, this is "wishful thinking" as clubs will not offer their members a break on such a scale, it said. Alternatively, JLT believes that P&I clubs should lower premiums for individual ship owners by adjusting their underwriting models in line with recent claims experience. This approach would reward the clubs with the best loss record, it noted. "The shipping industry faces unprecedented challenges, and the clubs, in the interests of their members, should do their bit by adjusting to a reality which allows their members' premiums to be reduced," JLT said. "It is the duty of the clubs to deploy [the strength of the mutual system] to their members' best advantage. That can be achieved by making the sustainable reductions in premiums that can clearly be afforded without in any way compromising the strength of the club system," it added.

P&I clubs urged to reduce insurance costs for ship owners

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