P&I renewal increases could be the last as pricing nears adequacy: Best

AM Best said general increases announced by most protection and indemnity (P&I) clubs ahead of key 20 February renewals are “fair” and could be the last significant rise after four consecutive annual hikes. “If clubs are able to navigate potential turbulences in financial markets during the 2023/24 year, while achieving at least break-even results on the technical side, then AM Best expects that no further significant general increases will be required over the next renewal cycles,” it said. Nine clubs have announced a 10% increase in P&I premiums at the upcoming renewal. Steamship Mutual has announced a lower rise of 7.5% and Gard P&I between 5% and 7%. London Steamship Owners’ Mutual has not made public a target increase and Shipowners’ Mutual said it will not apply a general increase for 2023/24. AM Best said the general increases are lower than last year’s renewal, when many clubs applied a 12.5% rise, but will allows clubs to achieve pricing adequacy for 2023/24. P&I insurers are expected to close the 2022/23 year with a near-100% combined ratio, helped in part by an “outstanding” reduction in pool claims in the first half of this year, following an underwriting loss of $267m in 2021/22, said AM Best. “Underwriting performance has clearly improved for most clubs in 2022/23 and conditions in the shipping industry have returned to normal, following a period of enhanced profitability over the pandemic period,” it added, But the rating agency said clubs are still recovering from unsustainable rates pre-2019 and five consecutive years of underwriting losses. At the same time, P&I insurers have increased rates again to help meet inflation-driven claims costs. “High inflation is leading to higher claims costs in the P&I industry. It is also impacting prior year claims, increasing reserve values,” AM Best said. Claims costs are also under pressure from bigger vessels and an upward trend on shipowners liability limits. But AM Best said investment losses are expected to offset any gains from underwriting for the 2022/23 year. It expects P&I clubs to report further decreases in free reserves for the past year as a result of investment losses. Some clubs built up capital buffers to withstand any deterioration on risk-adjusted capital but smaller rivals have had to take action, continued the ratings agency. “In AM Best’s view, the overall credit quality of the International Group has deteriorated, as a result of underwriting and – more recently – investment losses, leading to the reduction in free reserves,” it said. “More clubs would need to take action if, for any reason, their current levels of free reserves continue to deteriorate. This deterioration could be driven by further volatility in financial markets, pool claims returning to high levels or a larger-than-expected impact of inflation on the clubs’ results, among other potential causes,” AM Best said. However, the rating agency said P&I clubs have a better understanding of their risk-based capitalisation since the introduction of Solvency II. “AM Best views the clearer articulation of risk appetite positively, as well as the general improvement in governance and enterprise risk management standards throughout the International Group,” it said. AM Best also warned of an increase in shipowners’ exposure to cyber risk following the International Group’s renewed reinsurance programme, which placed an annual aggregate limit on claims in excess of $750m. The International Group pooled the excess risk not covered by the programme. “This decision exposes the clubs to the unlikely but potentially very severe risk of multiple large claims from cyberattacks,” said AM Best. “For their non-poolable risks, some clubs decided to restrict cyber cover as they were not able to find protection in the reinsurance market. This decision will create a protection gap, leaving shipowners exposed towards certain risks.”

P&I renewal increases could be the last as pricing nears adequacy: Best

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