Shipowners dodge P&I price increases and reductions expected

Shipowners have experienced little change in the cost of protection and indemnity (P&I) insurance at the recent renewal, but pressure to reduce rates is increasing. According to brokers and initial reports from P&I clubs, most shipowners appear to have avoided general rate increases at the annual renewal season that ended on 21 February. However, the underwriting discipline of P&I clubs is expected to come under pressure as competition intensifies and with a potential increase in claims. P&I insurance broker Aon said the recent renewal had seen another year of zero general increase and a small but welcome reduction in group reinsurance. “Whilst claims have shown a marked increase during the year, coupled with a number of pool claims deteriorating, the bottom line is that clients with favourable loss records still enjoyed premium reductions,” it said. The recent renewal saw growing pressure from members and brokers to reduce rates, according to AM Best. With combined free reserves at a record level at a time when ship operators need to reduce costs in a challenging economic environment, it was “inevitable” that P&I pricing would come under pressure, it noted. Analysis from AM Best found that P&I club’s balance sheets are generally strong, bolstered by several years of positive earnings. The reserves of the 13 principle members of the International Group of P&I Clubs (IGP&IC) – which collectively insure approximately 90% of the world’s oceangoing tonnage – are at record levels, it said. In the run-up to the renewal, insurance broker JLT said P&I premium rates in recent years have not fully followed favourable claims trends. Reflecting the reduction in shipping activity due to the shipping downturn, P&I claims have experienced low claims frequency and cost. However, P&I rates have remained flat during the past five years or so, while hull and machinery rates have tumbled, it said. Arthur J Gallagher noted that the benign claims environment had allowed P&I clubs to return money to shipowners. It said all but four clubs had returned funds to members in the 12 months up until October 2017. However, clubs have also been conservative and for every dollar rebated to members, they have kept $3.65 for themselves. However, Aon cautioned that P&I clubs are likely to come under more pressure. “One cannot ignore the fact the IGP&IC premium base is dwindling and, despite claims patterns remaining benign over the past few years, this trend is showing a marked degree of escalation. This coupled with the so-called churn, as well as new tonnage entering the market at favourable rates, will inevitably add more pressure,” it said. The reduction in shipping activity and a focus on underwriting discipline – including the greater use of deductibles – has had a positive impact on claims frequency and cost for insurers in recent years, according to AM Best. However, the average cost of claims continues to grow due to a number of factors, including higher liability limits, an increase in the size of ships and stricter liability regimes, while a recovery in the global economy could see the number of loss events increase. The UK P&I Club, which ended the renewal insuring slightly more tonnage, acknowledged the challenging operating environment for shipowners, but said that maintaining the club’s financial stability remains a priority. “The UK Club understands that many operators are under financial pressure. The club therefore continues to seek ways of delivering P&I cover at a competitive rate and did not announce a general increase again this year. However, safeguarding the club’s future financial stability through disciplined underwriting remains a priority. Of those fleets leaving the club at this renewal, almost all had adverse loss records,” it said. Hugo Wynn-Williams, chief executive of UK P&I Club managers Thomas Miller P&I, said: “We have sought to achieve a balance between the recognition of the market pressure on the members on the one hand, and the need to address adverse records on the other. This has led to some attrition of the entered fleet but this has been offset by gains both during the year and at renewal.” A handful of P&I Clubs reported growth at renewal, despite flat rates. Like the UK P&I Club, the Swedish Club reported a 0% increase in rates for its members at the renewal, as well as an increase in gross tonnage. The London P&I Club, Skuld and North P&I Club also posted growth. “The decision not to charge a general increase for the second year running represents North’s commitment to deliver real financial value to our members during difficult trading conditions,” said North P&I’s joint managing director, Paul Jennings. Skuld, one of a number of P&I clubs to diversify into other areas of marine insurance in recent years, said the P&I market continued to be highly competitive and pressured in the lead-up to the renewal. Separately, the International Group of Protection & Indemnity Clubs (IGP&I) announced this month that it has launched a tender process to place the group reinsurance programme for the year commencing 20 February 2019. The reinsurance programme is currently placed by Miller Insurance. Reinsurance costs for IGP&I members – which collectively purchase some $3bn in reinsurance cover via a pooling agreement – have been falling because of fewer large claims and excess capital in the reinsurance market. The 2018/2019 reinsurance contract was renewed with an improvement in terms that resulted in rate reductions across all vessel categories.

Shipowners dodge P&I price increases and reductions expected

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