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P&I clubs holding the fort for members

Source: Asia Insurance Review | Jan 2017

Despite the ongoing maritime industry downturn and shipping lines remaining in the doldrums, generally strong financials mean P&I clubs have been able to help members weather the storm. We speak to several clubs on their outlook on Asia for the months ahead. 
By Chia Wan Fen
  • Asia continues to be a growth region for P&I clubs, which are seeking to expand members here;
  • Clubs are strong financially and are not seeking a general increase for the upcoming renewals; and
  • Economic conditions ahead are still weak, but freight markets may improve soon.
By all accounts, Asia is still steaming ahead as a critical region of opportunity for maritime insurers. In October 2016, the International Union of Marine Insurance (IUMI) launched its first overseas hub in Hong Kong. Even as President Dieter Berg ran through a list of the challenges like geopolitical uncertainties and pressure on rates, he noted that the Asian marine insurance market accounts for almost 30% of global premium income and global trade in this region continues to grow. 
Asia still a beacon for expansion
For the clubs Asia Insurance Review spoke to, Asia too figures strongly in their plans, with many actively seeking to increase membership around the region. Just in November 2016, the North P&I Club, which already has Asian offices in Hong Kong, Singapore and Tokyo launched its Shanghai office, citing growing APAC membership which accounts for 34% of total tonnage. The American Club affirmed that Asia continues to be a growth area for the club and its associated Eagle Ocean Marine fixed premium facility, with its 2015 investment in the American Hellenic Hull Insurance Company Ltd helping to amplify its Asia presence.
   Mr Simon Swallow, Chief Executive of the Shipowners’ Club, which insures small and specialist vessels, said: “We see owners in the region becoming more aware of the benefits of mutuality, and especially being insured by a mutual within the International Group of P&I Clubs and the benefits of cover that this brings and the peace of mind it offers in their operations.” 
Strong financials buoyed by benign claims run and investments
Most clubs have had the benefit of a benign claims run this past year. “Despite continuing volatility in the bond markets, which again negatively impacted North’s pension scheme, healthy investment returns of 3.16% and a relatively benign claims experience during 2016 mean the Club has remained in a very strong financial position,” said Mr James Moran, Director (Singapore), North P&I Club.
   Other Clubs are also seeing strong, if not stable financials and remain well capitalised. Gard P&I’s Chief Underwriting Officer in Asia Andre Kroneberg noted its strong results for the financial year ending 2016 due to a “combination of good risk selection, a better than expected claims environment and a favourable development on prior years”, and was able to return US$37 million to the members by reducing the premium agreed by 8%. 
   The UK P&I has seen an “extremely strong” performance over the first six months of the 2016 policy year, with a modest increase of its free reserves and hybrid capital to $571 million at the half year. Its investment portfolio achieved a healthy return of 3.7% in that same period.
   Sound diversification despite a few large claims helped Skuld to absorb them and deliver a positive 2016/17 half-year result after investments. This followed a record 13th year consecutive positive results ending its 2015/16 year that allowed it to return 2.5% net mutual premiums to members. 
   As the freight slump continues, the American Club is feeling the “churn effect” somewhat, (ie, reduction of premium volume as older, higher-rated vessels are replaced by newer, lower-rated ships), which has continued to influence both the level of turnover and risk profile of the Club’s vessels, but managed to generate about 2% in returns on investment year to date as at mid-November 2016.
   “Although market uncertainties persist, particularly in regard to continuing sluggish global growth and concerns about the future direction of world trade following recent political developments on both sides of the Atlantic, it is hoped that investment earnings will continue to make a respectable contribution to global results over the months ahead,” said Mr Joseph Hughes, the Chairman and CEO of the Shipowners Claims Bureau, Inc. which manages the American Club.
Difficult time for clients
It is fortunate for members that the clubs are seeing good financials, which belie the difficult state of affairs for their clients. Mr Swallow summed up the sore situation of organic growth decline, with vessels increasingly moving in to lay up, while several companies have sadly folded, having only recently ridden high on the crest of a wave fuelled by inflated oil prices.
   “New business opportunities remain but these have slowed. Attention to risk in these uncertain times remains essential. As freight rates reduce and incomes become challenged, we must ensure that owners also maintain the highest levels of maintenance to their vessels. Similarly the Club is on hand with loss prevention solutions and also offering advice on contracts. It is very much a buyer’s market with charterers increasingly dictating terms looking to pass on indemnities, outside of the traditional knock-for-knock, back to the vessel operator,” he said.
   AmericanShipper, citing the latest figures from shipping consultancy Drewry, said the size of the idle containership fleet in November 2016 was about 435 ships with 1.7 million Twenty Foot Equivalent Units (TEUs), close to twice the level in November 2015 where it was 238 ships of 900,000 TEUs. At one time in early 2015, the amount of idle capacity even fell below 200,000 TEUs. What further reflects the current malaise is the young age of ships laid up, with 31% of these vessels below 5 years old, and 33% between 5 and 9 years old.
   The collapse of South Korea’s Hanjin Shipping, the world’s seventh-largest container carrier and the ongoing struggles of Daewoo Shipbuilding and Marine Engineering(DSME) have disrupted global trade networks and has highlighted several valuable lessons for the volatility in shipping. Mr Hughes however noted that the Hanjin insolvency has had a somewhat positive effect on container freight rates, which have increased somewhat and can be a benefit for all in the sector, including insurers. 
Some reprieve for clients in 2017
Shipowners can heave a sigh of relief as the clubs are in a position to grant them reprieve and many have already indicated that they will do so, despite the fact that premiums have been gradually reducing in the past few years and hence pressuring the market.
   UK P&I has decided it is prudent to revise the club’s approach to the general increase. For the upcoming renewals, the Club will not be seeking a standardised increase; instead, premium will reflect a specific risk a member brings to the club for the coming year. With the overall Club’s underwriting results largely in balance, the 2017 policy year renewal will focus closely on individual member’s underwriting performance. 
   “Capital strength has enabled the Club to discount premium three times in recent years, delivering real benefit to members as well as instilling confidence for the future,” said Mr Andrew Jones, CEO of Thomas Miller, the Club’s manager. 
   Also recognising members’ needs to reduce operating overheads, the American Club is seeking a zero general increase across all classes of business—though it will still be a vigorous negotiation process between members and Club, said Mr Hughes, who added that the subdued claims situation may start to rise again following commodity prices rising and supply and demand for ships balance out over time. 
   North P&I, too, recently announced that it has decided to keep rates unchanged for both P&I cover and freight demurrage and defence (FD&D) cover in the 2017/18 policy year. It had returned 5% of the mutual premium for 2016/17.
   On the International Group front, the decision not to set a general increase extends to other members as well, at least for Britannia, Gard, Standard, Steamship Mutual, West of England, London and Shipowners’ Club. Skuld had already abandoned the practice before the 2011 renewal for an approach which assesses the individual accounts’ risk for what it called a “fairer premium”.
   Skuld’s Chief Executive, Mr Ståle Hansen, acknowledged its consistent record in the past six years but noted that beyond that, reductions are not sustainable. “A P&I club is however, a true mutual insurance provider. Its role is to balance income and costs. We see limited possibilities to reduce premiums further, and most members and their brokers fully understand this situation,” he said.
   Mr Swallow echoed caution: “Some insurers who have perhaps asked too much in the past are now offering money back. Some owners will inevitably be looking at their bottom line operational costs and this will include insurance. This will play into the hands of the fixed commercial P&I insurers who will be trying to make the most of attacking the traditional not-for-profit mutual P&I market. Whilst this may offer short term solutions, we would hope that a long term approach to the purchasing of P&I is maintained not least because of the long tail nature associated with marine liability claims.”
An uncertain 2017
For 2017, Mr Moran of North P&I expects that there will be increasing volatility in the global investment and currency markets, together with continued difficult trading conditions for members, and will focus on maintaining the financial strength of the Club. 
   Mr Kroneberg of Gard acknowledged the “new normal” that now governs the sector. “Consolidation is happening, technology is changing our lives and the way we work faster than ever before and economic uncertainty remains a constant,” he said. 
   Skuld’s Mr Hansen is concerned that freight rates continue to be low and if shipowners are not paid adequately for their services, they will not have sufficient income to maintain their ships properly and develop technologies that benefit their customers and the environment.
   Mr Swallow of Shipowners’ Club also highlighted enhanced risk to insurers associated with the full adoption of the Maritime Labour Convention (MLC) from 18 January 2017, which requires that “the new financial security certificates” evidencing MLC financial security for both repatriation and the payment of crew wages, following insolvency, will need to be displayed on board for all vessels that are subject to the convention. 
   “In future, it is the Clubs who will be responding to the liabilities within the convention associated to the loss of wage payments and repatriation of crews following insolvency. What we have seen over the past five years or so is the increasing requirement on P&I Clubs to provide the blue cards – promises to pay – in relation to the adoption of maritime conventions such as wreck removal, bunkers, passenger liabilities and now the MLC. The lessons are simply that whilst some may report that claims frequency is declining, the risks and costs of claims are increasing,” he said.
Some reasons for optimism in 2017
There is at least some reason for optimism in 2017, at least according to the American Club, and it is not just because it will celebrate the 100th anniversary of its founding next February. Mr Hughes noted the freight market may begin to show signs of sustainable improvement over the next year, and it is already seeing an increase in ship purchase activity in Asia and elsewhere. 
   The Shipowners’ Club thinks there is a possibility of return to better times. “We all hope that we are now at the very bottom of the cycle and we will start to see a growing oil price, a rejuvenated China and a return to economic stability in the shipping sector,” said Mr Swallow, who is also wary of escalating costs of claims despite the stagnant premium rates. 
   “While loss prevention initiatives and better safe working practices have improved risk, we know that through increases in the Convention on Limitation of Liability for Maritime Claims and a greater awareness of globally to maritime incidents, especially where the environment is concerned, have resulted in increased claims costs. We must continue to ensure that premiums and terms of entry plus loss prevention initiatives remain commensurate to risk.”
The American Club
The Club has an entry, for P&I risk, of approximately 15 million gross tons (GT) and for FD&D risks of approximately 10 million GT. The Club’s Asian portfolio is approximately 20% of the total.
   When the Club’s Eagle Ocean Marine fixed premium facility is added to these figures, the Asian component of its business increases to about 25% of the total in tonnage and about 30% of the combined total in premium terms.

As of 20 February 2016, total owners including Mobile Offshore Units was 220.6 million GT. Out of this Gard’s Asian portfolio is 60.3 million GT, 27.3% of total owners portfolio.

North P&I Club
North’s total tonnage is currently around 187 million GT, comprising 133 million GT owned tonnage and 54 million GT chartered tonnage.  
   Asia-Pacific tonnage accounts for 34% of the total.  South Korea accounts for 45% of this, Singapore 29%, China (including Hong Kong) 19% and Japan 8%.

The Shipowners’ Club
Total tonnage is approximately 25.5 million gross tons made up of 33,000 vessels, with the Asian portfolio making up approximately 13.3 million gross tons from 12,840 vessels.

Mutual tonnage at the half year stood at 85 million, with Asia representing about 22% out of Skuld’s portfolio. 

UK P&I Club
With the Club having grown by 26% since 2012, it stands at 138 million GT of owned tonnage, and approximately 100 million GT of chartered entries. 37% of its entered owned tonnage is Asian.
(For full outlook from the Clubs, see Looking towards 2017).

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