Biggest claims aren’t second raters

P&I clubs face a fundamental shift in claims exposure

FOR shipowners and their P&I clubs, 2007 was the year in which the record claims experience of the previous policy year began to look “more like a plateau than a peak”, according to leading Lloyd’s broker and P&I specialist HSBC Insurance Brokers.In its Protection and Indemnity Report 2008, HSBC says that not only was the claims profile of the 2006 year by far the worst ever recorded, it was also probably evidence of a fundamental shift in claims experience.

Noting that, in terms of both numbers of pool claims and total value, 2007 is already running ahead of the figures recorded at the corresponding time last year, HSBC warns that the picture is as likely to deteriorate still further as it is to improve, and that there are no factors to indicate that 2006 and 2007 will be anything other than similar. It adds, “It is unlikely that any decisions for the 2008 renewal will have been made on the presumption that claims for 2007 will tail off.”

“Paradoxically,” adds HSBC, “the biggest claims are by no means confined to shipowners that would be classified as in any way second-rate. On the contrary, they are more often than not attributable to shipping companies that would be welcomed with open arms if they were in the market for a new club.”

Nick Riddle, Executive Director, Global Marine practice at HSBC, says, “The random nature of these catastrophic losses leaves the clubs with a dilemma. Do they impose draconian penalty increases where the record alone appears to justify it, thereby alienating otherwise top-quality members? Alternatively, do they attempt to mitigate potential high exposure and alienate arguably more marginal members that, through good fortune or otherwise, have maintained an historical claims record to be proud of? The reality is that club underwriters will get their money where they can, which unfortunately means that smaller owners — and particularly those without capable broker representation — will suffer the most.”

In its most comprehensive and analytical P&I report to date, HSBC examines a number of shipping market trends, and also looks at other specific developments in the P&I market during 2007. Commenting on suggestions that 2007 had been tipped to be a year of consolidation in the P&I sector, it says, “It is unlikely that any club mergers will be concluded in the foreseeable future. Consolidation in the mutual P&I sector is superficially attractive but, in practice, individual agendas, long-term loyalties and the lack of an overriding imperative all militate against the likelihood of a merger going ahead.”

As for the prospect of new clubs entering the market, HSBC says recent attempts to form a Greek P&I Club are – like previous, similar efforts — likely to fail unless sufficient support can be secured from larger shipping companies, in order to achieve the necessary economies of scale. “We suspect that the International Group is not too concerned,” concludes HSBC.

On the subject of the recent significant increases in rates – and restriction of cover — for passenger ships, HSBC says, “It is becoming apparent that the inherent risks of passenger shipping are not a good mutual fit with cargo ships and, because passenger tonnage forms a small minority of the total club entry, its needs will be always be a secondary consideration. However, there are some major corporations participating in the cruise business that are too astute to allow themselves to be treated as second-class citizens for long. It would be no surprise if investigations are already ongoing to determine how the benefits of the mutual system can be applied for the advantage of this sector.”

Commenting on the need for insurance providers to meet, by 2010, specific solvency capital requirements under the EU Solvency 2 initiative, HSBC concludes, “Solvency 2 will undoubtedly make the insurance world a much more orderly place in the long term. Whether it really benefits the members of a mutual P&I club is a different matter. We are unaware of any claim not being paid by a member of the International Group of P&I Clubs because the club had insufficient assets.”