LONDON, 16 August 2006 – Just when shipowners thought the P&I (protection & indemnity) premium increases were all over and there appeared to be no justification for the highly solvent P&I Clubs to increase their income, Aon PLF, the global P&I group of Aon Global Marine, a leading insurance broker and risk management consultant, warns that rate increases are set to continue at the 2007 renewals.

So when everything in the mutual garden appears rosy with clubs enjoying surplus funds, Aon PLF’s P&I Midterm Review*, to be launched on 21 August, looks at why rates are likely to go up at the 2007 renewal through three projections on market conditions: 

Projection 1: Stability

• Aon assumes that income will remain stable and in correlation with additional tonnage  - and, in turn, any increased exposure has not been factored into the claims estimates;
• pure underwriting result will be neutral on new vessels;
• investment income will remain at a consistent and non-volatile 4%.
  
  This is the most likely forecast - assuming the absence of any sudden external driver, such as significant natural disasters, skewing the reinsurance market. Also, the resulting surplus has already led to Gard and Britannia discounting call premium and other clubs could follow suit. However, even in this scenario, rates are still expected to rise at renewal due to social and regulatory factors.

Projection 2: Claims inflation

• harbingers of doom maintained that the 2004 level of claims would set an industry precedent but whereas high levels of claims have continued, this hasn’t been to the same extent as in 2004;
• unless there is a catastrophic event, there is still a surplus so the remedial premium increases of recent years now allows for a year on year high claims environment;
• clubs are unlikely to discount premium calls;
• expenditure could start to outstrip income;
• there is part justification for certain clubs with a below average underwriting result and lower end reserves to look for a higher than market average general increase at renewal 2007.
  
  However, if claims truly start to reflect the increase in world tonnage and exceed 2004 levels consistently there could be trouble on the horizon.

Projection 3: Excess claims inflation

• the hawk-like gaze of regulators, coupled with increased solvency requirements, does mean that individual club’s business plans and capital adequacy levels have to reflect potential as well as likely risk;
• if this projection was a likely eventuality, clubs would be justified in demanding a 10% to 20% rate increase at renewal 2007.
  
  An extremely unlikely projection but the possibility remains.

Stephen Hawke, executive director of Aon Marine and chairman of Aon PLF, comments: “While individual P&I clubs may have specific issues that demand a premium hike, the market is well funded and highly solvent. Free reserves continue to rise and only in the most extreme projections is the positive tide turned. And yet some clubs mutter darkly of another year of double digit rises in 2007.

“We have been saying for some years now that the influence of the outside world dilutes the ability of clubs to be flexible and concentrates the strategy towards the future and the possible rather than, as in less complicated times in the past, the contemporary and actual. This will be reflected at the next renewals when shipowners should expect to pay higher premiums.”

Notes to editor:

About Aon

Aon Corporation is a leading provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. There are 46,000 employees working in Aon's 500 offices in more than 120 countries. Backed by broad resources, industry knowledge and technical expertise, Aon professionals help a wide range of clients develop effective risk management and workforce productivity solutions.

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