Last year saw just six reported Pool claims, none of which presently exceeds USD 20 Million. While there will never be consistency, year-on-year, this level is something like a third of what we would expect and welcome news to both individual Clubs and the Group as a whole. Pool claims do carry a cost legacy.
Whether this benign period is a trend, taking into consideration the lower usage of tonnage and loss prevention programmes, remains to be seen. What we can be sure of is that it is welcome news, relaxing pressure on premium rating. Furthermore, the current environment has seen Free Reserves soar to an all-time high.
Back in 2015 we questioned the level of Free Reserves being amassed as these were far in excess of solvency requirements. At the time those remarks were taken lightly, but thankfully common sense has prevailed and a number of Clubs are returning much-needed funds from their war chests. A breath of fresh air and a wholehearted recommendation for mutuality, long may it continue.
The Group has gone for a zero increase this year with more focus on individual loss records. While this was a good starting point, meaningful reductions were hard fought, although we have relished the challenge.
The poor freight market seems endless so any reduction was a relief. We were able to seek improvements for many in rating and realign premiums where previous General Increases had created an imbalance.
Given this renewal was softer than in previous years, it was no surprise that movement between clubs was not as prevalent as in the past.
So is this a new era with premiums continuing to fall and claims reducing?
Foresight does not enjoy the clarity of hindsight. However, there is every indication that claims are fewer in number if not in quantum.
Sadly large claims are indeed becoming more costly year on year. Wreck removal is high on that list; but so is cargo and collision.
As we mentioned earlier, modern tonnage and loss prevention play their part, but accidents will happen.
From a Club’s perspective the potential erosion of claims attrition is a boost; as it is smaller claims (below USD 1 million) that eat into retained premium. Larger claims will often be recouped by way of reinsurance and/or the Pool. Though, as we mentioned earlier, Pool claims carry a legacy and as such we monitor each Club’s performance carefully.
Given this, and the level of Free Reserves, we anticipate premiums remaining stable. We also see many Clubs returning premium on back years.
So good news, unless you are one of the ‘Fixed’ P&I providers who will no doubt read this with horror.
One area that does not sit well with the present financial position is the level of Release Calls. True they have softened in recent years, but some are still too high. Again this does not apply to the Shipowners’ Club; the only Club not levy Release Calls.
The Insurance Act saw those clubs affected opt out as far as they could. The Act was never designed for commercial buyers of insurance. Greater protection is given to the consumer, while more responsibility is assumed by insurers and brokers to ensure the correct information is requested and adequate coverage explained and provided.
Yet more paperwork is required following the enhanced Maritime Labour Convention (MLC) coming into force on 17th January 2017. The Clubs will provide the necessary certification and absorb liabilities under the convention at no extra cost.
Meanwhile, the International Group Reinsurance programme saw rates softening. These along with some clubs returning premium, was a nice start to the year and much-needed in these times.
At Aon, we continue to press for a softening in reinsurance premiums, particularly for those clients operating Tankers and the Passenger vessels where reinsurance represents a heavy proportion of their premium.
If positive claims trends and the seemingly endless supply of global insurance capacity continue, we expect further reductions next year.
Each club has its own particular format when producing Loss Ratios, which can often make comparisons difficult. We fully understand the application of Group Reinsurance and Pooling contributions, as these are easily quantifiable. The inclusion under other ‘costs’ is a subject we often struggle with. These costs regularly include Abatement, Management charges, and Incurred But Not Reported claims. We are not suggesting these are anything other than genuine costs, but they strip out a lot of premium and render it all but impossible for a member to return an impressive loss ratio. We know clubs try to write to 100% where possible, but we are all too often faced with an uphill struggle at renewal when that magic 100% figure is reached even though the member can boast a positive claims performance.
A note must be made on reserving where we work hand-in-hand with our clients to see they accurately reflect the posted figure(s).
The early part of the year saw the potential merger of Britannia and the UK fail. Had this gone ahead it would have been a ‘game changer’ with a small but potential threat to the Group.
To date the standing of the Group in shipping is relatively unchallenged and for many the only insurer of choice. Whilst a number of commercial insurers have tried to wrestle market share, they have made little impact. The International Group set the standard that none have been able to match and all of this provided at cost. It is little wonder that their position has never been seriously threatened. It may be that it will never and that we have little doubt is a good thing.
The Group has withstood a number of heavy claims over the past decade, yet free reserves have never been higher. The reinsurance market is robust with seemingly endless capacity; with no immediate sign of premiums increasing in the near future. If anything, the threat to the Group may well come from within. Had the recent proposed merger between the Britannia and UK P&I Clubs gone ahead, we feel the landscape may well have changed with potentially fewer Clubs and less diversification. This would yet again have caught the eye of the EU Commission and non-competition regulations. Furthermore, it would have restricted choice.
Should there be a severe hardening of the reinsurance market and/or some fragmentation of the Group; would some of the world’s larger operators look for alternatives? At this moment, all of this seems remote, but by challenging the unexpected we limit surprises. We have looked to mirror the Club option in the commercial market should we be faced with such a scenario. It wasn’t so many years ago when ‘captives’ and the like were in vogue and unbudgeted supplementary calls the norm.
As with all industries, little clarity is available on what Brexit will mean. The insurance industry will have its challenges; not least of which will be seeking additional licences and opening up offices within the EU. We will know more during the course of the year and will update you via our regular bulletins.
One aspect that has crept into our business is the cavalier approach taken by some. Aon is no different to others in vigorously challenging all Clubs to seek the very best terms. Our growing client base bears testament to this strategy. A large part of that success depends upon managing expectations. Our vast experience means we can be confident about what is and isn’t achievable for our clients. Too often we see wild claims about delivering huge savings, which simply aren’t possible. While this is quite rightly seen as mostly gimmickry, it can have a destabilising effect where operators are left uncertain as to what the marketplace can offer.
At Aon, we push every boundary as far as we can and when we promise, we deliver.