State of the P&I Market: As Stocks Drop, Rates Will Rise

The 13 P&I Clubs within the International Group continue to dominate the world market for shipowners' liability insurance despite increasing competition in recent years from fixed premium facilities. The development of the fixed premium market and, in particular, the rapid growth of the P&I account of the marine and energy syndicate 329 at Lloyd's led by Jonathan Jones, served to increase pressure on premium rating in recent years. However, syndicate 329 is now in run-off, its capital providers having withdrawn support, and its P&I account, which was transferred to British Marine, an old-established P&I and hull club for small ships and offshore craft, which recently demutualized, reportedly lost more than 50 percent of its business to Group Clubs at the last renewal on February 20, 2001, marking a substantial rebuff to the fixed premium market and reconfirmation of the Group's dominant position.

Competition between the Group Clubs has become more aggressive in recent years, although in 1998 the Group secured a further 10-year exemption from European law banning trade cartel agreements for its International Group Agreement restricting rate-cutting competition between Clubs. In recent years a majority of Clubs have reported underwriting deficits. Indeed, it was recently reported that the Group Clubs together lost approximately $387.5 million on their underwriting in the policy year to February 20, 2000, and are likely to report a similar combined deficit for the year recently ended. In the last few years the Clubs have covered their underwriting deficits with investment income and unrealized investment gains on their mutual funds, benefiting from the buoyant U.S. investment markets over the past decade and, for the year ended February 2000, a number of Clubs were able to report continued growth in their funds and their free reserves.

However, the last six months have witnessed dramatic falls in the U.S. stock markets and, with Clubs holding approximately 30 percent of their investment portfolios in equities, a majority of Clubs have suffered significant declines in their investment performances for the year ended February 2001; and this will be reflected in consequent reductions in their funds and free reserves.

Irrespective of disappointing investment performance, Clubs have recognized during the last year the need to increase premium income in order to avoid underwriting deficits and the Boards of nine of the 13 Group Clubs decided to announce general increases in premium for the February 2001 renewal of 10 percent, with others going for 7.5 percent. While competition at the recent renewal remained intense, Clubs do seem to have achieved partial success in their efforts to hike premiums, with increases of seven to eight percent being reported. However, with the current downturn in the U.S. economy and, with the likelihood that the remarkable performance of the U.S.

equity market between 1990 and 1999 will not be repeated in the next decade, Clubs will need to continue to increase their premium income; and shipowners will have to become re-accustomed to paying annual increases. Moreover, in the more vigorous regulatory environment now faced by the U.K. insurance industry, under the supervision of the Financial Services Authority, Clubs based in the U.K. will be required to maintain healthy solvency margins, in addition to more formalized risk management procedures and internal controls.

In recent years a number of Clubs or their managements have become involved in hull insurance. Two of the Clubs, the Swedish and the North of England have run separate mutual hull Clubs for several years. In 1999 Thomas Miller, manager of the U.K.

Club, entered into a joint venture with Swiss Re and Lloyd's managing agent.

Chartwell, to set up a hull insurance product named Dex to be underwritten by a new syndicate at Lloyd's, also offering alternative risk transfer products to shipowners. In June 2000, Gard established a new management company, Gard Services AS, jointly with a Nordic insurance group, If..., a company recently formed by the merger of the non-life interests of Scandinavian insurance companies, Skandia, Vesta Marine & Energy, Storebrand & Pohjola, on a 60/40 basis, and all personnel were transferred from the Club to the new company, which now markets different 'product lines', including P&I, marine hull and energy.

Other Club managers have established different links with commercial insurance companies. Charles Taylor, the managers of the Standard Club, which obtained a listing on the London Stock Exchange in August 1996, announced in November 2000 that it was entering into a joint venture with Tokio Marine and Fire, to offer liability cover to Japanese shipowners, with Tokio Marine providing the first $300,000 of cover and the Standard Club traditional P&I cover for the excess. Moreover, in May 2000, the Britannia Club announced that it was in discussions with AGF MAT (part of the Allianz Group) to explore the possibility of a future alliance, with the Club manager, Tindall Riley, and AGF MAT forming a new management company.

In October 2000 it was reported that the contract for the management of the Club was to be transferred to a new company, Tindall Riley Marine Limited, and Allianz AGF now have a 25 percent share in this company. It has been reported in the press that they will be buying the balance of the company at 25 percent per year. It has also been reported that the new company intends to develop hull and multi-modal insurance products for its members, on a fixed premium basis, and possibly also a separate small craft P&I facility.

Club managers are now more active in loss prevention than ever before. A majority undertakes programs of ship inspections and, when considered appropriate, full surveys. Some Clubs undertake management audits of the ships' operators and also provided detailed technical advice and assistance in newsletters, magazines and videos and on their Internet websites.

Club managers, in close consultation and co-operation with shipowners' organizations, national, regional and international, continue to exercise considerable influence in government and inter-governmental circles in the development of new legislation and regulations for the international maritime community.

Indeed, Club managers are presently engaged closely in review of the international oil pollution liability and compensation regime provided by the Civil Liability Convention (CLC) and the International Oil Pollution Compensation (IOPC) Fund Convention, following the identification of 'shortcomings' in the system by France and the European Commission following the Erika spill of heavy fuel oil on France's Atlantic coast in December 1999 and pressure for Europe to follow the example set by the U.S. with its Oil Pollution Act 1990 (OPA 90). Club managers will play a key role in the current discussions.

The well-established traditions amongst Club managers of professional service to Members remains, but there is now a more commercial approach.

Clubs are taking advantage of recent developments in information technology.

They use electronic means of communication and most Clubs now have their own Websites, some of which are interactive, but underwriting is still mainly done in the traditional manner, with much of the business still placed by brokers.

The benefits of the International Group, namely pooling of claims and its excess loss reinsurance program, up to $2 billion, and the collective influence of Club managers as a group, have enabled it to maintain its dominant position in the market. However, the diverse commercial activities of Clubs and their managers, particularly in joint activities with commercial insurance companies, do put increasing strains on the cohesion of the Group.