In its annual report for 2021, American P&I Club has reported a premium earned by unbilled (EBUB) combined ratio of 12% (129% on a non-EBUB basis).
The new method of calculating EBUB was introduced last year.
The Club said that EBUB accounted for
- the explicit, pro-rata reinsurance by open policy years of pre-1989 asbestos claims (as has been the case for some time) and
- deficits attributable to the development of the open policy years themselves.
American Club said that this “properly recognizes the ex post facto, adjustable nature of the premium entitlements of mutual, assessable insurers such as the Club, and both the treatment and presentation of EBUB have been approved by its independent auditors”.
The Club also noted that EBUB “removed certain inefficiencies in the Club’s statutory accounting with the New York regulator”.
The Club said that the CR level highlighted “the need for the continuing pursuit of sustainability in premium pricing for the future”.
At the regular Board Meeting which took place shortly after the Annual Meeting of the Members it was resolved to close the 2019 policy year without further contribution, based on a break-even result for the year.
However, the Board also resolved to levy a supplementary call of 35% of currently estimated total premium for the 2020 policy year for both the P&I (Class I) and FD&D (Class II) classes of the Club’s mutual business. The supplementary call, which will apply to all assessable policies remaining open for assessment as of March 31st 2022, will be debited in two equal instalments due for payment on January 20th 2023 and July 20th 2023. There is not expected to be a need for further calls for the 2020 year, which will be scheduled for formal closure early in the second half of 2023.
In the interim, the release call margin for 2020 (i.e. over and above the 35% supplementary call figure) will be 5% of the originally estimated total premium for both P&I (Class I) and FD&D (Class II) entries, i.e. 40% in total.
Reviewing the year, the Club said that, “although COVID-19 maintained its morbid grip as 2021 began, conditions improved as the year progressed”.
Club tonnage and premium “grew respectably”, the Cub said, while noting that retained losses and International Group Pool claims continued to rise.
Investment returns outperformed those of 2020, and fixed premium operation Eagle Ocean Marine increased its revenue and market share.
American Club (Europe) added P&I lines for EU operators to existing American Hellenic Hull business.
The 2022 renewal saw a 20% year-on-year revenue increase, but rising reinsurance overheads ate into this.
Toward the end of 2021 the Club’s wholly-owned subsidiary, American Hellenic Hull Insurance Company Limited, was renamed American Steamship Owners Marine Insurance Company (Europe) Limited, or the American Club (Europe) for short. This was done as part of an application to extend its license to include P&I and related risks. The required authorization was obtained from the Cypriot authorities in early 2022.
The American Club (Europe) provides shipowners and operators trading under EU/EEA flags, or with another qualifying nexus to the EU/EEA, with primary P&I and related insurance as a locally domiciled carrier. It is reinsured by the American Club, and enjoys affiliated status under the International Group’s Pooling Agreement.
The hull and machinery and war risks business of American Hellenic Hull remains authorized under the original license granted in 2016, and any hull and machinery of American Hellenic Hull is now insured by the American Club (Europe) under the trade name of American Hellenic Hull.
For the 2022 renewal a minimum premium increase of 12.5% was mandated by the Board. Annualized P&I premium for 2022 was projected to be over 20% greater than that for 2021. The Club’s reinsurances for 2022, both those relating to its membership of the International Group and those it arranges for its own account, were renewed on broadly similar terms to those of the previous year, but at a substantial increase in cost.
The Club’s fixed premium brand, Eagle Ocean Marine (EOM), enjoyed a successful 2021. New broking arrangements took effect at the July reinsurance renewal. Although there has recently been a rise in claims, EOM’s premium has also increased.
The overall return on the Club’s investment portfolio for 2021 was 7.1%, up from 5.4% the previous year.
The Club noted that “the escalation of International Group Pool exposures which began in 2018 continued relentlessly into 2021, despite the Club itself not having had a claim on the Pool since 2016”.
The Club’s retained losses also increased during the year. The effects of Covid-19 continued, notably in relation to crew and passenger claims, and the impact of larger losses, influenced by social inflation in the US and elsewhere, also negatively affected results.
Toward the end of March it was announced that Joe Hughes would be relinquishing his position as CEO of the Managers of the Club on August 1st 2022, after 27 years’ service in that role. Vince Solarino would at the same time be stepping back from his role as Chief Operating Officer of SCB after a similar length of service.
Dorothea Ioannou takes over from Hughes as CEO while Dan Tadros would become the new COO. Arpad Kadi and Tom Hamilton continue to discharge their current duties as Chief Financial Officer and Chief Underwriting Officer respectively, and other senior members of the management team would remain in place. Hughes and Solarino would also remain, respectively, as Chairman and President of the management company, in order to focus on the transitioning of their day-to-day operational roles to their senior colleagues.
Don Moore retires at the end of June 2022 from his position as the Managers’ Global Claims Director. Following his retirement the global claims supervisory role will be re-shaped into a binary position in which Joanna Koukouli, the Managers’ Deputy Global Claims Director, and Molly McCafferty, currently the Managers’ Director of Claims for the Americas, would jointly serve as Co-Global Claims Directors. Changes at the Managers’ London office were announced in May. Simon Collins, having for several years served as Lead Market Liaison in that office, retires at the end of June. Messrs Richard Linacre and Chris Lowe will be assuming the roles of Managing Director and Deputy Managing Director respectively from that time, in addition to maintaining their current market liaison roles.
The Board thanked Messrs Hughes and Solarino “for their efforts in making the American Club and Eagle Ocean Marine, from modest beginnings in the mid-1990s, the respected global organizations they are today”.
It also extended “great thanks” to Mr Moore for his own work as Global Claims Director over recent years, and to M. Collins for his contribution to the affairs of the Club and Eagle Ocean Marine in London.
Reviewing the year, the report noted that the conditions which had characterized the last half of 2020 continued into the early part of 2021. For the 2021 renewal the Club had applied general increase of 5%, together with uplifts in certain deductibles.
Year-on-year annualized premium for the Club’s mutual P&I class grew by a little under 8% at February 20, 2021, while revenue for its Freight, Demurrage and Defense (Class II) portfolio increased by over 10%. Taking into account growth in the Club’s charterers’ book (Class III), total income on renewal was projected to be about 8% higher for 2021 by comparison with the previous year.
The Club’s reinsurance arrangements for 2021 remained essentially the same as those of the previous year. In 2020 the International Group’s market reinsurances had been renewed for two years, betokening only small changes to the programme as 2021 commenced.
The American Club continued to reinsure its retained exposures in 2021 in much the same way as it had during the previous year. The overall design of the cover was broadly similar, although elements of it became more expensive owing to market hardening over the renewal period.
The Club said that the renewal of business as of February 20th 2022 proceeded “in an encouraging manner”. In November, 2021 the Board had mandated a minimum uplift of 12.5% to all expiring premiums for the 2022 policy year. Further increases by reference to the rising cost of the Club’s reinsurance programmes were also to be applied, as were other changes made necessary by an individual Member’s record, or as might be required in relation to deductibles and other conditions of cover. Tonnage entered for Class I (P&I) risks diminished by about 3% over the renewal period. The average rate per ton on renewing business, excluding the effect of the substantial rise in the International Group’s market reinsurance costs, grew by about 3.5% above the Club’s minimum requirement of 12.5%.
Taking this into account, in conjunction with a 13% growth in P&I tonnage over the previous 12 months, to more than 20m gt, the Club began the 2022 policy year with projected income about 20% higher than the previous year.
Increases in deductibles, and the variation of other terms of cover, provided additional value to these rises. Class II (FD&D) tonnage remained (at 12.4m gt for 2022), largely the same as it had been 12 months earlier, but net premium grew by approximately 11% year-on-year.
Similar growth was expected to emerge during the year in relation to the Club’s Class III (Charterers’ Insurance) portfolio.
A number of challenges attended the renewal of the International Group’s market reinsurance arrangements for 2022. The Group’s deteriorating claims performance, together with the fact that the business had been renewed on February 20, 2021 without significant adjustment to premium or terms, “formed an unpromising background to negotiations with reinsurers”.
The Club said that “in the result, the renewal of the Group’s programme for 2022 was concluded on favourable terms”.
The main GXL contract was renewed with unamended, free and unlimited coverage for all risks except malicious cyber, Covid-19 and pandemic exposures.
For these categories, free and unlimited cover applies for claims up to $450m in excess of $100m, covering almost all Group clubs’ certificated risks. Excess of $550m there is up to $2.15bn of annual aggregate cover in respect of these exposures.
Above that, the Group has decided to pool unreinsured risks.
There were significant premium increases in regard to the Group’s GXL cover for 2022. Rates rose by an average of 33% year-on-year, but the effect was spread over different vessel categories with persistent oil tankers and passenger vessels attracting lower-than-average increases, while fully cellular container vessels experienced the largest increase (of 55%).
The Maritime Labour Convention (MLC) market reinsurance cover was renewed for 2022 on competitive terms, with the premium included in the overall reinsurance rates charged to shipowners.
In the middle of 2020, changes were made to the structure of the Club’s reinsurance of its fixed-premium Eagle Ocean Marine (EOM) facility. The reinsurance was renewed as of July 1st 2021, following the tendering of the programme for broker proposals, the successful outcome of which – involving a change of intermediary – “facilitated a positive result”.
The Club said that EOM “continued to make good progress in 2021”. Although claims had recently increased, the business continues to record a cumulative combined ratio in the 80% range.
Standard and Poor’s reaffirmed in 2021 the American Club’s BBB-/Stable investment grade financial strength rating. However, in 2022, much in conformity with the view which Standard and Poor’s has taken of the mutual P&I domain for several years, the agency adjusted its outlook for the Club from stable to negative. “Nevertheless, positive trends within the overall profile of the Club’s interface with the market were explicitly recognized by S&P, and these augur well for the Club’s business over the years ahead.”
Tonnage by type
Claims developed unfavourably during 2021. Retained losses continued at elevated levels, while the performance of the International Group’s Pool emerged along similarly negative lines. The cost of claims for the Club’s own account in 2021 was the worst for a decade. Inflationary trends affecting retained losses began to assert themselves in 2018, continued to develop in both severity and frequency in 2019, abated somewhat in 2020, but reasserted themselves strongly during 2021. Some of this was attributable to Covid-19. Early pandemic-related claims attaching to the 2019 policy year reached nearly $5m, reduced to less than half that figure for 2020, but increased to nearly $6.3m during 2021.
In addition to this – to some extent reflecting recent commodity price inflation – the cost of the average cargo claim on the Club had increased from $25,000 in 2020 to nearly $70,000 twelve months later. The development of claims in the final quarter of 2021 was particularly unusual. Although results for 2017 and 2018 improved during that period, and those for 2019 and 2020 deteriorated by approximately $5m in the aggregate, there were a further 651 additional claims notified for the 2021 year itself, and an increase in the total incurred for the year of $26m.
For 2021, the first six months of the year were the highest recorded Pool claims for any previous year.
The Club said that the increasing cost of claims had been exacerbated by the effects of “social inflation”.
Although definitions of the expression vary, it might broadly be defined as the manner in which claims costs rise over and above general economic inflation, impelled by developments in legislation and litigation which inflate liabilities, and attendant expense. “It has been most clearly visible in the United States but has also taken root in other jurisdictions”, the Club said.
The Club’s own experience from 2011 to 2018 showed that the average cost per claim for US personal injury cases rose by 143% above the cumulative rate of general economic inflation over the same period.
Outside of the US, the average cost per claim in regard to personal injury incidents increased by 51% above the rate of general economic inflation between 2011 and 2018. While this figure is a source of concern itself, it is still only one-third of the excess inflation rate exhibited in the case of US claims over that time.
The Club noted that, while sanctions on trade with some countries, notably Cuba, Iran and North Korea, had existed for many years, the recent Russian invasion of Ukraine had generated further impositions in regard to an already complicated sanctions landscape.
The sanctions on Russia, Russian individuals and Russian entities, had resulted in “a real impact on global shipping”.
Relevant embargoes had affected a wide range of persons, investments, and commercial activities including those related to the carriage of specific cargoes such as steel products, gas, oil and coal originating in Russia, as well as Russian-owned and operated vessels.
The Club noted that owing to the continuous evolution of relevant regimes, members and their trading partners have been forced to conduct frequent due diligence investigations in the conduct of vessel chartering and other commercial engagements”.
The Club said that this expanding requirement of needing not only to “know your client” but also to “know your client’s client” had placed burdens on otherwise routine commercial activity.
Looking ahead, the Club said that 2021 had been a difficult year. Although elements of normality had returned in many quarters, Covid-19 continued to impact the world, while other geopolitical and economic problems emerged.
“At the time of writing, hostilities in Ukraine – and the challenges they present to world order – dominate the global outlook. The turmoil and suffering engendered by these hostilities, together with the trauma they have transmitted to the rules-based system of international governance, will continue to darken the horizon for months and probably years to come”, the Club warned.