Clubs say “buffer” of reserves still vital as volatility increases

The increase in the average size of pool claims over the past few years was one factor in International Group P&I Clubs was one factor in North Of England’s decision to seek a merger with Standard Club, and was also a reason behind Group Clubs maintaining reserves/equity at levels higher than may leading insurance brokers would prefer, according to panelists at the opening session of yesterday’s Marine Insurance London conference.

Moderator Demian Smith, Head of Mutual, Agency and Captive Reinsurance Solutions at reinsurance broker Guy Carpenter, asked North Of England Group’s Chief Underwriting Officer Thya Kathiravel about the impact of volatility, noting that a few years of benign activity following Costa Concordia a decade ago had been followed by a recent uptick in the number of large losses. Kathiravel said that the increased level of claims volatility had definitely been seen in the International Group Pool (losses for Clubs in excess of £10m) “I think that it was 2018 that we started to see an uptick in pool activity and we thought it might last one or two years. But it’s been four years now with higher pool claims levels” Kathiravel noted that Covid-19 had brought additional volatility, and recent and geopolitical events had added to that.

Panelist Magne Nilsen, chief underwriting officer, London, for Norway-based marine insurer and the International Group’s largest member, Gard, noted that Gard referred to term its supporting capital as “equity” rather than “reserves”. He said that size and scale, assisted marine insurers in their ability to withstand volatility.

Demian Smith asked if this was driven by more recent developments, with Group Clubs relying less on unbudgeted supplementary calls and more on moving through the cycle without having to make such calls on members’ funds

Nilsen agreed that the Clubs should not forget their history. “It wasn’t too long ago that some were saying that we had too much money, but budgeting through the cycle is vital.”

Nilsen said that the amount of equity held by Clubs that was “not tied up in anything” was massively important for Gard and for shipowners.

The one broker (apart from the moderator) on the panel was Nick Adams, business portfolio leader at Marsh, and he accepted that, while brokers accepted that the Clubs needed a level of capital “back-up”, it was a question of how much was enough. “We’ve felt for some time that they have been over-reserving. Everyone is looking for a system of making things better as we go forward. We are here to keep these guys on their toes.”

Joe Hughes, CEO of American Club’s managers Shipowners Claims Bureau (but stepping down in August to be replaced by Dorothea Ioannou, whom he congratulated on becoming the first-ever female CEO of a Group Club) made the interesting historical point that the Clubs had evolved the concept of mutuality, and that one factor in this had been the role of rating agency Standard & Poor’s.

Before American Club joined the International Club in 1989 it had kept books open for a decade, to ensure that the losses for each year were allocated completely accurately. Supplementary calls had a much greater role in the Club system relative to Advance calls. But the arrival of S&P in the 1990s brought about a change. And he felt that the current “absolutist” judgements of the rating agency somewhat militated against the concept of mutuality. Hughes said that “. I think we have to live with that, but in the final analysis it’s what the members want is what matters. The system has survived for so long surely says something about how the shipowner community sees it and continues to see it.”

The panelists representing the Clubs felt that the move into the fixed-premium sector had, as Gard’s Nilsen put it “offers us an opportunity to be a bit more efficient. The balance of the risk is not always the same on the P&I side as the hull side, and sometimes we would say yes to one side but no to the other. It provides a bit more stability for shipowners”.

However, Guy Pierepoint, business portfolio manager at the fixed-premium operation British Marine – since 2005 a subsidiary of QBE – said that “you have to offer the insurance buyer a choice and we are certainly seeing a development of the fixed market within the mutual club system, which sort of goes against the concept of mutuality. It’s a question of, what are the managers are trying to achieve?”

Joe Hughes said that American Club had been running its fixed premium operation Eagle Ocean Marine for a decade, and the underlying imperative was always to ensure that it benefited the Club’s mutuality rather than detracted from it. He said that a Club could not run a fixed premium offering as an actual part of a mutual business. Yes, to provide diversification, but the interests of the mutuality had at all times to remain paramount. Hughes said that the Group Clubs represented “the Gold Standard” when it came to service, and he felt that this was more important to the shipowning community than size. “The clubs are as much service providers as they are indemnity insurers in terms of the shipping community”, said Hughes, adding that “above all you are diversifying your service opportunity to the wider part of the community”.

Marsh’s Adams concluded that “from Marsh’s point of view it is about the client. It’s good that the clubs have their own identities. We can keep the good bits and get rid of some of the not so good bits as we move forward.”