Insurance Marine News met up with Simon Swallow, chief executive of Shipowners’ Club, at their company’s London office on Minories. He gave us his thoughts on some of the issues facing the P&I sector today.
Trends: Getting underwriting right
This year all of the clubs reported reasonably good underwriting results for the policy year ending 20th February 2016, but not one Club reported an investment return once exchange rates and taxes had been taken in to consideration. Our Club board have always held the philosophy that we must get our underwriting right. In the past there was a trend for clubs to think that they could ultimately underwrite risks at a loss because they had investment income to fall back on. With the advent of Solvency II, greater levels of capital requirements, and greater levels of competition, those days have definitely gone. Clubs do not want to start making additional un-budgeted calls during this period of intense competition and price pressure, so most Clubs have built up reserves firstly because they are required to do so, and secondly to avoid an additional call scenario. It is also a factor of greater levels of loss prevention leading to improved claims patterns.
The larger ship clubs within the International Group (IG) have been talking about a benign claims year. There’s a lot of laid-up tonnage and they’re not seeing the previous claims activity, maybe due to vessels also slow steaming to keep operational costs to a minimum. In contrast smaller vessels have not seen a slowdown in claims activity. In fact, if anything, claims activity has been picking up a little bit.
These days, when our Members suffer a claim it’s invariably more expensive than it used to be, even in the smaller vessel market. All the clubs entered vessels operate commercially with most sectors challenged during the global shipping recession. Whilst offshore, coastal tankers and dry cargo and the tug and barge sector are finding operational conditions challenging we have seen a number of sectors such as super yachts, fishing vessels, dredging and some inland European operations bucking the trend and doing well.
P&I premiums charged today are frankly on par with those charged 10 to 15 years ago. But, looking at the liabilities, the cost of claims has increased substantially. Whilst we see greater levels of efficiency and greater levels of loss prevention, resulting in fewer claims, when average claims costs are assessed they are today more expensive. Owners are quite simply today getting a good deal from their P&I insurers.
January 2017 will see the introduction of the Maritime Labour Convention. Whilst good for the industry and good for shipping, it’s going to create a lot of additional work for the P&I clubs. The certificates we have to issue, the promises to pay for crew wages — which is quite an enhanced risk — in the event of insolvency, plus the repatriation risk of abandonment of seafarers, creates a significant change in the risk environment.
Because MLC is going to create a lot of work, strong IT is essential. Members will want their Club to provide prompt “blue cards” the promises to pay, issued to flag states – ship owners are requiring certification
immediately these days – so the investment we have put into IT is key. There’s still a significant amount of manual process in P&I and I think that some clubs may have been a little left behind when compared to others when it comes to IT.
Competition from outside P&I clubs
Another trend of course is competition. Whilst fundamentally a mutual philosophy applies in all that we offer our membership, it is alongside our mutual premium product, which represents our Members declared to the IG, that we also offer a fixed premium P&I product. There’s an historical reason why Shipowners’ Club writes fixed premium business. We recognised over 20 years ago, when the International Group brought in a limit on club cover, establishing the overspill contribution, that a large sector of our business – fishing vessels — had been traditionally entered into the IG programme on a released up front basis. These vessels would still be accounted for in any overspill calculation (established by taking, at the time, 20% of the limitation value of each vessel based on the LLMC calculation applying a minimum tonnage of 500 tons). This would have resulted with our mutual membership having to foot the bill of any overspill claim on behalf of the fishing vessel members. And so in 1993, we decided that we would take the fishing vessels completely out of the overspill calculation process and arrange a separate fixed facility. It would not be a commercial insurance solution as the focus remains a not for profit mutual, but at a fixed premium and therefore ring fenced from the overspill process.
Over the years, our fixed premium facility has developed. On occasions some owners and their brokers have commented “…..we don’t want the huge limits of cover associated with the IG; we are a small limited trading operation and therefore reduced limits of cover are adequate against a fixed premium solution…”. And that business has grown reasonably well with yachts, small utility vessels, some tugs and barges and European inland barges but the Clubs fundamental focus is always on the International Group and the benefits that a mutual entry in the IG system provides.
I feel strongly to the need to reinforce the benefits of the International Group. During the past two decades we have seen the emergence of an aggressive commercial fixed premium P&I market. I suggest that has fuelled many of the IG Clubs saying “well, if you can’t beat them, you might as well join them”, and all the clubs in the International Group now have separate fixed premium facilities either forming part of the Club, feeding in to the common P/L account, or underwritten separately through an underwriting agency.
I understand why they have done that, but I also worry about it, because it can create aggressive competition amongst the group clubs. Whilst there has always been competition the advent of fixed premium solution has introduced a new style of competition.
Additionally there are about 20 fixed-premium commercial P&I carriers outside of the IG– some are underwriting agencies such as Lodestar, Osprey , Hanseatic, Raets and Carina underwriting on behalf of Lloyds underwriters whilst some insurers such as Navigators and QBE are direct insurers– all these facilities, hungry for business in a depressed shipping market with an abundance of capital are placing pressure on rates, and that worries me, not least because the IG Clubs are also chasing this business. And invariably much of the business is small craft business ….business that traditionally we have insured for over 160 years.
Our value-added “unique selling points” are more than simply our heritage…it is our claims service, and the fact that we apply the mutual principle to claims. In contrast, a commercial fixed premium insurer who, upon receipt of a claim must ask “prove your loss”. Not being profit driven, in that any underwriting surplus belongs to the memberships, the mutual clubs in contrast say “how can we help? How can we pay your claim…”. Most commercial insurers need to return combined ratio upwards of 80% to return a profit for shareholders. In contrast we have established KPI’s of achieving a combined ratio of <100% having achieved an average of 94.3% over the past five years.
One fear I have is with continued competition driving down premiums resulting in the mutual industry moving towards a more commercial insurer attitude to claims handling. If I’m competing with a commercial insurer theoretically I should always be more expensive, because we are a mutual, and we have a mutual philosophy towards claims handling and because of the value added that we offer. But the concern is that if we start to see pressure on premiums, is it going to have an influencing factor on the way we service clients? We mustn’t let that happen…
For too long the mutual’s have challenged that the fixed premium commercial markets are going to disappear not least because they are not achieving their premium income targets, …” it can only be a matter of time”. …..But, let’s face it, a lot of the commercial fixed players have been around for a long time now.
I should also stress that, when we are quoting a piece of business, we do not offer brokers or the owners a choice. We don’t say “Option 1 is fixed, Option 2 is mutual”. We have strict underwriting criteria. So if a fishing vessel, a small tour boat or a yacht requests a quote we provide terms to the fixed programme. Likewise we strongly believe that tankers, dry cargo, construction barges, offshore vessels need to have the benefits associated with a full mutual entry in to the International Group.
When I joined 25 years ago from the broking industry there was one real competitor for us in the small ship sector – British Marine. I remember a wonderful occasion involving London Steamship, which today is a solidly traditional mutual, although they too have a small ship fixed premium facility…..probably to fend off the commercial competition. The London approached us regarding a large Chilean member who operated large tankers but also within their fleet were some harbour tugs.
The claims from the Member’s tankers was impacting the overall claims record and the London would need to put premiums up on the tankers and also to the tugs. After reflecting the London Club contacted me and suggested that the Shipowners Club may like to take on the tugs…..recognising we were the only specialist mutual within the IG for such tonnage. That business is still entered with us to this day. Such activity today t would never happen , because there is so much competition within the Group, fighting to maintain market share.
Before I moved from broking to underwriting back in 1991 most owners accessed their P&I clubs directly. Today nearly all owners negotiate their P&I entry through brokers. Of our 7,000 members, only 10 come direct. We deal with more than 600 brokers globally, so the broker network is essential to us. Traditionally we have dealt with the smaller retail brokers throughout the world, but the route to market can be convoluted, such as ship owner to bank, bank to a broker, who may in turn go to another broker, and then to us.
We have a unique dynamic in terms of route to market. We also deal with the established London wholesale brokers, specialists in P&I, but they too are facing difficulties. They are being threatened by disintermediation from the offices of the wholesale brokers in Asia and North America , looking to cut London out of the loop. The regional broker’s bottom line is also getting squeezed by the lower level of premiums. In the specialist marine sector the London wholesale brokers are having a really tough time and they each play a hugely important role in the P&I sector.
Like most insurers these days we have an Emerging Risks Group. Representatives from different departments will meet to discuss “new” risks and analyse the risk consequences. We categorize them as red, amber, and green, and these are placed within the Clubs risk register. The Trump affect is obviously on that list and, while we are all aware of the global risk relating to his forthcoming presidency, at the moment we have to sit and wait and see as to the consequence to world trade and insurable risk..
At Shipowners’ Club we have always tried to avoid a direct US risk. We aren’t frightened of it. We insure some US yachts and of course many of our covered vessels call at US ports. But generally we would not insure tugs and barges operating in the US.
On the financial side, we report in US dollars, but we insure businesses and transact both premiums and claims in currencies other than the US dollar such our business from New Zealand, Australia, Canada, South Africa, the UK and countries within Europe where premiums are transacted in the Euro. It is fundamentally important that we match our assets and liabilities in those currencies. This year, when we consolidate our premiums into US dollars and report our income, there was a slight drop in headline numbers because of the strengthening dollar. Our only hedging is in relation to our operational expenses, which are in sterling.
As to Brexit, that is a bit of an unknown for everyone. We are domiciled in Luxembourg, so in one way we are already advantaged. When it comes to us operating here and retaining our passporting rights, like everyone else we will have to wait and see. But it’s no secret that clubs currently domiciled in the UK are looking at alternative European domiciles such as Cyprus, Luxembourg or Dublin.
There’s still a lot of piracy, but it has switched from Somalia back to South-east Asia. In the seas off Malaysia, ships have been captured and, within 24 hours, they beat up the crew, lock the crew in a storeroom, bring another vessel alongside, discharge the cargo, and vanish. That has happened on a number of occasions with small tankers. We have issued advisories; we support our clients, and we’ve met with the Singaporean and Malaysian authorities. But there’s only so much that we can do, and if the pirates aren’t there, then they will be somewhere else.
Interviewer: Why do you think it died down in the Somalia region?
Globally there’s much greater piracy awareness. There was a great deal of military intervention in the Somalia region, and it was acceptable practice for vessels to have armed guards on board.
The difference with Somalia was that the pirates attacked the larger ships transiting the Suez Canal. There weren’t many occasions when the Somali pirates attacked the tugs and barges. They started nearer the coast and then moved further out, focusing in the larger ship for greater returns. In South East Asia we have seen the resurgence being linked to the Philippines-Indonesia coal trade. And, while the Somalians sort huge ransom payments piracy in South East Asia appears to be fuelled by much lower returns.
We’ve have a number of vessels laid up. Traditionally you either put it into warm lay-up or cold lay-up. With the latter everything is drained down and turned off, and to reactivate a ship from cold lay-up can take months. Warm lay-up is generally when there is some work around, but not enough to necessitate a full complement of crew. It’s the cold lay ups that are worrying. While the vessels were operating they were working perfectly well, but after a few months of everything being turned off, it’s like coming back from holiday after your computer has been turned off and it mysteriously stops working! With reactivation following cold lay-up it is impossible to check everything. The vessel is reactivated, and it all seems fine. Then, three or four weeks later, something goes wrong which was a direct consequence of the lay-up.
A real added value of the IG system is that all the clubs have a dedicated loss prevention department. Within the Shipowners’ Club we have a team of seven and we have written loss prevention circulars on the subject of ship reactivation. We recently issued a publication which addresses the issue and offers support to owners who are going through difficult times and who have asked what happens if they put their vessel into layup, or if they get into a dispute with charterers following the failure to pay charter hire or a contract is terminate early. This is where the P&I club system of mutuality can show its true strength. The Members are not customers or clients; they are Members. Our mutual offering to our membership should always be for the benefit of current and future members.