Gallagher warns that some Clubs’ investment income strategy is not without risks

The trend for returns of capital or premium by P&I Clubs over the past few years, with some clubs prepared to accept substantial underwriting deficits on the closing of policy years while still rebating funds to members, is not a particularly stable or indeed low-risk strategy, warns insurance broker Gallagher in its just published 2021 Marine P&I Pre-Renewal Review.

The broker said that the returns were in reality “nothing to do with balanced underwriting results and the distribution of the resulting surplus arising from core trading”. Instead, claimed Gallagher, it was a return of surplus investment income recognized at the end of a year, noting that this was “all very well for so long as fortune favours the brave”. However, it added that this was not a particularly stable or indeed low-risk strategy, and that “a far more sustainable model is to get the right premium in the first place (perhaps recognizing, for example, a 2% expected investment return) and incorporate a mechanism that leads to returns of a premium or capital if the resultant combined underwriting and investment yields allow”.

Gallagher said that this lower-risk strategy would mean that, during years where investment yields dried up, free reserves would not be dipped into extensively and there might still be an opportunity to return money “even in more volatile years”.

Gallagher said that this would also enable the clubs to carry a lower level of free reserve, because volatility would be minimized. “By subsidizing underwriting rates up front, in advance, the clubs have been in effect taking into account investment income that they have yet to receive or earn”, the broker said.

Gallagher concluded that the Clubs had maintained a robust approach to the 2022 renewal thus far, with a renewed focus on core technical underwriting and associated deficits. “With the increased cost in the International Group reinsurance renewal rates just announced, underwriting discipline is being and will continue to be rigorously tested in the run up to 20th February”, Gallagher said.