JLT asks Clubs: Do we need a fundamental review of IG Reinsurance buying? (part 2)

In its 2017 report on the P&I Clubs, broker Jardine Lloyd Thompson asked all of the clubs a list of questions. Here are the responses of Japan Club, London Club, North P&I Club and Shipowners’ P&I Club to one of those questions. Tomorrow IMN will be printing the responses of the remaining P&I Clubs.

Q: The International Group (IG) excess of loss reinsurance programme is no longer the relatively simple construction of years gone past, given the participation of Hydra (the IG captive reinsurer) and the introduction of so-called “private placements”. The IGP&I Annual Review 2016/17 talks briefly about a review of Hydra’s role during 2017, but do you consider a more root and branch review of how the IG buys reinsurance is called for?

Japan Club

Japan Club said that it was happy with the comprehensive review of the group reinsurance programme that the Reinsurance Subcommittee, drawing on the knowledge and experience of specialist brokers and relevant external consultants, carries out every year.

London Club

London Club took the view that the group prioritised:

(i) achieving the optimal balance of risk retention and risk transfer for the thirteen participating clubs when designing the programme structure each year;

(ii) obtaining the best possible pricing for the risk transfer element.

The Club said that it fully supported the prioritization of these two aims. It did not think that simplicity of construction was irrelevant and noted that it was a feature of the most recent renewal (referring to December 2016 for 2017) but felt that, in the context of the annual cost to the group of buying this cover, it sat “some distance” behind the aforementioned aims. The Club said that the appropriate group subcommittee, assisted by its brokers and actuarial consultants, considered in detail a range of options as part of its annual review and said that it had every confidence in this process.

North P&I Club

North noted that the renewal of the International Group’s General Excess of Loss Reinsurance (GXL) contract in December 2016, involving a number of new reinsurance partners, secured an 11% reduction across the various layers of the GXL contract and saw rate reductions across all vessel categories.

North said that the IG approach to reinsurance had delivered cumulative premium savings of around $100m since the 2014 renewal period. “The scale of the value and benefits being delivered to members illustrates that the reinsurance programme is fit for purpose”, the Club said.

North said that the IG Reinsurance Subcommittee (RISC) reviewed the structure of the group reinsurance programme annually, noting that the comprehensive review included the role and participation of Hydra, the programme layering and composition, and alternative structures, such as multiyear placements, optimization of cover terms and alternative risk transfer mechanisms. This, said North, was intended to ensure the optimal balance between retention and transfer of the collective risk, both from the scope of cover and pricing perspectives. North felt that the RISC was able to draw on the combined knowledge and experience of specialist brokers and had for a number of years taken separate advice from consultants on a range of factors, including pricing. It felt that, going forward, there would be further change and evolution within the programme but not necessarily a full “root and branch” review.

Shipowners’ Club

Shipowners’ said that the Group clubs could arguably afford to retain more risk as a consequence of their capital strength and, as such, “a review might be in order”.

That said, Shipowners’ said that the role of the IG Reinsurance Subcommittee remained as relevant as ever, with strong governance and oversight to ensure that the reinsurance programme was benefiting from the current market conditions. The Group provided “the comprehensive cover on a free and unlimited basis that has always been the bedrock of the clubs’ reinsurance system”.