JLT asks clubs if surpluses might be too high (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 Of England P&I, and Shipowners’ Club to one of those questions. Over coming days IMN will be printing in turn the responses of the other P&I Clubs.

Question: The P&I clubs collectively have racked up in excess of $5bn in surplus funds and together have reported profits for the year ending 20 February 2017 of close to $600m. To many ordinary club members this may seem excessive. What justifies the accumulation of surpluses at this level?

Japan Club:

The club said that reserves had to be maintained at a certain level to ensure the stable management of the club and the provision of reliable insurance services to members. It noted that each club determined what reserves should be kept according to the level of risk each club takes. Japan Club also observed that all of the group club’s risks were growing as the size of vessels increases, along with the potential for a significant environmental claim. The reserve amount of each club reflected this situation.

London Club:

The Club said that capital strength was something which required and received continuous attention, including in the context of the kind of future volatility to which P&I might be subject. It felt that an unusually benign claims environment played an important part in the 2016/17 results, “but we don’t have to look back far for an illustration of a more challenging picture”. London Club said that one could not expect the more recent experience to be repeated and therefore it took a prudent approach to maintaining financial strength.

North of England Club

The Club said that it believed all members wanted their clubs to have a strong balance sheet, which ensured that, amongst other things, they would not be burdened by unbudgeted supplementary calls.

North said that the level of capital needed by each club would depend upon the assessment of the club’s exposures and the capital requirements of regulators and S&P, although it also found space to observe that many clubs had found it necessary to charge unbudgeted supplementary calls within the past 10 years.

The combined capital of the clubs had grown over the past 10 years, but it needed to be recognized that the fleet insured by the IG had grown by about 50% over that period, and that the capital requirements of regulators and rating agencies had increased. In addition, the range and quantum of liabilities covered had increased and the clubs were collectively retaining more risk, all of which highlighted the need to hold more capital.

North said that its directors had agreed (endorsed by the members’ board, representing nearly 40% of the membership) that the target capitalization should be equivalent to “AA” S&P capital plus a buffer of between 80% and 120% of the board approved risk limit, an approach it saw as “very logical”. It said that this buffer enabled the club to continue to meet its capital targets in the event of materially adverse financial results, adding that it believed a number of other clubs had adopted a similar approach. “First identify the minimum capital needed to ensure that the club meets regulatory capital requirements and retains its desired rating and then add a buffer linked to the risks faced by the club.” North noted that a P&C insurer operating in the commercial market was likely to hold a buffer of at least double its risk limit.

Shipowners’ Club

Shipowners said that it aimed to write business “at cost”, in line with its mutual ethos, noting that this had been delivered very successfully in recent years, with an average five-year combined ratio of 97.2%. The Club said that the Shipowners’ Solvency and Financial Condition Report, published at its half-year on June 30th, showed a solvency ratio of 177%, which became 127% when one excluded conditional capital that it had the ability to call, but which the Club had not actually called from its members. “Therefore, on balance, we believe we continue to price business appropriately and to retain an appropriate level of capital to achieve financial security for the benefit of all our members”, Shipowners’ concluded.