JLT asks clubs if surpluses might be too high (part 3)

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 Skuld, Standard and Steamship to one of those questions. Tomorrow IMN will print the responses of the final three 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?

Skuld:

Skuld noted that each of the 13 Group clubs pursued its own strategy and business profile. It said that its own long-term strategy included targeting sub-100% combined ratios, which ensured stability and sustainability, and reduced the risk of unwanted additional calls.

It said that, in order to reduce volatility, enhance service and ensure competitive premiums, it had diversified into a wide range of additional marine products. These provided “a healthy income” and permitted the mutual business to run a higher combined ratio. Skuld’s strategy was to maintain an S&P ‘A’ rating. It said that all clubs were aware that an S&P downgrade would be viewed negatively by owners and brokers. Clubs were also now subject to Solvency II regulations, which demanded higher minimum capital levels. “The board decides on an acceptable solvency margin, and surpluses, when generated, are channelled back to members as credits. This happened for 2015/16, and will be confirmed for 2016/17 at Skuld’s upcoming AGM,” said the insurer.

Standard

Standard Club said that P&I clubs had recently benefited from a relatively benign claims environment, with most recording lower than expected levels of medium and large pool claims. As a result, most clubs announced zero general increases at the 2017/18 renewal, and many gave rebates or returns of premium during the 2016/17 financial year.

But the Club also noted that, as recently as the 2013/14 policy year, many clubs reported one of their worst years for the number of medium-to-large claims notified to them, with Standard recording a combined ratio of more than 110% on that policy year. Less than a decade ago the global financial crash saw all P&I clubs record large reductions in their free reserves, with half of them requiring unbudgeted supplementary calls to maintain their capital base, observed the Club.

With this in mind Standard Club said that one of its main business goals was maintaining excellent financial security, “with the need to avoid making an unbudgeted call being a priority in its risk appetite and business strategy”.

The Club said that, in the current difficult market conditions for the shipping market, members would not welcome unexpected and unbudgeted supplementary calls.

“As such the club aims to maintain sufficient levels of reserves to enable the club to avoid making an unbudgeted call in stressed conditions”. The Club also noted that it had not made a supplementary call in over twenty years.

Steamship

Steamship said that it was important to understand the factors which have led to the recent increase in surplus funds.

  • The Solvency II regime had led to an increased scrutiny on capital held by insurers.
  • Many insurers, including P&I clubs had seen back-year amelioration. The Club said that precisely why this had happened was a matter of some conjecture. It was possible that new technology had led to quicker and more accurate assessment of claims estimates, and hence a shortening of the tail. The Club said that the full ramifications for the calculation of IBNRs (Incurred But Not Reported) would be a matter for further discussion.
  • Finally, the International Group pool and individual clubs at the retention level had experienced a low level of claims. “Many factors may have contributed to this experience. Whether or not this continues to be the case is unknown”, the club concluded.

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