JLT asks clubs if surpluses might be too high (part 4)

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 Swedish Club, UK Club and West of England to one of those questions. Over coming days IMN will be printing in turn the responses of the P&I Clubs to other questions that JLT asked.

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?

Swedish Club

The Club said that surplus in the industry was a combination of an improved combined ratio (CR) and a reasonable return on investments. It said that improved CR in many cases was the result of a less than expected number of large casualties including pool claims. Swedish Club also noted that, for many clubs, investments were negative in 2015.

UK Club

UK Club said that the free reserves and capital requirements of all clubs were set by their shipowner-controlled boards. The level of funds needed to be sufficient to meet the requirements of regulators (which under Solvency II were capital intensive) and of rating agencies (for clubs with members that use ratings in their selection procedure).

Regulatory capital requirements had been strengthened by Solvency II to protect policyholders by ensuring that clubs had sufficient funds to pay claims, even in the most extreme years. Subject to the need to maintain adequate capital, a club could avoid excessive profits where the claims experience was significantly better than expected by using mechanisms such as discounts on premium instalments.

UK Club noted that it had returned $25m in discounted calls over the past five years to ensure that premiums collected were not excessive.

West of England

West of England said that it was well aware of the need to balance the amount of capital the club held against the necessity in any mutual for funds to remain with the owners of the business where possible, especially in the light of continuing poor shipping markets in which many of our members were operating.

The Club said that “headline” figures needed to be viewed in the context of the environment in which the clubs operated. Regulators demanded that insurers hold levels of capital well in excess of minimum operating requirements, while capital models were primary drivers of a club’s financial rating to which shipowners and their brokers increasingly referred.

West of England said that there was also a need to exercise caution to ensure that the club was sufficiently capitalized to meet the future risks to which its business as a mutual was routinely exposed, and also robust enough to counter future adverse volatility from whatever source, whether from escalating claims, low premiums or investment losses.