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 American Club, Britannia and Gard 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 USD 5 billion in surplus funds and together have reported profits for the year ending 20 February 2017 of close to USD 600 million. To many ordinary club members this may seem excessive. What justifies the accumulation of surpluses at this level?
American Club said that the level of surplus any club considered appropriate to its needs was a matter for that club alone, and that decisions in this regard would be made by club boards in consultation with club managers.
American said that the drivers of such decisions will varied from club to club, including consideration of the regulatory requirements of the jurisdiction in which individual clubs were situated. The Club said that it would be invidious for any club to gainsay the policy positions of others in this respect, and that club boards and managers would be motivated by the best interests of their membership.
Clubs would consider a wide range of matters bearing upon what was appropriate by way of overall reserves at any point in time. However, American Club noted that the attentions of both local regulators and rating agencies had clearly become more insistent over the past several years. “It is not unreasonable to suggest that this has informed the accumulation of reserves to levels which, 30 years ago, might have been considered unnecessary by the standards of those times”, American Club said
Britannia said that its members demanded “unrivalled financial strength”, which provided “stability and reassurance”. Notwithstanding this, Britannia said that its board regularly reviewed the club’s finances, balancing the merits and need to maintain that financial strength against a desire to act in a mutually supportive way for its members.
Britannia noted that in May 2017 it made an “unprecedented” $20m capital distribution to its members, with an additional $19.5m having been returned to members as deferred call waivers in the past four years. It added that general increases for the corresponding four years were set at 2.5% in 2014/15, 2015/16 and 2016/17 and at nil for 2017/18.
Gard said that the sharing of risk and reward were at the core of the P&I mutual market, and that the model was built to weather severe unpredictable financial challenges.
The Club said that the role of healthy capital base was to absorb periodic shocks to the system, and that individual clubs made their own decisions as to the size of the capital buffer required, depending on growth appetite risk appetite and threshold, and their own models.
Gard observed that the group clubs were owned and run by the members, “so if shipowners think their clubs should hold less, then they can and should get involved in those discussions”.
Gard felt that “looking at the aggregate of these decisions is probably not very meaningful. We focus on offering the stability and predictability that members value.” Gard said that it had demonstrated a consistent capital management policy since the early 1990s. The policy set clear targets as to how much capital the club believed was prudent to hold and, when these targets were achieved, funds were returned to members as was appropriate.
The Club noted that, by following this capital management framework, it had reduced its deferred call by $230m over the past five years. “Competition amongst the P&I clubs is fierce. A club that does not adjust premiums and returns funds will, over time, see a reaction from its members”, the Club said, adding at the same applied to a club that needed to improve results or capitalize in a different way from its competitors. “Prudent capitalization is the key to seeking the lowest cost at the highest service from the individual clubs”, the Club concluded.