JLT International Group of P&I Associations market review 2017 (Part Two)

Over the past couple of weeks IMN has been publishing the responses of the Group Clubs to some of the questions posed by broker Jardine Lloyd Thompson in its annual review of the International group P&I Clubs. JLT also published its own analysis of the Clubs’ situation, strategy, and views. We conclude JLT’s analysis today.

The broker said that the subject of how to deal with what it described as “excessive club surpluses” divided the market. JLT had for some time been pushing for a reduction in rates. “P&I rates overall could be reduced by a margin that would be beneficial to club members without risking the stability of club finances”, it said.

JLT noted that some clubs appeared to disagree very specifically with this approach. Swedish Club stated in response to this year’s JLT market questionnaire that “it is more correct to return surpluses rather than under-pricing the risk at the front door”. Other group clubs expanded on this theme and how, in their view, the process of returning funds should work.

However, JLT observed that London Club offered the broker’s proposition more than a flicker of support, stating that “…our view is that the best way to balance the different considerations over the long run is to focus on the up-front rating”.

West of England made a similar point, but added that “a general return of premium tends … to be indiscriminate because, by definition, it applies to all regardless of good or bad performance”.

JLT said that it had “much sympathy” with this sentiment, adding that “premium returns however made, or discounted calls, while unlikely to be dismissed by club members once offered, don’t seem particularly mutual, based as they are on premiums paid or due. In relative terms poorer performers benefit more. Adjusting rates where possible seems much fairer, as the degree of such an adjustment and its value over time can be matched to the individual performance of club members.”

JLT insisted that if the clubs could afford to return premiums or discount calls then they could afford rate adjustments instead.

The broker said that it was “probably too cynical” to assert that this was for Group Clubs more a matter of preference, for the ease of applying a non-negotiable not-especially-generous policy to the membership as a whole, “versus the more arduous task of negotiating renewals with each member individually that reflect that member’s overpayment towards current surpluses”. JLT said that it was not necessarily suggesting that the one approach was always offered to the exclusion of the other, “but the emphasis on returns of premium is doubtless thought to be a lower risk strategy.”

JLT concluded that current rating levels were not unduly eroded from the clubs’ perspective, and clubwide call discounts looked generous in overall terms, amounting to tens of millions of dollars, even if the benefits to individual members were actually quite small.

JLT said that, while it recognized that P&I clubs by their very essence were cautious and risk-averse, it did not consider there to be a high risk factor associated with making meaningful rating adjustments where loss records allowed.

The broker said that club surplus funds had risen by 60% between 2009, when the shipping boom had just come off its peak, and 2016, while tonnage entered had grown by slightly over 40%. Total net outstanding claims provisions over the same period, even allowing for serial over-reserving, had grown by only 13%, JLT said, asserting that “a very handsome margin for error” had been built into the mutual P&I system.

The broker said that the 2017 P&I club reporting season had provided new evidence of a general trend towards over-reserving, via the FRS103 development claims tables that now form part of the notes to many P&I club financial statements. JLT said that in every case, for virtually every policy captured by these new reports, there had been significant positive development in claims costs reserves between the figures given at end of each new P&I policy year and the value of those figures as the policy year develops over time.

Positive development of 20% plus of original claims costs forecasts by the time a policy had reached the 60 months marker had become standard, with the ultimate release to surpluses often much more. This, said JLT, had allowed club surpluses to grow even when reported underwriting results were hovering around breakeven.

JLT said that it was not putting forward the argument that current P&I club surpluses were a bad thing, noting that “it would be strange if any club member were not comforted by the strong capital position of the club or clubs with which it has vessels entered”.

The broker accepted that many would be pleased to see calls returned or premium instalments discounted or waived altogether, but it believed that, at the very least, there were “few if any” club members that would wish “to fund further unnecessary growth in club surpluses through current P&I rating levels, and in our view the only fair way to stop that happening is to reduce P&I rates where circumstances allow”.

Since JLT’s 2016 Market Review was published, the broker has built the JLT P&I Rating Engine, which it said allowed it to interrogate and challenge P&I club claims reserving in all its aspects and applications, “providing a technically sound, actuarially substantiated analysis of the effect of club reserving policies on individual client premiums”. The broker said that, based on this evidence, it could demonstrate that rate reductions were justified for many of its clients.

Referring to the new rating engine, JLT said that establishing a reliable data sample was a relatively simple matter. However, developing a method of analyzing the data sample in a way that allowed it to overlay and compare the different underwriting structures of the 13 P&I clubs, so that the engine provided separate but complementary analysis of abatement and pooling costs, “required much more time and effort”.

Working with experts in JLT Re, the broker said that it had produced a rating tool that did not simply benchmark rates against the market, but instead produced what it described as “an actuarially validated evaluation of what any individual shipowner should fairly pay for P&I insurance”.

This, claimed JLT, would help the P&I clubs achieve what Rod Jones of Standard Club termed “excellent and sustainable value”.