Mergers between mutuals not like other mergers, say P&I Club executives

Broker JLT asked all the P&I Clubs a number of questions for part of their annual review. Here is the response of the final group to the question: “For you, what are the three key events of the past 12 to 18 months?

9) Standard Club’s CEO Jeremy Grose said that the club had been focused on diversifying its sources of income to support its core mutual P&I business. It had launched the Standard Syndicate at Lloyd’s and established the Singapore War Risks Mutual (SWRM).

Standard had also worked to deliver significant cost savings in claims management. “The Standard Syndicate provides members with a wide range of covers designed to meet their needs. In its first year the syndicate exceeded its targets to bring new business to Lloyd’s and underwrote high-quality risks. In the medium to long term, we expect the syndicate to provide a meaningful profit to the club, supporting the club’s growth and financial strength and contributing towards reducing the costs of members’ mutual P&I cover,” Grose said.

Standard noted that SWRM was a dedicated war risks facility. established in April 2015 and fully supported by the Singapore Shipping Association (SSA). “This is the first national mutual war risks insurer in Singapore and was set up with the aim of providing Singapore with a flexible and competitive war risks provider to match other national war pool initiatives. The mutual has received support from owners both

locally and internationally and is well ahead of budget, with over 400 ships entered by members”, Grose said.

On claims cost management, Grose observed that Standard Club had been making “strenuous efforts to explore all avenues to reduce the cost of claims”, which comprise underlying liabilities and also the fees of third-party services providers such as lawyers, consultants and correspondents. He said that the Club had introduced service level agreements with the majority of the law firms used by the club and negotiated better terms and alternative billing structures. Standard was working with service providers to achieve cost savings at every stage “through proper staffing, phased budgeting and a clear case strategy based on a detailed evaluation of the particular claim”.

10. Steamship Mutual’s Chief Operating Officer Gary Rynsard said that the increase in the capital held by P&I clubs was significant, because it opened up the potential for greater risk retention. At the same time, capacity in the reinsurance markets and softness in the pricing due to a good claims environment meant that attractive reinsurance deals were available.

Rynsard observed that most clubs had been experiencing a relatively low level of claims in the current year and back-year claims development were also better than expected. “Credit should be given to shipowners for these improvements. Amelioration in back years is a feature across the insurance market and the extent of this has not been fully explained and accounted for”, Rynsard said.

The failure of the proposed merger between UK and Britannia appeared to demonstrate two things, said Rynsard. “First, that at least one board after a presumably thorough investigation could not be convinced that amalgamation was in the best interests of its members, thus challenging the assumption made by some people that amalgamation of P&I clubs is both inevitable and desirable; secondly, that P&I clubs are ultimately run by boards of shipowner members, not the managers”.

11) Lars Rhodin, managing director at Swedish Club, said that there had been a commitment to steady growth across all areas of Swedish Club’s business, demonstrated by three key achievements:

“We are pleased to have seen controlled P&I growth developing organically from the business relationships we have established. Last spring the club opened an office in London with its own underwriting presence and our goal in 2016 is to develop that presence further. We also expanded our presence in Norway, moving to a new office in Oslo and increasing staff numbers and market participation”, Rhodin said.

12) UK Club said that, although the merger talks with Britannia failed, the board of the UK Club still believed in “the underlying logic and the value proposition behind consolidation in the P&I market”. It said that, if delivered successfully, the value proposition would reduce cost, deliver capital efficiency and allow for investment in value-added services.

The Club noted that in February this year it obtained approval from the Prudential Regulatory Authority (PRA) for the use of the internal model to calculate the solvency capital requirement for the UK Club. “This placed the club in a small group of 19 firms in the UK to get approval from the PRA for an internal model or partial internal model. It is no exaggeration to say that the development of this model has revolutionised the enterprise risk management approach of the club and is now used by the board in all the major financial decisions from assessing capital requirements to the purchase of the club’s own reinsurances and the pricing of risk”, UK Club said.

The Club noted “consistent underwriting results”, having delivered an average combined ratio of just under 100% for the past six years. It said that “this consistent approach to underwriting has enabled the club to plan with a high degree of certainty and return capital when appropriate”.

The Club said that as a result of this, there was “a new confidence about the club which is evidenced by the success of the last renewal and the 7% growth in the club’s tonnage over the last 12 months.”

13) Peter Spendlove, managing director at West Of England, said that “in no particular order”, the first significant event of the past 12 to 18 months was the lifting of sanctions against Iran in January. “Not only did this open up much needed extra trading opportunities for members (especially tanker owners) but also demonstrated the strength and flexibility of the IG clubs in responding to members’ needs”, Spendlove said.

He noted that the risk of US domestic underwriters being unable to contribute to GXL claims because of US primary sanctions caused most shipowners to hold back from committing ships into the Iranian trades. “The clubs responded by putting a separate reinsurance structure in place and agreeing to pool shortfalls for non-certificated as well as certificated claims between them, effectively transferring the financial risk of trading to Iran from the shoulders of individual shipowners onto the pool. The IG clubs are uniquely placed to deliver these kinds of solutions to the world’s shipowners.”

Secondly, Spendlove said that the failure of the proposed merger between the UK and Britannia clubs raised the question of consolidation within the P&I industry generally. He noted that there had been much speculation on what was the “right” number of clubs, the supposed benefits of merger and who the likely suitors might be. “But for us the discontinuance of the UK/Britannia discussion clearly showed the difficultly inherent in trying to merge two mutual clubs.”

Spendlove insisted that West of England was not against consolidation per se, if that was clearly the best solution for shipowners, “but the merger of mutual enterprises does not necessarily follow the usual M&A rules and by necessity must deliver real and tangible benefits for their respective memberships”.

Thirdly, Spendlove noted that the vote in the UK to leave the EU left it far from clear what shape the future relationship between the UK and the EU would take and how profound the long-term impact on the P&I industry would be, “but we’ve already seen some immediate consequences in terms of volatility in the investment markets”. Spendlove noted that West of England, as a Luxembourg-domiciled and regulated club for many years that was already based there, would only suffer a modest impact, if any at all.