Following the publication of its mid-year summary, North Of England Club has released its full mid-year review 2018.
Chairman Pratap Shirke wrote that it was difficult to recall a more critical period in the history of the industry, “as the challenges we now face require ever more imaginative responses if we are to maintain our commitment to the essence of what we do: mutuality”.
Shirke referred to the volatile global sanctions regime, the effects of the impending 2020 global sulphur cap, and the developing technological landscape as three examples.
He continued, noting that the squeeze in profitability was affecting not only the Clubs but also the Lloyd’s market. “With falling P&I premiums and market ‘churn’ combined with the prospect of a claims environment which is less benign – all of this against the background of our Members experiencing continued variability in their earnings – this is a situation which applies to the industry as a whole, and it seems appropriate to take stock together of the challenges ahead of us and resolve to meet them ‘head on’”, Shirke wrote.
He said that the industry could be seeing signs of a changing claims environment, which was evidenced by the Club’s experience in the category of retained large claims in excess of $1m. He said that the Club was also making an allowance for a continuing pattern of elevated Pool claims.
North had seen a deterioration in investment returns during H1 and the Club was now estimating a combined ratio of 110% for the 2018/19 policy year.
The first half of 2018 saw 18 high-value claims across a variety of areas. While the experience on the Pool was common across the International Group, the combination of the increase in all these high-value claims against the background of lower premium levels and churn was a key driver of an increasing projected combined ratio.
The 110% ratio would lead to a fall in free reserves, which Shirke said would place the Club’s capital level in the middle of the prudent capital range established by the Board, while on February 20th 2018 the club had been positioned just above that range.
“As a result, corrective action to premiums will be required to halt the decline in the capital in order to remove the risk of it falling below the prudent range. The Board has therefore decided that in recognition of the continuing economic pressures being experienced by the Membership, the Club will not announce a General Increase in premium at the 2019/20 renewal. However, we will robustly review all Members’ premiums to ensure that a fair rate commensurate with performance and exposure is applied”, wrote Shirke.
The Chairman said that, should the trends in premium dilution and marginally elevated claims continue through next year, it would be difficult in the absence of significant investment returns to avoid an increase at the 2020 renewal.
North’s share of the more than 1.1bn gt IG-Club insured tonnage is around 12%. The most recent Annual Review reported growth in owned tonnage at North to just over 142m gt, as well as a 6% increase in chartered tonnage to 53m gt.
The main driver behind North’s growth was its existing Membership, complemented by new Member growth from across the globe. Types of ships entered in the Club reflected the world fleet profile. North said that, although the growth in the world fleet had slowed to less than 3%, the Club’s growth had been further constrained by the M&A activity across the shipping sector over the past 18 months. Shirke said that this activity was likely to continue in the near future because of continuing volatility in global freight markets and the increasing rates of vessel demolition. “This uncertainty is likely to be exacerbated by the introduction of the global fuel sulphur cap on 1 January 2020”, said Shirke.