Is there not a case for reducing P&I rates overall? (part 2)

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 Japan Club, London Club, North of England P&I Club and Shipowners’ P&I Club to one of those questions. Over coming days IMN will be printing the responses of other P&I Clubs to this question.

Q: Many of our clients would rather see P&I rates reduced upfront rather than excess capital returned or call instalments discounted or waived later in the day. We understand that clubs aim to offer long-term stability but, with club surpluses at today’s record levels, is there not a case for saying that P&I rates overall could be reduced by a margin that would be beneficial to club members without risking the stability of club finances?

Japan Club

Japan Club said that, although the club’s overall loss record had been good in recent years, as the vessels’ size has grown and the potential for significant marine environmental claims had increased, there was a greater risk of a vessel being involved in an accident. In such circumstances, returning premium to the members by not levying part of the supplementary call, etc. was a more appropriate means of proceeding than reducing rates upfront, the Club said.

London Club

London Club said that its essential view was that the best way to balance the different considerations over the long run was to focus on the upfront rating, using renewals as an opportunity to review and, if necessary, adjust terms for individual members, reflecting their records and risk exposure, within the context of our overall capital requirements.

North Club

North said that the reality was that the capital requirements of the clubs would vary from one to the other based on a number of different factors. Each club was therefore in a different position. Some clubs would have benefited from making unbudgeted calls over the past 10 years, whilst others would have also endured significant premium “churn” on their book of business (ie with older higher premium paying tonnage being replaced by lower premium paying new buildings) over that period. It was therefore helpful that a number of clubs were now relatively transparent about their capital requirements and the level at which reserves might be deemed excessive by their shipowner member boards, prompting a return of excess capital.

For North, the reality was that premium “churn” was naturally eroding P&I rates anyway “so that we do not believe that there is an issue to be addressed in this sense”.

Shipowners’ Club

Shipowners noted that its combined ratio performance and overall capital position were focused on the needs of its members, and that Shipowners’ regularly reviewed its capital position to ensure an appropriate balance between that and its income requirements.

As it said in response to a question relating to excess surplus funds, Shipowners’ Club aimed to write business “at cost”, in line with its mutual ethos. It had an average five-year combined ratio of 97.2%. The publication of the Shipowners’ Solvency and Financial Condition Report on 30 June shows a solvency ratio of 177%, which becomes 127% when one excludes conditional capital that we have the ability to call, but which Shipowners’ had not actually called from our members. “Therefore, on balance, we believe we continue to price business appropriately and to retain an appropriate level of capital to achieve financial security for the benefit of all our members”, the Club said.