P&I Clubs’ balance sheets strong but pricing under pressure; AM Best

Pricing was under pressure ahead of the February 20th renewals, according to AM Best in its just-published special report on the P&I Clubs. The rating agency said that competition was strong, exacerbated by a growing fixed-premium market and pressures on shipowning members in challenging commercial conditions for shipping.

Twelve of the 13 Group Clubs have announced no general increase for the forthcoming policy year, following no general increases at all in 2017 and 2018. AM Best said that “with free reserves across the International Group at a high level, bolstered by several years of positive earnings, balance sheets are strong and clubs are finding it difficult to justify general increases to members”.

West of England was the one club to announce a general increase (5%), noting in its circular to members that its free reserves were likely to fall a little below $300m as of February 20th 2019, and that it did not expect to quite meet its rolling three-year target of a combined ratio below 100%.

AM Best warned that the pressures announced by West of England were not unique, and that therefore it was likely that the free reserves of other P&I Clubs would have decreased when they report their year-end February 2019 results. Volatile equity markets in the past 12 months could impact investment performance, as the Clubs traditionally have a higher proportion of funds invested in equities (estimated at 18% on average by AM Best, including mutual funds) than do the listed insurers. Once again, AM Bdest noted that there was a significant variation between clubs, with Japan Club, for example, holding nearly all of its invested reserves in cash and fixed-income securities, while other clubs had an allocation to equities of more than 30% — believing that long-term returns are better with a greater equity allocation. Overall, investment returns were likely to be down for 2018/19 compared with the previous year, the agency said.

AM Best said that “if combined with another year of underwriting losses, clubs may be under pressure to introduce general increases for the 2020 renewal to support solvency buffers”.

AM Best also observed that the “no general increase” norm masked an increasing tendency among clubs to price at a more granular level. “Renewals in the sector are driven increasingly by analysis of individual loss records and risk exposure , with more clubs using deductibles to control exposure”.