P&I Club diversification a thorny issue with brokers

Malcolm Godfrey, Executive Director, Marine P&I Division at AJ Gallagher, has noted that on “the emotional issue of diversification”, he had “often expressed concern” about it in past reviews.

He noted that this year the strategy had “bitten hard” into the results of those clubs with diversified operations, and, excluding the long standing diversification into FD&D and War, had generated about $120m in losses for the Clubs.

While Standard had closed down its Lloyd’s syndicate, Skuld had switched its M&E operations to its own corporate paper “which should at least result in a reduction in acquisition costs following the change of platform”, Godfrey said, adding that “whether this will be enough to turn losses into profits is for the future to determine, but at least they will still have skin in the game when premiums begin to climb again”. Godfrey observed that the 2010’s “drive for growth”, which was fuelled in part by the excess capital held in the system and the need to justify keeping it, looked to have proved to be “strategically questionable”.

Godfrey observed that growth, be that in the core business or through diversification, was not great when you were in a falling market.

He said that growth when you were fully aware that rates are uneconomic – and restate that at every renewal – perplexed him. “Why do all Clubs seek growth when they also repeatedly emphasise that rates are too cheap? Falling effective premium rates, in part exacerbated by the churn, put pressure on the Clubs to chase growth merely to stand still, at a time when the more cautious underwriter would back off”, he said.

Godfrey conceded that there might be synergetic benefits not shown in the numbers, or increased premiums to absorb fixed overhead costs, but he said that this was a high price to pay.

He also conceded that investment into fixed premium facilities such as Eagle Ocean might now yield positive returns, because there had now been market consolidation and the level of overcapacity had been reduced. But he said that rates were still thin in this sector as well.

Godfrey observed: “We have said many times the spirit of mutuality is disappearing – although we support the IGA system and the cover it provides absolutely”.

He said that last year 20% of the Clubs’ revenue came from non-P&I business. Within the 80% that was P&I, there was a growing proportion of fixed premium business. He said that this change of emphasis was further supported by the introduction of Club roles in the form of ‘marketing manager’ or ‘commercial officer’, roles which traditionally had not existed in the less competitive environment of the Clubs in the past.

“I believe that the Clubs are now competing amongst themselves more than ever before, not just on premium, but marketing loss prevention, apps for everything, diversification, fixed premium etc”, Godfrey said, and it was for this reason he thought that there was every chance that the February 2020 renewal might again be softer than expected.

“The fundamentals say one thing, the appetite for growth and competition says something else. But what value is there to that growth, if it is achieved by taking on business that is increasingly loss making?”, Godfrey asked.

Godfrey also warned that extreme competition placed extra stresses on the resolve of the IGA. “Perhaps it is time for Clubs to review their role in the wider maritime business: that of a service provider, at cost”, he said.

Godfrey noted that shipping had changed over the past decade, with mergers and acquisitions, public finance, hedge funds, Far East Trust Companies etc resulting in further significant consolidation and a new generation of shipping companies and owners.

The larger the Company, the better the buying power. Godfrey said that this created a challenge for the Clubs, in that size was not always compatible with mutuality. “Yet in the Clubs’ thirst for growth, no Clubs wish to be seen losing Members.