Are P&I Clubs unduly in thrall to rating agencies, JLT asks Clubs (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, and North to one of those questions. Over coming days IMN will be printing in the responses of other P&I Clubs to this question.

Q: Are the P&I clubs unduly in thrall to the ratings agencies? Holding a capital base equivalent to the AAA level of target capital as measured by one well-known ratings agency may be necessary for relatively small (in the context of the general insurance markets), “mono line” insurers to achieve A ratings, but some may feel this is too high a price to pay, especially as membership of the IG has been the traditional measure of acceptability so far as port authorities, banks and charterers, etc. are concerned.

Japan Club

Japan Club said that P&I clubs, which provide mutual insurance services, did not need the high ratings required by commercial insurers, because the rating did not reflect the merits or demerits of the service that mutual clubs provided. However, it accepted that, as the rating and evaluation by a third party was useful to show the stability of a club, Japan P&I Club aimed to obtain a higher rating than it currently had.

London Club

London Club said that it was indeed the case that the essentially mono-line mutual model, which had been the foundation for all group clubs over most of their existence, and remained intact for many today, did not provide the best “fit” with rating agency models. This. The Club said, might well have led to upward pressure being placed on capital levels over the years. London Club said that it had taken a number of positives from its interactions with the analysts at management meetings. “However, notwithstanding that we are not entirely aligned in our views on what represents the optimal model for a sustainable mutual P&I club and the rating implications this has for our club”, the Club concluded.

North P&I Club

North said that many shipowners and their brokers required counterparties to be rated at least at the “A” level. Consequently clubs had no real choice other than to meet the rating agencies’ capital requirements. North also noted that the capital requirements of regulators had increased materially, not least because of Solvency II, also requiring clubs to hold significant levels of capital.