Shipowners’ Club produces first Solvency II SFCR

In accordance with the Solvency II regulations, Shipowners’ P&I the Club has produced its first Solvency & Financial Condition Report (SFCR) as at December 31st 2016. The report was produced on a single Group basis, reflecting the fact that on a dayto-day basis the Club manages itself as a Group. However, the report also includes information about the Club on a standalone legal entity basis (Solo) and about its Luxembourg-domiciled reinsurance subsidiary Spandilux SA. Shipowners’ owns two reinsurance captives, Spandilux, and Bermuda-domiciled reinsurer SOP (Bermuda).

Shipowners’ Protection Ltd (SPL) is Club Manager. Business is underwritten from the Club’s London office, from branches in Singapore and Hong Kong and through a small number of delegated underwriting authority agreements.

The Club also has a branch in Canada which is in run-off. At a Group consolidated level on a mid-market investment valuation basis, the Club recorded an underwriting surplus of $2.8m and an overall surplus of $14.7m for calendar year 2016 and closed the year with $294m of capital and reserves. Premium income at Shipowners’ has reduced for two consecutive years, largely because, unlike some of the other International Group clubs, Shipowners’ accepts premiums from Members in multiple currencies. Therefore the relatively strong US dollar affected the Club’s reported income as measured in US dollars, although with 50% less impact than in 2015.

The stronger US$ serves to reduce the reported levels of both income and claims. The downturn in the offshore sector was the major factor in the reduced premium income received. In 2016, offshore vessel numbers reduced, in part as the result of the decision to reduce exposure to claims in Saudi Arabia; consequently, two large accounts were not offered renewal. Overall tonnage held up well, mainly as a consequence of some owners taking delivery of large offshore heavy lift, accommodation and specialist pipe lay and construction vessels.

Business continues to grow in other sectors. Yachts saw the most significant growth, with vessel numbers up nearly 20%. Direct entries grew, as did entries through a number of strategic alliances. Elsewhere, harbour craft, barge, tanker and passenger vessel numbers grew, mainly through the acquisition of additional tonnage by existing Members. The Club’s investment portfolio had a market value of $552.3m inclusive of accrued interest at the end of 2016; invested 68.08% in fixed income, 1.10% in cash and the remainder in various forms of equities.

The Club does not make use of the matching adjustment, volatility adjustment, transitional risk-free interest rate term structure or any of the other Solvency II transitional arrangements in its valuation basis. On a Lux GAAP basis the Club said that its technical provisions were calculated on an undiscounted basis and there was no requirement for the carried reserves to be set on a best estimate basis.

However, in practice and consistent with the Board’s reserving philosophy the carried reserves included an element of prudence to ensure a sufficient degree of certainty that the reserves would be sufficient to meet the future claim liabilities. For Solvency II compliant purposes there has to be a calculation of best estimate future claim, expense and premium cash flows, all discounted for the time value of money using the relevant risk-free yield curve specified by the European Insurance and Occupational Pensions Authority (EIOPA), with the addition of a risk margin.

Technical provisions also have to reflect the possibility of losses to the Club that are of a type or scale not reflected in the Club’s historic claims data. Such events are referred to as ‘events not in data’. This could be due to changes in the exposures faced by the Club based on the business written or changes in the legal, social, regulatory or economic environment. The Club has made separate additional provisions for events not in data within both its claims and premium provisions based on considerations of a hypothetical latent claim exposure and large loss incident respectively.

*Shipowners’ has more than 6,600 Members, utilizing a controlled distribution model through owners’ brokers. These brokers introduce a strong majority of the Club’s premium income and as such are key partners of the Club. The Club has more than 32,700 entered vessels from eight main vessel types, representing more than 25m GT, with a focus on providing P&I coverage to small, regionally trading vessels.