Steamship and UK Club disproportionately hit by Covid impact on cruise industry, says Gallagher

The impact of Covid-19 on claims and premiums at the 13 group P&I Clubs has varied significantly between different clubs according to each of their vessel portfolios, noted Malcolm Godfrey, executive director, marine P&I at broker Gallagher in a market overview of the marine P&I market, at which he warned that the reinsurance programme could see rates up 30% from the last renewal two years ago.

For Steamship Mutual and the UK Club, both with above-average involvement in the cruise sector, Gallagher saw an 8% to 9% decline in policy year premium income between 2019-20 and 2020-21. Unfortunately, there was no parallel decline in claims incurred on a policy year basis at 12 months, but Godfrey said that this might well be due to other losses offsetting savings in cruise sector claims.

Most other clubs saw no dramatic change in policy year premium income levels. While there had been Covid-19 related claims across the board, only two clubs had reached the pool as yet – both operate in the cruise sector and both had claims coming in within the early days of the pandemic.

Godfrey warned that it was likely that the worst was yet to come with regards to Covid-19 related claims. Covid-19 continued to bring a number of logistical challenges; none more so than owners needing to carry out changes to their crew, which brought with it substantial welfare and safety implications. “Human error underlies many P&I claims, and the fatigue associated with extended stays on board could have longer-term consequences for insurers”, Godfrey observed.

The impact at a global financial level of all the uncertainty and volatility that we had seen since March 2020 appeared to have been minimal. Free reserves were broadly unchanged and a small net surplus was earned, with Britannia still managing to return some funds to members.

The underwriting deficit continued to be offset by investment income, with both of these levels still above average.

The final destination of 2020-21 was much the same as 2019-20, although the route taken had been very different.

2020-21 was the first year to feature general increases (averaging around 6%) after a sequence of three years with fundamentally no general increase. Financial year premium incomes were largely unchanged at $3.8bn, indicating that the clubs’ resolve to address underwriting deficits might have been slightly compromised. Claims continued to rise on a financial year basis, pushing the underwriting shortfall to $550m, up from $492m in 2019-20.

Gallagher observed, as had most of the group clubs, that the biggest driver for claims now would seem to be the International Group pool. 2020-21 was one of the worst years for pool claims in recent memory, and this was exacerbated by a significant deterioration in the 2019-20 year of account. By August of this year the 2020-21 pooling experience has worsened. with 19 claims exceeding $500m net to the pool – although Godfrey said that it was as yet uncertain how this would impact the 2021-22 year result, “as we cannot say how much IBNR (incurred but not reported) the clubs were holding”.

The current year was understood to feature just five pool claims, totalling around $300m, although the winter months were still to be negotiated. “It is beginning to look like the severity of pool claims is more of a trend than a statistical blip, which again, will put pressure on future premiums”, warned Godfrey.

He also observed that it might be considered strange that, at a time when very large claims were impacting the P&I market, we had seen two years of comparatively low numbers of total losses in the Hull Market.

Rather than the current focus on individual member claims, it was anticipated that pool claims and overhead costs would play an ever-increasing role in the underwriting model going forward. “At a time where all clubs are pointing to pooling losses as being their biggest problem, it is perhaps time to reflect on the fact that every pool claim is at least one club’s member claim, with every other club contributing”, said Godfrey.

While this might point to the virtues of diversification, Godfrey observed that “with the experiments in Lloyd’s have coming to an unfortunate end, clubs may be less inclined to seek pastures new to utilize their surplus capital”.

While diversification did not produce a clear financial benefit at a technical underwriting level, when looking at the Scandinavian clubs, it had produced considerable benefits to them historically. “Perhaps now is time to retrench and for the clubs to get their own houses in order vis-a-vis P&I results?” said Godfrey

As a result of the 2020-21 performance, Free Reserves remained unchanged at $5.56bn, with the clubs continuing to face the dilemma of being asset rich and results poor.

Godfrey said that this was a dilemma that left them trying to improve their core underwriting result by increasing what they regard as inadequate premium rates, despite sitting on substantial piles of members’ money. Godfrey said that it was well-known that clubs traded commercially on the back of their ‘A’ rating and that they worried about the consequences of losing it.

Godfrey said that, notwithstanding London Club’s recent unbudgeted supplementary call, he felt that the excuse that the money was needed for the “one in 50 year” event had been somewhat discredited given the fact that we have just seen one such event. “Overall, the clubs have been (other than in the short term) more than capable of handling these events, with no loss of wealth”, claimed Godfrey.

Six clubs now sat on the S&P downgrade radar, with negative outlooks. This was not a reflection of the market’s perception of the weakest clubs, as the negative outlooks include a number of the stronger clubs, such as Gard. However, Godfrey said that “the question does remain on whether S&P will move to downgrade any of these clubs in the period leading up to renewals”.

Godfrey said that the Group Clubs had clearly embarked on a multi-year plan to get their rating integrity back, having had successive years with average general increases of 5.75% and 8.25%. It was, however, becoming clear that a number of clubs were backtracking away from the “general increase” mechanism – although they still have target premium increases.

Gallagher expected “meaningful” rises to be sought. Gallagher said that it firmly believed that the approach featuring a premium increase and a capital return was the way forward.

The renewal would also have to factor in the increased cost of the international group reinsurance programme, which had been placed on a two-year basis for 2020-21 and thus did not feature Covid-19 and cyber exclusion clauses. Gallagher predicted that the 2022-23 renewal would reflect the experience of the programme and the general pricing issues in the reinsurance market, where reinsurance risk codes suffered for some time.

Godfrey observed that in recent years there had been a steady drip-feed of claims on the programme, although none to match the $1.48bn Costa Concordia claim from nearly a decade ago. He said that the Golden Ray had been a notable recent feature (ca $800m according to Gallagher, but thought by some to be likely to be close to $1bn by the end). This event was exerting significant pressure in a liability market feeling wider stresses and strains. “Likewise, the Ever Given and One Apus losses have contributed significantly to the wider maritime woes”.

Big increase in reinsurance costs feared

Godfrey warned that the latest market speculation suggested as much as a 30% increase in the Group reinsurance programme cost, which would have a knock-on impact on owners’ individual increases. This would be of particular significance to operators of larger vessels, where Group RI costs often comprise a significant proportion of overall premiums. Godfrey said that it was important that owners were aware of these potential increases when reviewing overall placement costs. and prepare accordingly for their renewal discussions.

Godfrey said that, from Gallagher’s recent and ongoing discussions with club senior management, it believed that there would be General Increases and internal targets (for those without GIs) in the range of 7.5% to 15% to address persistently high combined ratios (with possible outliers on either side). West’s recent announcement of a 15% GI would seem to ring true with this. This, coupled with significant RI increases and the ever-watchful gaze of the regulator (with six clubs on the S&P watch list), would lead to a confluence of market pressures that have not been seen in recent years.

“Indeed, should clubs act as a mutual and control the reinsurance renewal, costs of their members, whilst help alleviate the impeding RI pressures through an allocation of investment returns or contingent part of their free reserves?”, asked Godfrey, noting that these are, after all, funds generated by their member’s contributions”. Would it not therefore “be an opportune moment and use the Group’s overall financial resilience to mitigate the impact of the coming process?”

Gallagher put the idea to one senior club manager, who declared that when the RI rates consistently reduced, members did not volunteer for the clubs to keep it and that probable increases would still mean owners paying less than five years ago.

Godfrey observed that a prolonged hardening market was not new to the P&I world, but it was certainly a first for many individuals who had more recently joined the market or moved into management positions, particularly over the last decade or so. Godfrey said that, while the market was indeed hardening at this time last year, Gallagher felt this was the first of a number of significant steps that would play out over the next few years. There was concern that, because of Covid-19, there would be another largely virtual renewal this year, which would be frustrating to all concerned.