A significant number of claims above $3m last year – 12, compared with an average of six such claims in the previous 10 policy years, – pushed UK P&I Club’s combined ratio to 114% for policy year 2018/19.
At the Club’s Board meeting in Athens on Monday May 13th the Directors approved the Report and Financial Statements for the year ended February 20th 2019.
Nicholas Ingelssis Chairman, in his first annual statement since taking over from Alan Olivier in October 2018, noted that, in recent years, generally favourable claims experience and rising capital levels had depressed premium rates across the market, exposing the underwriting result to increases in claims activity.
“In the past that exposure would have come from the generality of all claims but, over the past 10 years, the shape of the Club’s claims profile has changed. The attritional claims (those with a cost below $0.5m) have dropped dramatically in number and in cost and now represent a third of the total cost of claims as opposed to half, 10 years ago”, he said.
Ten years ago, claims above $0.5m constituted approximately half of notified claims costs. In 2018 the proportion was two-thirds. “As large claims form a greater part of the Club’s claims costs, they will also need to form a greater part of Members’ premium requirements and this will naturally influence the Club’s approach to underwriting”, Ingelssis said.
The Club noted that “over the last eight years Members have benefited from significant premium reductions. Premium rates are at historically low levels.”
Ingelssis said that the change in the claims profile meant that the Club was now much more exposed to even a moderate increase in the number of large claims. The cost associated with the six additional claims above the average was nearly $40m and added 15pp to the combined ratio. “This additional cost increased the combined ratio for the financial year to 114%. This is above the Club’s acceptable range and, although the cost of large claims may be exceptional, it highlights the need for future action on premium rates”, warned Ingelssis.
The underwriting result and a decline in investment return year on year saw free reserves fall to $505m. The Club has maintained its S&P rating of A (Stable).
As of the start of this policy year mutual owned net tonnage over the year had grown 5m gt net to 144m gt. Fleet profile is 35% bulk carrier, 28% tanker, 13% gas, 13% container, 6% other and 5% cruise ships. The geographic distribution is 54% EMEA, 36% Asia-Pacific and 10% Americas.
The weaker investment return last year, at 1.4%, was due in the main to a very strong equities performance the previous year, followed by a flat equities performance in 2018/19. UK Club investment distribution is 36% government bonds, 29% corporate bonds, 21% equities, 8% alternative investments and 6% cash.
Claims development on prior policy years had continued to be favourable.
Currency movements for the year reduced returns from 2.8%, but the Club noted that the liabilities it faced in non-US Dollar currencies would also have reduced. The Club said that its investment strategy remained unchanged, “focusing on a diversified portfolio which matches assets against liabilities and aims to maximize returns over the medium term”. However, the Club warned that “with the current uncertain economic environment, investment returns over the near future might be more muted than in recent years”.