The recent conclusion of the protection and indemnity (P&I) renewal season has resulted in premiums remaining unchanged in 2018 thanks to benign financial conditions. But large losses booked by reinsurers for a series of natural disasters in 2017 will have the effect of pushing up P&I premiums in future years, though the impact will be considerably greater in the hull and machinery (H&M) market. These developments are significant in so far as total insurance costs, including both H&M and P&I, account for as much as 10% of average vessel operating costs.
During the past ten years of shipping market woes, the P&I industry has managed to acquire assets and wealth by way of underwriting surpluses and investment income. The International Group Clubs are at present full of capital, whereas during the longest boom in world shipping since the late 1700s they were strikingly short of cash. This counter cyclicality is a feature of the industry. Shipowners pay more attention to insurance costs and claims returns when shipping rates are poor than in boom times.
This year the Clubs all decided to eschew any increase in their P&I renewals, on account of stable financial balances and continued cost pressures from shipowners – see chart below. As anticipated in Drewry’s Ship Operating Costs Annual Review & Forecast 2017/18, shipowners were able to enjoy at least a premium cost standstill, if not a small reduction for good claims record. And where warranted discounts were available for restive members with good claims records.
However, most owners tend to remain with their chosen Clubs. History has something to do with their loyalty and their connections to the Club Boards. But also larger operators find Clubs which work to accommodate their financial and operational needs. And there is less cost advantage for operators of small sized fleets to switch Clubs.
But both saturation in the P&I insurance market and consolidation in the shipowning community has led to some jostling between Clubs eager to maintain their share of the fixed premium market. In particular, this has been the case with owners willing to accept pared down cover with lower limits of liability. Commonly owners and charterers are provided with smaller limits of liability in exchange for lower premiums and immunity from unbudgeted mutual premium calls for unfavourable back years.
These developments have been facilitated by the indifferent application of the International Group Agreement (IGA) pertaining to competition between Clubs. Under this agreement Clubs are not supposed to offer financial inducements to owners to switch Clubs. But the obligations to honour the rates issued by the holding Club are indifferently policed these days. Vigilance for transgressions has become a thing of the past and inducements to change Clubs crop up without anyone calling foul.
Where once owners jockeyed for better offers by splitting their fleets between Clubs, there is now a tendency to consolidate entries into a fewer number of Clubs. Competition is fiercest for new tonnage coming onstream with no prior premium or claims history.
Looking ahead, Drewry advises owners to watch financial developments in their Clubs. Those forced by competitive market conditions to offer attractive “as is” renewals will inevitably erode their cash balances. As forecast in Drewry’s Ship Operating Costs Annual Review & Forecast 2017/18, a more competitive P&I market is looming, ushered in by large losses booked by reinsurers and large funds paying for a series of natural disasters in 2017. As a result P&I insurance costs are expected to rise in 2019 and 2020 before receding in subsequent years.