Lockton recently published its P&I Market Review 2022, an analysis of the 2022/23 policy and financial years’ data for P&I clubs, as well as fixed premium providers and reinsurance & pooling arrangements.
In the 2022/23 policy year to date, there has been only one confirmed pool claim and two preliminary notices, marking an improvement on the claims performance of the 2021/22 policy year and 2020 before that. However, this year has been marked by much lower investment returns compared to previous years, reflecting the turbulent and volatile state of the global economy, geopolitics and indirect factors such as the drive towards clean energy.
The pool record in the 2021/2022 policy year significantly deteriorated from 2020 and was unexpectedly high because premiums were insufficient to guard against deteriorating pool claims.
Despite a stronger claims performance in 2022/23, some P&I Clubs have chosen to treat the current policy year as an anomaly, rather than recognise the fluctuations that carriers typically expect as part of the claims cycle. According to Lockton, clubs will use this outlook to encourage premium increases.
Downgrading and investment returns
Lockton predicts ratings downgrades among the International Group Clubs could continue this year if investment returns for 2022 are the driving factor, rather than overall solvency position, as investment performances have been poor across the global economy and not just for the Clubs.
“S&P’s surprise downgrade of the West and Swedish Club has caused confusion given that their premium income has increased from the 2021/22 Policy Year, the tonnage of both Clubs has decreased and the reported investment losses for this financial year are unrealised (paper) losses produced by the bond market, suggesting that these downgrades may be premature,” said Alistair Rivers, Head of Lockton Marine.
“Whilst we do not have all the information that the regulators / rating agencies have when making the decision to downgrade, one cannot help but question the rationale, especially given the positive effects that the premium increases and 2022/23 claims performance had had on the Clubs’ solvency capital ratios,” he added.
Last year, nine of the 13 International Group Clubs received a negative outlook from ratings agency S&P. This was largely due to investment uncertainty, record low premiums and a deteriorating claims performance at the time.
Changes to the International Group Reinsurance Programme
Lockton has analysed the 2021/22 policy year, as the incumbent programme is not due to renew until January 2023.
Following several years of high claims activity across the Group, reinsurance rates last year saw marked increases in some categories for the 2022 policy year. Prior to this, the Group’s two year commercial market placement provided security for shipowners by alleviating the increases witnessed elsewhere across the market. International Group Clubs also benefitted from the lack of restrictions applied to these reinsurances that were seen elsewhere in the market, primarily as a result of Covid.
Whilst reinsurers have now in part applied these exclusions (as outlined below ), Clubs have continued to support their membership by providing cover to the extent they are able to do so, within their own retentions (and as demonstrated by the third column of the reinsurance graphic on page 56). Market-wide reinsurance restrictions have been applied in respect of malicious cyber, COVID and pandemic: despite these exclusions, the Group has secured significant coverage for these risks, as follows:
- Layer 1 – No amendment to coverage for 2022 year. There is free and unlimited reinsurance for all losses including those arising from malicious cyber, COVID and pandemics within this layer
- Layers 2, 3 and 4 – Free and unlimited cover for all losses, but for those arising from malicious cyber, COVID and pandemics, there is an AAD in each layer
- Overspill – Group clubs have agreed to Pool any losses that exceed the annual aggregate limit recoverable under the GXL, resulting in no change in cover
*It should be noted that these reinsurance arrangements apply to the core mutual P&I cover only. Individual clubs’ non-poolable extended covers are subject to pandemic and cyber exclusions – clubs offer cover for these risks within their own retention. The limits thereunder differ between clubs.
Structurally, the GXL programme had remained unchanged over the past several years, however the GXL placement has now been split into four layers (in addition to the Collective Overspill).
M&A, sanctions and the environment
Trading conditions have been impacted by a number of additional factors such as merger and acquisition activity and diversification, ongoing political sanctions and the transition to green energy.
In M&A news, the proposed deal between the North of England P&I Club and the Standard Club, which could form a ‘Super Club’, has dominated headlines. Given the growing differential between size and solvency among the International Group clubs, it is possible that, should consolidation continue, a two-tiered system of P&I Clubs could emerge: one tier for those that merged and another for those that favoured independence and a minority share of the market.
As the war in Ukraine continues, and the laws around what is/is not permitted by international trade continue to change, Lockton observes that P&I clubs have displayed strength of mutuality and the advantage of having one industry voice in discussions with the European Union. P&I Clubs have continued to represent operators rather than dictate to them what trade can or cannot be carried out through warranties and coverage restrictions, subject to legality.
The shipping industry continues to progress towards IMO 2050 objectives of net-zero carbon emissions. Solutions include the development of alternative fuels and technology, at a faster rate than many other industries. Lockton is committed to supporting these advancements and their impact upon the insurance market, and continues to build its expertise in wind-turbine installation construction and alternative fuels.
Alistair Rivers said: “As the global economy has emerged from the stasis of 2020 / 2021, the war in Ukraine and the resultant inflationary pressures, market turmoil and trade restrictions have presented unanticipated challenges to P&I Clubs and to the wider maritime community during the 2022 / 23 Policy Year. Whilst members’ budgets remain stressed, Club solvency ratios will generally require a continuation of the rate increases seen during recent years of poor claims performance – with potential for premium returns if the current low claims trend continues, if inflation reduces and P&I Clubs are able to recover from the investment losses incurred this year.”
“Facing into the uncertainties of 2023 and into the challenges of transition to net zero and the implementation of new operational standards, there is undoubted value in the mutual model and its protection and representation of member interests – individual and collective. With one of the largest and most experienced P&I broking teams in the market, Lockton Marine is fully prepared to equip insurance buyers with the knowledge, data and essential insights needed to achieve the best possible P&I insurance programme for their fleets.”
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