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Message from the Chairman
I am again pleased to report another operating surplus for the year just ended and a further significant increase in the Club’s free reserves and capital which now stand at $478 million, the highest they have ever been. Holding capital at this level puts us in a strong position to meet the challenging requirements of the new European solvency regime which will take effect from 2013. Just as importantly, our Members can be confident that the process of rebuilding the Club’s reserves has been successful and that the Club is now back in a position of considerable financial strength from which to meet the challenges of the future.
It is an extremely encouraging sign of that confidence that during the last year the Club saw some 15 million gt of newly acquired tonnage join the Club, mainly from our existing Members, even though this was offset to a much greater extent than normal by the effect of sales and scrapping.
Investment income has again made a welcome contribution this year, of nearly $70 million, to the surplus. This represents a return of 6.2 per cent, significantly higher than the 5 per cent long term average return we have been targeting. Our investment policy is kept under regular review and the board of our subsidiary reinsurance company, IPIR, monitors closely the performance of the investment managers within the policy set by the board to reflect the risk appetite we have agreed for the Club.
In addition to the investment income, the Club recorded a small operating surplus which brings our combined ratio below 100 per cent. This means that in this financial year we have achieved our goal of balanced underwriting so that all the investment income of the year is effectively transferred to the reserves rather than being required to support an underwriting deficit. It is important that we continue to aim for a combined ratio of 100 per cent or lower, since we have seen in the past how quickly reserves can be reduced by successive underwriting deficits, even when starting at an apparently healthy level.
At our meeting in October last year, when the Directors reviewed the half year position, the Board decided to impose a general increase of 5 per cent for 2011, which we considered to be prudent in the context of the expected inflationary impact on claims. In itself the increase will not ensure an underwriting surplus since next year’s result will inevitably depend on how claims develop, but it was designed to help premium levels at least keep pace with the anticipated effect of claims inflation.
The level of claims is always difficult to assess accurately even once a policy year has ended, but as we had expected, the 2009 policy year claims picture has developed favourably and continues to improve. More encouragingly, the 2010 year at this early stage is not showing signs of a significant increase in claims although in line with our usual policy on reserving, we have set a conservative claims reserve for the year to reflect the relative uncertainty of the outcome.
Looking forward, it is of course not possible to predict the level of claims we will experience in 2011.
As mentioned however, the effect of the general increase should give some protection against inflationary factors and we have again put in place the reinsurance protection for our own claims to which I referred last year.
This reinsurance programme safeguards the Club against a significant uplift in claims within the Club’s own $8 million retention under the Group pooling arrangements, as well as giving additional protection against claims at the Pool level and furthermore protects us against a single very large loss from one of our own Members.
Clearly these financial developments and the current strength of our capital position will be important as we move to comply with the developing requirements of the European Solvency 2 regime; but as I mentioned last year, the new regulatory regime also places great importance on a company’s corporate governance arrangements and its ability to assess and manage risk.
As Solvency 2 approaches, we have initiated a high level review of our structure with a view to optimising the amount of capital required. At the same time, the opportunity will be taken to simplify and streamline, where appropriate, the corporate governance arrangements for the Club, whilst still maintaining the benefits of a widely representative board drawn from the membership and the technical expertise of our independent professional managers.
This active membership participation in the governance of the Club reflects the mutual nature of the Club which is shared with the other clubs in the International Group and lies at the heart of the pooling and reinsurance arrangements of the Group.
Ultimately these are designed to provide all Members with the highest sustainable level of cover at an economic cost.
In August last year the European Commission initiated a formal investigation into the competition aspects of these arrangements following on from the expiry of the second ten year exemption for the International Group Agreement. We, and all other clubs in the International Group, are fully co-operating with this investigation and have been providing full and timely answers to the Commission’s requests for information.
We hope that as on the previous occasions when the Commission has considered these matters in detail, the conclusion will be that the Group’s pooling and reinsurance arrangements remain appropriate. These arrangements provide unique benefits in the high levels of cover made available at economic cost, delivering security not only to the members of all the clubs (who are the consumers in this context), but also to the wider public in the context of the major human, environmental or property claims that occur from time to time.
During the year, the Board also had to consider the serious implications for the Club of recent sanctions legislation in Europe and the United States, particularly in relation to Iran. The apparently growing trend towards including insurance in international trade sanctions has raised new issues for the Club.
There is a difficult balance to be struck between trying to ensure that individual Members have the best possible cover for their own legitimate trading operations and protecting the Club and all its Members from the serious consequences of being in breach of relevant sanctions legislation.
As a result of the Board’s consideration of this issue, Rule changes have been introduced for the 2011 policy year which we hope reflect a fair solution and will give the Club the essential protection we felt was necessary. Unfortunately one casualty was the enforced departure from the Club of a long-standing Member for whose fleet the Club was no longer able safely to provide cover as a result of such legislation.
Whatever the outcome of the review I referred to earlier, it is certain that the workload of Directors, and particularly the members of two of the Board’s key committees—the Strategy and the Audit & Risk committees—will not be reduced. We are very conscious of our responsibilities not only as a result of the regulatory requirements but also of our responsibility to the membership. Inevitably, increasing time has to be devoted to ensuring a full understanding of the risks faced by the Club, the effective management of those risks and the implementation of the Board’s policies by our Managers.
At the same time we are also a Board which is concerned with general industry-wide issues faced by our membership. Often these are reflected in the claims reports which the Managers provide for us at each of our meetings but even where we are less directly concerned with claims, we monitor developments closely with a view to trying to provide as much support and guidance for our Members as we can.
This is reflected in the high volume of loss prevention and advisory material which our Managers are providing on a weekly basis through the Club web site which has become such an important feature of the Club’s service.
We have been most concerned for example, by the predicament of those seafarers caught up in piracy. Detailed reports from the Managers, and contributions from individual Directors with expertise in countering piracy, have helped the Board to monitor activities at a political, military and industry level, and to promote Members’ awareness of the crucial role of industry self-defence through the Best Management Practices.
The work of the main committees of the Board has become ever more demanding as we seek to ensure with the Managers that the Board has the necessary information and, where appropriate, recommendations to discharge its responsibilities. We rely heavily on the members of these committees and I am most grateful to them all for giving their time and experience so generously. I am particularly indebted to the deputy chairmen—Eric André, who is Chairman of both IPIR and the Audit & Risk committee, Alan Olivier who represents the Club on the Thomas Miller Board and Patrick Decavèle for their guidance and support as well as the long hours they devote as members of virtually all the committees. It is thus with great sadness that we have said farewell to Patrick who has served the Board and the Club with great distinction.
Two other directors who have also given the Club distinguished service retired last October—Sergey Frank and John Ioannidis—and I would like to thank them for their contributions particularly in John’s case where over the last fifteen years his commitment and service to the Club have been exemplary. I would also like to make special mention of Jan Kopernicki who retired from Shell in March of this year, having been a director of the Club for over twelve years; his eloquence and clarity of thought will be greatly missed.
Finally I would like to take this opportunity to thank our Managers for the work they do on behalf of the Club. For all Members, the Managers represent the face of the Club in their day to day dealings with underwriters, claims executives, loss prevention experts or just on general enquiries.
The Managers’ team has been led in recent years by Luke Readman who has announced his intention to retire this year after nearly 40 years of working for Thomas Miller. We will miss his understated style of leadership and the benefits of intellect and experience he has brought to our Board meetings, but I have every confidence that his successor Hugo Wynn Williams, ably supported by Nigel Carden, will now take the Club forward from the sound financial base we have re-established successfully to meet the challenges that lie ahead.
Dino Caroussis, Chairman