Issue 23 - December 1998

Board cuts costs to members New faces on the board Board meets in Singapore Clubs near agreement on IGA Introduction of the Euro

Club managers work for members Making Contact '99 Fixed premium vs. mutuality Managers speak on Year 2000 Reinsurance costs down again

Board cuts costs to members five times in six years

However, the Club anticipates that the level of its world trade and demand for shipping tonnage will lead to an increase in claims compared with recent years. The Club intends to maintain the strength of its reserves with a conservative approach to future supplementary and advance calls. The planned supplementary for 1999 is 40 per cent. The Club also decided on a general increase in premium rating for the 1999 policy year of 5 per cent. This increase is to be applied from 20th February before any adjustment to individual Members' ratings in the light of loss records and other relevant factors affecting the risk presented by their fleets. Debit notes for this reduced call were issued on 9th November 1998 with provision for payment within 30 days. No further call is expected.

Financial Strength The supplementary call has been cut for five of the last six policy years. UK Club Year Original Estimate Final % ETC* Reduction % 1992 40 25 10.5 1993 40 30 7 1994 40 40 0 1995 40 30 7 1996 40 (25) 10.5 1997 40 (25) 10.5 * = Estimated total call

Supporting Missions to Seamen at Christmas

Every year, officers and crews spend Christmas at sea ensuring the safe passage of the vessels, passengers and cargoes entrusted to their care.

The UK Club is making a donation to the marine charity Missions to Seamen – rather than sending Club Christmas cards to members, brokers and other friends.

Staff and managers of the UK Club/Thomas Miller would very much like to wish our members and friends in the P&I world a happy Christmas and a prosperous New Year.

Eight new faces on the board

The new directors are:

1 Tullio Biggi, President, V Ships Inc, Monaco
2 Jan Kopernicki, Vice President, Shell International Trading & Shipping Co Ltd, London
3 Joseph Kwok, Group Chief Operating Officer, Neptune Orient Lines Ltd, Singapore
4 Jin-Bang Lee, Executive Vice President, Korea Line Corporation, Seoul
5 Nicholas Lykiardopulo, Director, Lykiardopulo & Co Ltd, London
6 Yang Bin, Vice President, China, Ocean Shipping (Group) Co, Beijing
7 Dato Haji Mohd Ali Bin Haji Yasin, Managing Director, Malaysia International Shipping Corporation, Kuala Lumpur.

Masaharu Ikuta, President, Mitsui OSK Lines Ltd, Tokyo is not pictured. Nils-Gustaf Palmgren (A) was re-elected Chairman and President of the UK Club. Aleco Kairis (B) and Tom Moore (C) were re-elected deputy chairmen and vice-presidents, while Klas Kleberg (D) was also elected to these offices. Also pictured are other board members attending the meeting.

Board meets in Singapore

In October, the UK Club held its Board meeting in Singapore and its first annual general meeting outside Bermuda. Subjects discussed included the ISM Code, oil pollution cover, the International Group Agreement, supplementary calls and Year 2000 compliance. An accompanying programme included a reception for members of the Singapore Shipping Association and guests from the South East Asian shipping community.

ISM code: comply in good time

Members were encouraged to ensure proof of compliance with the ISM code in good time. The directors were pleased that since the circular in July which made it clear that ISM certification would be a condition of renewal in 1999, there had been only one problem and no significant instances of non-compliance.

Year 2000 Rule amended

Rule amendments relating to Year 2000 date compliance were approved. From 20th February 1999, an owner “must at all times take such steps to protect his interests in relation to date compliance as the directors in their discretion would expect an uninsured person acting reasonably in similar circumstances to take”. The directors will be empowered to reject or reduce any claim when members have not so acted.

Oil cover debate

The renewal of the International Group's reinsurance has stimulated debate over the provision of excess oil pollution cover. The UK Club, however, believes that the current excess cover should be included within Club cover. Those favouring the status quo argue that increased limits will encourage legislators to increase compensation limits to the maximum cover available. The UK Club feels that since the excess cover already exists. There would in fact be no increase in the overall cover available. However, it would be cheaper. Subsequent to the board meeting it has become clear there is insufficient support from other Clubs for a change for 1999.

Renewals refused

It was agreed that two fleets would be refused renewal in 1999 on the basis that their vessels were not of a satisfactory standard. The volume of tonnage refused by the Club on grounds of quality since 1990 stands at 5 million gt.

Clubs near to agreement on IGA

Following intense debate for more than a year, the European Competition Directorate (DG IV) appears to have accepted that the fundamental aspects of the International Group Agreement should remain in place. DG IV's Commissioner Karel van Miert had queried the IGA provision whereby vessels switching between Group clubs could not pay a reduced premium for at least 12 months. The Group has always argued that the holding club's experience of a member's historical risk profile and business performance should be respected by the new club.

It now appears that the Commissioner will allow rating discipline to continue in relation to retained claims, Pool and reinsurance costs. A provisional notice to that effect was issued in October.

However, the Commissioner is in favour of management and admin-istration costs no longer being included in rating calculations. Further, all Group clubs would have to incorporate into their annual accounts an audited five-year benchmark for administration costs, calculated on a common basis. This is the ‘transparency’ proposal.

At their meeting in Singapore in October, the UK Club directors agreed to support these changes.

It is expected that Clubs which do not quote a rate which includes a specific amount for administration costs will generally offset those costs against investment income. The UK Club expects to take this approach. Other Group clubs will also consider these proposals and are generally expected to adopt them. DG IV has made it clear that its own approval is contingent upon acceptance by club boards.

It is not yet known whether these arrangements will be approved by way of negative clearance or exemption or how long any exemption will last.

The Commission has already issued an Article 19 (3) Notice indicating its intention to approve the Group's 1998 Pooling Agreement, which incorporates a cover limit of about US$4.25 billion; and new provisions for the reinsurance by Group clubs of commercial insurance companies.

The most recent 19(3) notice dealing with the new rating procedures also includes a proposal to increase transparency.

There is an important distinction to be made between the costs as defined in the alteration to the IGA quotation procedures and those set out in the transparency proposal. The IGA costs refer to all internal expenditure incurred in operating a Club, including (without limitation) costs incurred in dealing with claims and potential claims, as well as commissions, brokerage, other acquisition expenses and depreciation.

Conversely, the transparency proposal excludes expenditure incurred in dealing with claims. This includes both corres-pondents' and all internal costs associated with claims handling, i.e. employment, accommodation and IT relating to Miller staff worldwide. This exclusion of claims handling costs emphasises the importance the Group places upon service to members.

So, how are the expenses going to be paid for in the end? Most Clubs, like us, will use investment income as the first line of defence. However, it will remain open to all Clubs either to take any shortfall into account when setting their supplementary calls or to use reserves.

Introduction of the Euro

With effect from 1st January 1999 the majority of EU countries will regard introduce the new European currency, the “euro”. The euro has not yet been adopted by the United Kingdom. However, the UK Club has a euro bank account to enable it to deal in that currency. The Club is requesting all correspondents and service providers resident in countries participating in the euro to submit all their accounts in euro from the earliest date. This will reduce the number of differing currencies that have to be processed and assist with the handling of fees and the settlement of expenses. The Club is able to settle claims in euros, if required.

Pictured above is the official symbol for the Euro. The official abbreviation for the Euro is ‘EUR’. It has been registered with the International Standards Organisation (ISO), and will be used for all business, financial and commercial purposes in the same manner as USD, DEM, etc.

Company name
Bank account name (if different)
Bank name
Bank address
Bank account number
Bank/Swift code

Anyone who needs to liaise with the Club on issues regarding euro payments should liaise with their usual Club contact or alternatively call Gordon Sharp on Tel: +44 171 204 2183, Fax: +44 171 204 2189 or e-mail: gordon.sharp@thomasmiller.com

Forthcoming circulars to members

The Club will shortly be issuing a series of circulars to members in respect of electronic bill of lading transactions and revised wordings for letters of indemnity required for delivery of cargo without a bill of lading or at a different port from that stated on the bill.

Electronic Bills of Lading

BOLERO, a joint venture of the TT Club and inter-bank transfer organisation, SWIFT, is set to launch an electronic bill of lading. The relevant circular explains that the Club will provide the same cover in respect of such BOLERO bills of lading as is provided in respect of traditional negotiable bills. The members' certificates will be endorsed with a wording to ensure that such cover is available.

Bills of Lading & Delivery of Cargo

Liabilities arising out of the delivery of cargo without production of at least one original Bill of Lading and/or the delivery of cargo at a port other than that stated in the Bill of Lading are not covered, unless the Directors otherwise determine in the exercise of their sole discretion.

Members seeking to protect their position in such circumstances should refer to a forthcoming circular incorporating three standard forms of letters of indemnity now recommended by the International Group. These apply where either delivering cargo without production of the original Bill of Lading and/or delivering cargo at a port other than that stated in the Bill of Lading.

The revisions provide a clearer indication of the details which are required when the forms are being completed. Furthermore,they clarify the circumstances under which indemnifiers are required to provide bail or security and incorporate an express limitation of the liability of the indemnifier to 200% of the CIF value of the cargo.

How Club managers work for members

In the course of a year, a member of the UK P&I Club will typically have a series of contacts with the managers as he negotiates on renewals, liaises over claims and requests advice. There is no doubt that contact between members, managers, correspondents, consultants and other professionals is on the increase. This reflects the Club's extended range of services and the global network of offices across the time zones.

A diary of contacts through the year between the managers and a member company with 15 Panamax and handy- sized bulk carriers and tankers portrays a busy relationship covering a wide range of activity.

In addition to routine claims, the member had contacts with the Club over a range of separate matters. Following renewal negotiations, there were claims relating to illness, spillage during bunkering and cargo damage, and incidents involving bills of lading, and cargo discharge. Advice and information were given on ISM, Year 2000 fixture negotiations and loss prevention not least through a series of publications.

“In recent years, we have built up a range of services in direct response to members' requirements” said Herry Lawford, the UK Club's service director. “That is why we have been able to cover so much ground on behalf of this member and many others.”

22nd January Emergency response Chief Mate suffers appendicitis whilst on a Mediterranean voyage. Ship diverted to Malta to facilitate emergency treatment. Malta correspondent assists in arrangement of medical treatment and liaises with area group executive, Ursula Elsden in London. Co-ordination of claim management enables reimbursement less than 14 days from submission of claim. 7th February Dispute avoided Panamax suffers bunker spill whilst at port of Singapore. Substantial clean-up costs and penalty fine for pollution threaten a costly delay to the vessel's departure. Club's Singapore branch office and correspondent on hand to ensure provision of letter of guarantee with the necessary wording to facilitate release of ship on time. 28th March Head Office visit Underwriter and claims executive from UK Club visit head office. In addition to discussions on variety of ongoing claims matters, explanation provided on the various online services available in support of member's. IT manager arranges access for key operational and management staff to the UK Club's website. 17th April Claims Information via Internet Access to UK Club website enables fleet's claims record to be viewed online via “ClaimsTrac”. Bad experience with steel claims clarified. Number and cost of crew illness and repatriation claims highlighted to management. In contact with Area group executive, explore joining Club's Crew Fitness Project which provides enhanced pre-employment medical tests for Filipino and other crew members. 18th May Technical query Call Club for advice in respect of on-going fixture negotiations of a charter for the carriage of a cargo of cocoa beans, specifically to find out the ventilation requirements for this cargo. The Club advised that at least 20 airchanges an hour were required, and the ventilation warranty in the charter was amended accordingly. 24th May Loss prevention Club contacted to arrange for a pre-loading survey of two parcels of steel coils to be loaded in Odessa, Ukraine. Club instructs the local correspondents to appoint a surveyor to carry out the survey and to advise the master regarding the clausing of the bills of lading. As a pre-shipment survey on a finished steel cargo, the surveyor's fees are paid by the Club. 15th June Crew training Contacts Club to arrange additional copies of “Tanker Matters" loss prevention videos for new ship recently delivered. 17th July Urgent advice Club contacted about the discharge of a cargo of bulk fertiliser in Antwerp, where the receivers insists that discharge operations continue during heavy rain. Club checks with cargo consultants who confirm that particular grade of potash is not sensitive to fresh water. Club further assists member's position by obtaining an indemnity from the receivers, through the Antwerp correspondents, in respect of any rain damage to the cargo. 30th June Millennium Bug Attend Year 2000 seminar organised by Club managers, and receive Year 2000 Toolkit. Establish Year 2000 project team reporting to managing director. Immediately commence reviewing plans for compliance and contacting fleet equipment suppliers to establish whether current equipment is compliant. 1st July ISM in force All vessels obtained necessary compliance documentation in good time guided and assisted by the UK Club ISM Template. Club Circular reminds members to submit individual vessel compliance documents for Club records in good time for next renewal. 10th August Potential claim Dispute with shippers of a consignment of galvanised pipes being loaded at Mobile, Alabama for discharge in the Arabian Gulf. The pipes have clearly suffered pre-shipment damage but the shippers insist that the master sign clean bills of lading, without reference to the damage. Club advises the master to insist that the shippers remove the damaged pipes and replace them with sound cargo. 13th September On-Line advice Immediate information on Port State Control requirements in Australia required. On line to the Miller Encyclopedia via Club's website to download the Clubs Port State Control booklet immediately and copy to ship by email. 17th November Potential claim Master of bulk carrier discharging at Zhanjiang, China, report that receivers complaining that the cargo had suffered heat damage during the voyage from the River Plate. The Club's Hong Kong office appoint a surveyor to attend.

Keeping in contact

Making Contact '99, the new worldwide directory of the UK P&I Club's offices and representatives, will be published shortly. It provides an up-to-date guide to the new area groups based in Europe and the regional and local offices in the Americas and Asia-Pacific.

The directory includes each executive's role, direct contact details for telephone, fax and email, brief biographies to indicate expertise and experience, and photographs to aid identification.

UK Club members benefit from a considerable range of services derived from the sharing of overheads with other Miller-managed mutuals. These include business information and IT.

It is appreciated that many members focus their activities mainly or entirely on a single region or country. Comments and recommendations on how contact information can be tailored to meet those needs would be welcomed.

In addition to its web-based online resources, the Club is considering other media for distributing information about its services. These include CD-ROM or diskette based information for IBM PCs. Members with views on how this information should be presented should contact Service Director Herry Lawford (Tel: +44 171 204 2143, Fax: +44 171 283 6517 e-mail: herry.lawford@thomasmiller.com) or the Editor of UK Club News (scroll to end for details).

Why fixed premium cannot match mutuality

This year has seen a considerable debate on the nature of marine protection & indemnity insurance; the role of P&I and the Inter-national Group Agreement; the scope and limits of cover; and the range of services and executive skills. Inevitably, the mutual system has been contrasted with the fixed premium facility. Stephen James, Chairman of Thomas Miller P&I Limited, compared the main distinguishing features of the Club and fixed premium systems at a P&I conference in Piraeus in October.

To begin with, the fixed premium insurance company has to make a profit for its shareholders. It must repay the subscribers of its capital for the use of that money in establishing an insurance facility. Capital providers include banks, other lenders and shareholders. The lenders will demand a return on their investment, regardless of the commercial performance of the insurance facility.

In good times and bad, interest must be repaid. P&I club insurance requires no external providers of capital. The reserves of P&I Clubs have been built from the long term commitment of resources by the member shipowners. They have provided the capital for the specific purpose of insuring against risk and not for supporting a speculative venture. Since the Clubs do not have to provide a commercial return on capital, they can provide their members with insurance at the net cost of claims plus management expenses.

Passing back benefits The fixed premium insurer does not pass back the benefit of good underwriting years to the shipowner in the form of reduced or returned premiums. Lower rates depend on rates being driven down by other competing insurers. However, as members are the de facto shareholders in their P&I Clubs, they immediately benefit from good underwriting years. Accordingly, ship-owners benefit regularly from initial premium calls being kept in check and from cuts in supplementary calls. Shipowner control The ultimate control of a commercial insurance is in the hands of the insurance company and not its customers. The nature of their product, the pricing and follow-up service and support are determined by their ambitions as commercial enterprises. Changes in the environment and the market, new regulations, co-operation with trade associations, dealing with financial interests, joint venture partners and the customers' customers are all demands on resources which reduce the bottom line.

Stephen James Chairman of Thomas Miller P&I Ltd.

This contrasts with the P&I club where the shipowners are in control. Cover is focussed on the direct needs of the ship operators. The ultimate decision on claims payments is made on behalf of members through their elected directors. Policy guidelines to club managers condition claims procedures. Claims covered under the omnibus clause are reviewed at club board meetings. The directors set premium calls, balancing the needs of the club with the ability of the industry to pay. The breadth of experience and expertise among the membership and of their appointed managers is able to respond to the changing demands of the market and regulators.

Long-term commitment

Fixed premium insurers have no convincing track record of commitment to the protection & indemnity needs of the shipping industry. Various market facilities have come and gone, usually focussing on high-risk tonnage and foundering when the claims cycle sustains an upward phase. P&I Clubs have been serving the industry effectively for 140 years. Indeed, they were originally formed as a result of the market's inability and unwillingness to cover a number of core liability and other risks.

Greater cover

A recent independent survey, commissioned by the UK Club, found a concern among its own members and other industry figures at the potential shortcomings in cover from fixed premium providers.

Higher limits

The financial limits of cover are deemed inadequate, and the wordings used by fixed premium insurers curtail cover more extensively than the Clubs in order to facilitate a competitive price. Mutuals offer a greater breadth and responsiveness to claims.

Service philosophy

Fixed premium insurance companies are simply insurance suppliers to ship-owning or operating customers. In a P&I club, the managers are the servants of the shipowners, dedicated to the provision and development of the required services. They seek continually to innovate and improve the service beyond simple claims handling and underwriting. This philosophy has underpinned substantial investment in loss prevention to improve the performance of members' fleets. The ship inspection process improves the collective exposure of the club members by helping to raise the quality of entered vessels, as well as providing beneficial advice to members. The Major Claims Analysis research into the origins of claims relating to specific trades, technologies and cargoes – is widely disseminated to members. It is the pre-eminent industry work on shipowner liability claims. The fixed premium sector has yet to deliver quality information at anything like this level for the benefit of its customers.

Letters of Undertaking

P&I club members generally rely on cost-free letters of undertaking which can be provided without delay to claimants to free ships from arrest. Shipowners who insure with fixed premium providers and whose ships face arrest risk considerable delay and expense as bank guarantees have to be arranged.Indeed, one industry observer has estimated that the P&I Club letters save the shipping industry as much as US$ 65 million per year in terms of delay costs and bank charges.

Industry standing

Fixed premium insurers are unable to speak convincingly on behalf of shipowner interests. The P&I clubs, however, have acquired considerable industry standing and are effective spokesmen on matters such as national and international legislation affecting shipowners, loss prevention and ship standards. The mutual approach to insuring liability risks has had a cohesive effect on the industry. When liability issues arise, the International Group provides a natural forum for discussion, review and change. It is difficult to imagine commercial insurers getting together over the ISM code, the Millennium problems and the travails of port state control.

Managers speak on Year 2000

The Year 2000 problem – the incapacity of some computer and microprocessor equipment to cope with dates beyond 31st December 1999 – continues to be a source of major concern to owners and charterers.

In recent weeks, UK P&I Club managers Mark Holford, Roger Nixon and Hugo Wynn-Williams have addressed a range of audiences in the UK and USA on Year 2000 developments. They have made presentations to the Houston Marine Insurance Seminar, the International Ship Managers' Association, the North Sea Operators' conference, the Shipping Contracts & Year 2000 conference (IBC), the international Union of Marine Insurers, the Liberian Shipowners Council, the U.S. Coast Guard and Ensuring Safety & Business Continuity for the Year 2000 Date Change Problem in Shipping & Port Management (IQPC). A summary of their main points follows.

Management problem

First and foremost, the Year 2000 issue is a management problem, not an IT problem. Furthermore, the interdependence on Year 2000 issues throughout the shipping and transportation industries means there is little competitive advantage to be gained from others' problems. It is not enough for systems to work within a ship since service is ultimately integrated with other vessels, port installations and far-reaching supply chains.

Hardware issues

Many equipment manufacturers were co-operating in helping shipowners identify and test equipment which might fail. However, not all were responding as well as they might. Ships built between 1987 and 1993 are potentially vulnerable because of the installation of micro-processors which are susceptible to failure on January 1st 2000. Purchasers of new vessels with ‘millennium bugs’ may seek remedies from the builder. New buildings contracts should be worded to exclude or cope with this type of problem.

P&I and regulatory Issues

New Rules agreed by the International Group clubs require an owner to take appropriate steps to protect his interests in relation to date compliance as if he was an uninsured person acting responsibly in similar circumstances. Club directors may reject any claim arising from failure to take such steps, or reduce the sum payable. ISM compliance may require shipowners to address the year 2000 problem. The ISM paper trail makes omissions and reckless behaviour easier to detect. Lloyd's Register is already taking compliance into account in issuing ISM certificates.

Legal & regulatory Issues

It is now impossible for owners and managers to use ignorance of the dangers of Year 2000 as a defence against litigants and claimants. If a vessel went to sea with unremediated Year 2000 problems of which the owner was aware, the vessel might be adjudged unseaworthy with all the ensuing consequences. There is a danger that the statutory limits of liability as embodied in the Limitation and Civil Liability Conventions, and in the Hague Visby Rules could be breached by an owner's failure to take reasonable steps. The U.S. Coast Guard and the Australian Marine Safety Authority are considering making millennium compliance part of their Port State Control checking procedure.

Banks

Some banks are despatching questionnaires to assess clients' Year 2000 readiness. Customers providing inadequate answers may find loans more difficult to obtain and maintain.

Contingency plans

The single most important action emerging from these conferences was the need for shipowners to establish contingency plans. Despite their best efforts, aspects could be missed or new coding errors introduced. Failure of other elements of commercial infrastructure will have consequences directly affecting the transportation industry.

German members briefing

Some 80 UK Club members and potential members were briefed last month by managers on a range of P&I related topics at the Hamburg History Museum.

Herry Lawford surveyed the range of Loss Prevention initiatives provided by the Club and showed how they limit and pre-empt accidents and costly claims, whether insured by the Club or not.

Hugo Wynn-Williams analysed the conclusions of the European Community's Competition Directorate on the International Group Agreement. He set out the implications for the shipping industry's continued mutual insurance of its key liability exposures.

The two briefings were concluded with a lively question and answer session engaging both members and non-members alike. Members were able to enjoy the Museum's attractions – particularly the largest model railway set in Germany!

Reinsurance costs down yet again

The International Group has achieved a significant cut in the cost of its main reinsurance contract – for the fifth year in a row. An overall reduction of about 20 per cent for 1999 has resulted from a continuing good loss record, favourable reinsurance market conditions and some restructuring to include charterers' risks.

In the preceding four years, the cuts have been 18, 40, 15 and five per cent.

The contract, effective from 20 February, encompasses claims higher than the Pool retention of US$30 million. The limits remain unchanged. Cover is up to US$500 million for oil pollution claims and US$2 billion for most risks. The first layer, placed through brokers Miller Marine, covers 75 per cent of the risk. It provides unlimited free reinstatement limits of US$500 million for oil pollution claims and US$500 million for others.

Brokers Benfield Greig have placed 15 per cent of the contract over and above a Pool retention of US$50 million. The other 10 per cent will be pooled among the Group clubs. The upper layers of the contract, providing cover above US$500 million, are placed 100 per cent with the market underwriters.

And the winner is ... Mr Lee Pong (left), chairman of the Singapore branch of the Institute of Chartered Shipbrokers, won the UK P&I Club's South East Asia Golf Tournament in Singapore in October. He received his trophy from UK Club Chairman Nils-Gustaf Palmgren.

UK CLUB NEWS is published by
Thomas Miller & Co. Ltd.

International House
26 Creechurch Lane
London EC3A 5BA

Tel +44 20 7283 4646
Fax +44 20 7283 5614

Editor: Nick Whitear

Tel +44 20 7204 2334
Fax +44 20 7621 9761
e-mail: nick.whitear@thomasmiller.com

For and on behalf of the Managers of

The United Kingdom Mutual Steam Ship Assurance Association (Bermuda) Limited
The United Kingdom Freight Demurrage and Defence Association Limited