Issue 29 - Spring 2002

A message from the Club’s Chairman Quality performance indicators Loss prevention posters Continued improvement in Member quality

2002 Reinsurance arrangements Cover for P&I war risks Oil pollution limit confirmed Last year in the International Group How Members view the Club

Dear Fellow Members

I am pleased to have this opportunity, shortly after 20th February, to wish you all a peaceful and prosperous new year.

Our Club starts the year in a strong position. As the article on page 7 explains, our AA- rating has recently been re-confirmed by Standard & Poor’s. Another article, on page 4, records the renewal, albeit with an increase in cost, of those International Group pool’s excess of loss policies which underpin our enjoyment of extensive cover at affordable prices.

Your Board has given and will go on giving high priority to maintaining the financial strength of the Club, not least for the simple reason that we Members must have confidence that our claims will be paid.

But there is more to being the leading club than being strong financially. We also need to provide our Members with excellent claims-handling and advisory services throughout the world. This is true on a routine, day-to-day basis. But it goes beyond that. We shipowners join a club not merely to buy insurance against and advice upon our expected claims, but also to have immediately to hand the expert help we will need if suddenly faced with a potential liability so severe that it threatens the very future of our fleet. On that day the club call element in our annual overheads may not seem quite so irritating!

To me the service element in what the Club offers to us as Members is vitally important. As I see it, two of the features that distinguish this Club from an ordinary commercial insurer are (a) ultimate control by its Members and (b) an obsession with providing excellent service as well as mere insurance. Feature (a) guarantees, among other things, that we need never lose feature (b).

My own intention, as I indicated in my letter last March, is to intensify the focus upon service throughout my time as Chairman. Both your Board and our managers, who work together as a balanced partnership in running our Club, share my enthusiasm.

So we have decided, as described in more detail on page 8, to commission a specialist firm to gather and analyse objectively our views as Members on the service we are actually receiving and our ideas for further improvement.

I thank you in advance for the time and care you will give to supporting this survey and I promise an energetic response to its findings.

Yours sincerely,

A.G Kairis, Chairman

When conducting ship visits, the inspectors assess each of the six key areas of ship quality on a scale ranging from 1 to 5 (see panel). This enables the Club to produce a numerical indicator of quality.

This procedure is used to offer a confidential service to Members who wish to know how the results of inspections of their ships might compare with a Club average.

More than 1,000 ships from 340 different Members now have a recorded rating for each of the six quality areas plus a consequent overall rating. The graph on the left shows the average fleet ratings obtained by the Members whose ships have been visited in the last two years. It is encouraging to note that 272 Members (80% of the 340 inspected) recorded a score of 1 or 2 and 334 (98%) gained a score of 1, 2 or 3. Only 2% were considered below standard requiring further detailed survey under the Club’s Rules.

UK Club Ship Quality Scale 1. Excellent - Good systems, just some small suggestions 2. Good - Improvements suggested to enhance overall performance 3. Satisfactory - Improvement needed if vessel not to slip below standard 4. Below Standard - A lot of work and input needed to raise the standard 5. Very Poor - Full condition survey required

These figures give a broad overview of the quality of the ships inspected in the last two years. The percentage of readings of "Good" or "Excellent" (80%) indicates that the Club’s strategy on quality of membership is working.

Experience gained from the ship inspection programme shows that there is still further scope for developing a culture of safety awareness among ships’ crews. Our Club’s inspectors have been in a unique position to observe a wide variety of operational practices during their 6,000 visits over the last eleven years. They try to share knowledge gained from their visits as widely as they can, but in practice it often does not get further than senior officers who are present at the time of the visit.

In order to widen the audience, the Club will shortly be releasing to all Members a series of A4-size "good practice" posters. These posters will highlight good and not so good practices that have been seen during visits. Contemporary but non-attributable photographs will be used to draw general attention to practices which, if avoided, may reduce the risk of claims.

The quality indicators and good practice posters are both on-going activities by the Club’s team of ship inspectors. Any enquiries should be directed through Karl Lumbers, manager of the Loss Prevention and Ship Inspection department, on +44 20 7204 2307 or by e-mail karl.lumbers@thomasmiller.com.

In a mutual insurer, the quality of the Members is essential to its strength and security as the risks brought in by individual operators must be borne by the membership as a whole. So it is encouraging to see evidence of measurable improvement in that quality over recent years.

Our Club’s claims in recent years have lagged behind monetary inflation and, although the causes of this happy state of affairs are difficult to pin down, it seems likely that our loss prevention and ship inspection programme deserves part of the credit.

The Board has always been closely involved in this programme and has recently received a detailed report from department manager Karl Lumbers.

Since 1995, 3,946 visits have been made to 604 ships in 302 different ports. Those visits are made to a wide range of entered ships including those over 10 years old. It is reassuring that from 1995 to date only 5 percent of those ships inspected have required a condition survey under the Club’s Rule 5Q.

The overall message from the ship inspection programme is that quality continues to improve year by year. This is captured in the table above, which shows the reduction between 1995 and 2001 in the percentage of inspections producing adverse comments on the key quality areas of Operational performance, Cargoworthiness, Manning, Pollution control, Safety and Service & Maintenance.

Adverse comments on cargoworthiness halved from 1995 to 2001 and this is reflected to some extent by a reducing trend in the Club’s large cargo claims. Naturally there is still room for further improvement. A high proportion of inspectors’ comments in this area continue to relate to deficiencies in the maintenance of hatch covers.

Most Club claims are due to human error. The STCW 95 amendments are a spur to all shipowners, especially as ships must be compliant by this month. Manning comments by inspectors halved over the period.

Although pollution claims account for only 5 percent of large claims by number, their high individual cost means that they represent 17 percent of large claims by value. During the period, adverse comments by inspectors in this area fell from nearly 17 percent to just over 9 percent. No doubt international regulation has had a benign influence here; the 1991 MARPOL Annex 1 Amendment requiring all ships to have a "SOPEP" - Shipboard Oil Pollution Emergency Plan - was in force from 1995. There has undoubtedly been an improvement in the attention given by Members to pollution control. The route to further improvement is clear as more than 50 percent of comments related either to shortcomings in SOPEPs or oil leaks on board, mainly in the engine room.

Comments on operational performance cover a wide range of deficiencies that can lead to claims.

Typical comments included unserviceable equipment ranging from autopilots and radio sets to bow thrusters. However, this area shows the greatest improvement of all, being down from more than 27 percent 1995 to 5.5 percent in 2001.

Service and maintenance issues also fell in the period, albeit by a lower proportion than other areas. Although cost pressures on crew numbers and maintenance schedules continue to have an adverse effect on ship operation, the largest single area of comment by the inspectors related to the updating of charts and nautical publications, followed by bridge procedures.

Last and certainly not least is safety. Large personal injury claims continue to account for around 30 percent of the Club’s major claims, second only to cargo claims. The trend in safety issues seems similar to that observed in safety and maintenance, that is to say that the number of comments is reducing, but not as significantly as in the other areas inspected. The majority of comments are in respect of factors within the knowledge of the crew, the very people most likely to suffer from accidents arising from these deficiencies.

At its January meeting your Board received a report on the Club’s reinsurance arrangements for the 2002 policy year. Hugo Wynn-Williams, who has responsibility for these arrangements and represents the Club at the International Group’s reinsurance committee, summarises that report as follows.

The International Group’s reinsurance arrangements were agreed at the end of 1999 on the basis of a two year contract for the 2000 and 2001 policy years. There was also an option for a third year on the first two layers of the contract up to US$1 billion, provided no catastrophic claims were notified during the period of the two year contract and subject to a maximum increase of 20 per cent of current levels.

The third year option was exercised and the cover was put in place for the 2002 policy year. The brokers have also confirmed that the two layers excess of US$1 billion (i.e. a further US$1 billion) will be in place for next year.

This means, subject to one area of doubt which is referred to below, that the reinsurance arrangements for the Club (including the Group’s excess of loss contract) will be the same as the two previous policy years.

The main elements of the 2002 reinsurance programme are as follows.

The retention for each club is $5 million and above this their claims are pooled.

The conventional reinsurance contract of the pool, placed by the brokers Miller Marine, operates in excess of $30 million and covers 75 per cent of the risk up to $500 million on the first layer and 85 per cent on the second layer up to $1 billion.

The portion of the contract placed by the brokers Benfield Greig and first introduced for the 1998 policy year, operates in excess of $100 million for a 15 per cent interest up to $1 billion. This cover is subject to a limited number of reinstatements free of charge.

The remaining 10 per cent of the first layer excess of $30 million is retained by the Group’s pool, but capped at $500 million in the aggregate per annum. The oil pollution limit is $1 billion.

Above the first two $500 million layers, mentioned above, the cover is placed by Miller Marine in two further layers of $500 million. The first of these layers, up to $1.5 billion, has free and unlimited reinstatements and the top layer, $500 million in excess of that $1.5 billion, has a single reinstatement provision.

The combined impact of the increase on the third and fourth layers and the option has resulted in an overall increase in 2002 in the reinsurance costs of around 28 per cent. These costs have now been allocated across the major ship categories and they formed part of the renewal for the 2002 policy year.

The graph below shows, year by year, the cost per gt of the Group’s reinsurance arrangements (red line) and the amount of cover purchased when the $1 billion for oil pollution is added to the upper limit of the main cover (in blue).

If a claim were to exceed $2.03 billion i.e. the limit of the Group pool’s excess of loss contract, the excess or overspill would be pooled amongst the Group clubs. The overall Group pool limit for such an overspill claim remains unchanged at 2.5 per cent of shipowners’ property limitation funds under the 1976 Limitation Convention. In 2000 and 2001 our Club protected its share of a $1 billion overspill claim with a specific reinsurance protection. This reinsurance, together with the protection provided by the catastrophe reserve, raised our protection against an overspill claim to approx. $1.28 billion in excess of the Group reinsurance limit of $2.03 billion. At the time of writing this article it is not known whether it will be possible to renew this overspill reinsurance. Even if capacity can be found, the price to be paid may be uneconomic.

The final decision will be taken by your Board once the facts are clear. Members will be advised of this decision and the overspill protection arrangements available for the 2002 policy year taking into account the Club’s catastrophe reserve and the long-term reinsurance arrangements with Swiss Re as soon as the position with respect to the overspill reinsurance is known.

Any member desiring further information can contact Hugo Wynn-Williams on +44 20 7204 2144 or by e-mail on hugo.wynn-williams@thomasmiller.com.

In the last edition, Luke Readman explained the background to a change in the special P&I war risks cover provided by the Club, and the need for Members to maintain market war risks P&I cover up to a minimum of their ship’s proper value.

In this article, Nigel Carden continues the theme, with a commentary on the Rule change to exclude terrorist risks, passed at a Special General Meeting held on St Valentine’s Day, and an explanation of some further improvements in the Club’s special P&I war risks cover.

The Rules of the Club exclude from cover P&I risks arising from war and certain related causes. The risks are real because statutory defences based on war are narrow in scope, and not applicable to some liabilities. The normal expectation has been that shipowners will insure P&I war risks (together with hull war risks) under a dedicated war risks policy. However, for some years Members have also had the additional benefit provided by the Club’s special war risks cover.

As drafted in the 2001 Rules, the war risks exclusion (Rule 5E) applies where P&I claims are caused by certain types of political situation (war, civil war, rebellion, etc), by certain types of event (capture, seizure, etc), or by weapons of war (mines, torpedoes, explosives, etc). Many of the more likely scenarios for terrorist activity at sea therefore already fell within the scope of that exclusion. However, the events of 11th September have shown that it is difficult to predict forms of terrorist activity or to classify them exhaustively by means of the traditional war risk wording.

This is a matter of concern to the reinsurance market, whose judgment of capacity to address terrorist risk is dependant on knowing that exposure to the risk arises only under policies designed for that purpose - and not as the unintended consequence of a P&I policy. In order to alleviate that concern and to protect the future availability of reinsurance, Members were recently recommended to vote for an amendment to the Rules for the 2002 policy year, to add to the wording of the war risks exclusion a specific reference to "any act of terrorism".

In recognition of the prospective Rule amendment, the reinsuring underwriters for the Club’s special war risks cover have agreed that their protection will for the 2002 policy year respond to P&I claims caused by "any act of terrorism", in addition to the currently excluded war risks.

The Club’s special cover was previously stated to be in excess of amounts recoverable under P&I war risks policies. But, its formal terms were revised with effect from 24th October, 2001 to respond only in excess of the "proper value" of the ship or, if greater, any amount recoverable under any other insurance. These terms remain for 2002.

The "proper value" is defined in Rule 5D as market value, without commitment, at the date of the incident giving rise to the claim. Your Directors have nevertheless decided that, solely for the purpose of their resolution to provide special P&I war risks cover for the 2002 policy year, the proper value of a ship shall be deemed not to exceed $100 million.

This addresses the possibility that some owners of high value ships might be unable to buy P&I war risks insurance to the full proper value. Your Directors have also addressed the risk that an owner’s claim might be rejected by his war risk underwriter, by retaining an absolute discretion to pay claims which in whole or in part fall below the proper value of the ship.

A claim submitted under the special P&I war risks cover is subject to whatever deductible or other terms would have applied to it, had it been caused other than by an excluded war risk. However, the limit of cover is, of course, different. Last September’s events have heightened Members’ concerns about adequacy of cover, and the Directors therefore resolved to raise the limit of the Club’s special P&I war risks cover from $100 million to $200 million for the 2002 policy year. No doubt all Members will join in hoping that none has cause to claim on it in the year ahead.

Any member desiring further information can contact Nigel Carden on +44 20 7204 2147 or by e-mail on nigel.carden@thomasmiller.com.

In addition to hearing a report on the latest arrangements for the 2002 policy year, your Directors at their meeting in January confirmed the oil pollution cover limit at $1,000 million each accident or occurrence.

They also approved the new rates for the tanker voyage additional premium system applying to voyages to the USA. These new rates represented an increase of 20 per cent on the 2001 rates, in accordance with the underlying increase of the first two layers of the Group’s excess of loss contract. Your Board also agreed to increase the limit of the special war risks cover to US$200 million. The full details of this cover and the US tanker voyage additional premiums can be found on the Club’s circulars 4/02 and 5/02.

Last Summer’s edition included an article explaining the purpose of the International Group of P & I Clubs and how it carries out its work. Nigel Carden summarises the report that has recently been made to the Board on what the Group’s sub-committees have been doing during the last year.

The primary and overriding function of the International Group is to arrange for pooling of the larger claims from each of its clubs and for the purchase of market reinsurance to support that pooling. The Group also provides a voice for the industry in the drafting of new national and international shipping legislation and regulation plus a forum in which the clubs share practical information on claims handling and loss prevention.

The Directors usually receive at their January meeting a review of the previous year’s activities of the International Group - and have asked that Members should have a similar report.

This review summarises strategic matters that have been followed by the Board during its earlier meetings. Examples during 2001 included subjects as diverse as a new regulatory framework set by the UK Financial Services Authority, proposals to alter the international oil spill liability and compensation regime, policy on confirmations of cover, and possible revisions to the Athens Convention on passenger liabilities.

However, the Board observes a distinction between such strategic matters, on which it must make specific decisions, and those, usually of a more administrative or technical nature, where authority is delegated to the managers, who report under a standing item on Group matters at all Directors’ meetings.

Managing the work

As was explained in last Summer’s article, the Group employs only three full time staff. Much of the Group’s work is therefore done by managers of individual clubs, in correspondence and also through meetings of sub-committees and working groups that vary in size from three or four people upwards. The International Group is currently chaired by Stephen James (e-mail stephen.james@thomasmiller.com).

Our other representatives on the International Group sub-committees are shown below.

• Nigel Carden - Pollution; Ships’ standards; Bills of lading; 'Claims made’ cover.
  nigel.carden@thomasmiller.com
• Graham Daines - Salvage; Panama Canal Authority; Pilotage.
  graham.daines@thomasmiller.com
• Herry Lawford - Club letters of guarantee.
  herry.lawford@thomasmiller.com
• Peregrine Massey - Compulsory insurance; Regulatory affairs.
  peregrine.massey@thomasmiller.com
• Phil Nichols - Personal injury; Passenger liabilities.
  phil.nichols@thomasmiller.com
• Luke Readman - Co-insurance; Confirmation of cover.
  luke.readman@thomasmiller.com
• Gordon Sharp - Accounting standards.
  gordon.sharp@thomasmiller.com
• Martin Turner - Occupational disease.
  martin.turner@thomasmiller.com
• Nick Whitear - Equasis.
  nick.whitear@thomasmiller.com
• Hugo Wynn-Williams - IGA; Reinsurance; Ship management.
  hugo.wynnwilliams@thomasmiller.com

The outcome of the Reinsurance sub-commmittee’s negotiations to renew the Group’s reinsurances is reported on page 4 of this issue. Examples follow of the recent work of a number of other sub-committees.

Pollution

The pollution sub-committee has been much concerned with the European Commission’s reactions to the "Erika" spill, including its proposal for a third-tier fund and other changes to the pollution liability regime, and the subsequent take-up of these issues by a working group of the International Oil Pollution Compensation Fund.

Bills of lading

The CMI’s work on a new transport convention was reported in the last edition. The insurance implications of new developments in electronic documentation, such as Bolero and remote printing of bills of lading, are also being considered by this sub-committee.

Salvage

The International Group was represented on the working group which produced the SCOPIC clause (see our Summer 2001 edition & Club circular 6/01). Review of the SCOPIC clause and its application to salvage awards continues.

Ships’ standards

This sub-committee is the vehicle for liaison with classification societies and other industry bodies concerned with the quality of shipping. It sends a representative to the advisory committee of the IACS quality system.

Compulsory insurance

In addition to work on the proposed revision of the Athens Convention, mentioned in our last edition, this committee has followed the activity of the joint ILO/IMO Working Group on abandonment of seafarers, treatment of seafarers contractual claims for injury or death and use of pay-to-be-paid defences. Guidance on the handling of crew claims was issued to correspondents in the Club’s circular 8/01.

Representation

The representation of Group clubs through their correspondents is reviewed by this sub-committee. A Correspondents conference was hosted in Bristol, UK in September 2001.

EU

In accordance with the terms on which the EU agreed to exempt the International Group Agreement from Article 27 of the Treaty of Rome for another ten years, this sub-committee provides an annual report to the EU Competition Directorate.

Equasis

Representatives of this sub-committee met with Equasis to discuss what information held by clubs on ship quality should properly be provided, bearing in mind the safety-related aims of the database.

Any member desiring further information on the various sub-committees should contact the representative detailed above. General enquiries on the range of sub-committees can be referred to Nigel Carden +44 20 7204 2147 or by e-mail nigel.carden@thomasmiller.com.

Despite recently suffering, along with other insurers, poor investment returns and a consequent decline in free reserves after many years of growth, the Club has retained the AA- rating that it was first awarded by Standard & Poor’s last year.

Standard & Poor’s, having taken took a good look at the Club through its interactive rating process, saw its outlook as stable and predicted that its capital position would remain very strong and that its operating performance would improve in the medium term.

They referred to the Club’s very strong capitalization, saying that its free reserves in the year ended 20th February 2001 covered their risk-adjusted capital requirements by approximately 2.5 times.

The Club’s market position as the largest P&I mutual with a high quality, well diversified membership was acknowledged and its long-term reinsurance arrangements with Swiss Re were seen as enhancing the stability of the Club by reducing the prospect of unexpectedly large calls.

The maintenance of its AA- rating keeps the Club in the top flight of the International Group clubs since Standard & Poor’s began ratings of the marine mutuals in 1994. The Club’s leading position has been further strengthened during the year by the certification of its managers’ offices worldwide under the ISO 9001:2000 quality system and by the best rates from supplementary call insurers Elysian.

Members who would like to know more about this and other quality and financial ratings should contact Nick Whitear (+44 20 7204 2334 or nick.whitear@thomasmiller.com)

Charles Elmer has recently taken over as Correspondent Manager combining this role with his position as Area Director for the London based Area Group L1.

One of his responsibilities is ensuring the Club maintains up to date contact details for all the correspondents in its worldwide network. As well as being printed in handbook form, the latest List of Correspondents is currently available in electronic form from the UK Club’s website. The complete handbook including the 2002 Rules and Bye-Laws can be downloaded as an Acrobat file.

The List of Correspondents is also available as part of its online services to be found via the main menu of the www.ukpandi.com website. This online version is a link into the Club’s database of correspondents which can be searched either by port or by country.

If members require any additional information regarding the Club’s correspondent network they should contact Charles Elmer. Tel +44 20 7204 2116 Fax +44 20 7204 2101 or by email: charles.elmer@thomasmiller.com.

The Club’s regional office in Hong Kong, staffed by manager’s agents. Thomas Miller (Asia-Pacific) Ltd is relocating this month from Wanchai to a new building further along Gloucester Road into Causeway Bay. The new details feature in the 2002 List of Correspondents.

Thomas Miller (Asia-Pacific) Ltd.
Room 1201-1204, 12/F Sino Plaza
255-257 Gloucester Road
Causeway Bay
Hong Kong
Tel +852 2832 9301
Fax +852 2574 9954

The Club Chairman mentioned at the beginning that the Board has commissioned independent experts to gather and analyse Members’ experience of the Club’s services and their ideas for future improvements. Herry Lawford explains what this survey seeks to achieve and how it will be organised.

The Board considers it important to gather the views of Members in this way. It provides a structured opportunity for Members to make their voices heard directly. It is hoped that the survey will endorse the Club’s strategy on service, based on its network of offices around the world, and will provide a check on the standards of service actually being provided on a day-to-day basis.

This survey will be conducted along similar lines to earlier surveys (see below) and by the same specialist firm, Research International.

As in 1992, preparation of the survey questionnaire has been preceded by a small 'qualitative’ survey conducted through interviews with both Members and non-members to establish the issues thought to be most important. The response to these interviews - some of which were delayed by the aftermath of the tragic events of last September - are being used to focus and refine the main survey questionnaire.

To permit both Members and managers to get over the administrative burden of the renewal seasons, dispatch of the survey questionnaire to Members will be delayed until April. At that time each Member should receive a questionnaire. This will be addressed to the person who is in touch with the Club on a daily basis.

The responses will be analysed and reported to the Board at its meeting in July.

The questionnaire is likely to follow the pattern of that used in 1996. This covered (a) a profile of the Member company, (b) its points of contact with the Club, (c) the services of the Club and (d) the Member’s overall view of the Club. Each of these sections contained questions that could quickly be answered by ticking boxes. They did, however, allow the Member indicate his or her level of satisfaction with or interest in various aspects of the Club, its services and activities.

As before, Members will not be asked to identify themselves in their replies to the questionnaire. Moreover, their anonymity will be carefully protected by Research International as they carry out their analysis. This encourages the full and frank responses which make this exercise a reliable measure of present service levels and a worthwhile pointer to future service needs.

Any questions or comments regarding the survey should be put to Herry Lawford on +44 20 7204 2143 or by e-mail herry.lawford@thomasmiller.com.