UK P&I Club - Issue 30

Such losses as there were tended to be of Members with poor loss records who had been asked to pay substantial increases. 96 per cent of the departing fleets had been asked to pay increases above 20 per cent and just over 35 per cent of those entries had been given renewal proposals requiring an increase of 50 per cent or more in mutual premium.

Maintaining the overall quality of the membership is an essential part of the Club's long term strategy (see for instance the article on ship inspections in our last edition). Between 1st January and 20th February 2002, the Club was invited to quote on more than 100 new enquiries. Many of these were owners who had sought cover in the fixed premium market and were returning to the International Group or who faced onerous renewal terms with their existing clubs. As the fleets concerned did not meet the Club's quality criteria, the majority of these enquiries were not quoted on by our underwriters.

Even before the autumn round of club board meetings had concluded, it was clear that all the clubs in the International Group would be looking for sizeable general increases. Levels of premium, which had recovered slightly at the previous renewal (a 5 per cent actual increase appears to have been the norm), were still inadequate to cover the underwriting deficits which had been exposed by two years of zero or negative investment returns. The events of 11th September had destroyed what little hope there might have been of a recovery in the investment markets. Three clubs - Skuld, Steamship Mutual and the American Club - had already been forced to bolster their reserves by announcing supplementary calls in excess of original estimates.

Club		Increase %
Skuld		30.0
Britannia		28.8
Standard	London	27.5
American		26.0
Gard North of England Swedish	Steamship Mutual West of England	25.0
Shipowners P&I	UK Club	20.0
*These increases include the notified general increase and the effect of any increase in the supplementary call provision, e.g. American Club set a 12.5 per cent general increase and adjusted their supplementary call requirement from 25 per cent to 40 per cent.

In the event the UK Club's 20 per cent general increase was, together with that of the Shipowners Mutual (the small ship club), the lowest in the International Group as can be seen from the table below. The Japan Club, which had benefited from a large tax return during the year, imposed no general increase.

Two weeks before the renewal, Standard & Poor's published their annual Marine Mutual Report. The report predicted the development of a two- tier industry in the future, with the financially stronger clubs prospering at the expense of the weaker clubs. The weaker clubs were described as having low levels of reserves, weak investment returns and exposure to the hardening reinsurance market because of their reliance on reinsurance to protect claims within their retention and their contributions to Pool claims.

The scene was therefore set for a tough renewal with premium rather than tonnage growth the priority for most clubs.

It is the Club's practice to focus on two measures of premium performance at renewal. The first is the per centage change in premium paid by renewing Members. The second is the overall change in premium including new Members as well as the continuing entries, net of any withdrawing Members.

Renewing Members from all owned classes of entry contributed an additional 18 per cent premium compared to the previous year. However, despite the slight net reduction in owned entered tonnage, the balance of net premium contributions from new and departing entries was positive. Thus the Club's overall annual premium income is anticipated to be around 20 per cent greater than the previous year.

Market sources have indicated that the Group clubs overall have achieved an increase of approximately 20 per cent in premium from their members, despite their higher levels of required general increase. The same sources were of the opinion that discipline on renewing entries had been maintained although business that was freely quoted had attracted competitive rating.

The interesting feature of this renewal was the paradoxical correlation between the rating of Group clubs and the corresponding change in tonnage at renewal. Some commentators had suggested that clubs like the UK Club, Gard, Standard and Britannia would enjoy a "right to quality" by owners concerned about the threat of un- budgeted supplementary calls. However, those clubs which enjoy the highest financial rating appeared to experience the smallest net change at renewal. Next year's renewal will be an even bigger test. Most market observers, including the brokers, are already predicting another round of meaningful increases. It remains to be seen whether the Standard & Poor's prediction of a two-tier market will manifest itself increased volume of tonnage or a more qualitative distinction as a result of a second year of hardening rates.

Club Report & Accounts

Although the Club reported an overall loss in its annual Report &Accounts for the year ended 20 February 2002 it remains particularly well placed to deal with the challenges posed by the increased reinsurance costs and unprecedented investment market volatility faced by the entire insurance industry.

The Club earned a -2.8 per cent return on its investments, compared with -0.8 per cent the previous year. To reduce the Club's reliance on investment income and balance the underwriting defict incurred in recent years, a general increase of 20 per cent in premium ratings had been sought for the 2002 policy year. "It is satisfying to report that the 20 per cent increase overall was achieved," said Club Chairman Aleco Kairis. "Though increases of this nature are never welcome, there has been a wide understanding amongst the membership of the need for this move."

The Club's total funds were US$955 million compared to US$1,083 million the previous year, a fall of 12 per cent. Against this, outstanding claims, including the forecast of unreported claims, were US$744 million compared to US$734 million in the 2000 Club year, an increase of only 1.5 per cent.

Stephen James, chairman of the Club managers, said that claims performance had been stable for some years and remained within projections. "Members' standards of operation and loss prevention measures have been significant factors in keeping claims under control. However, the Club will maintain its cautious approach to forecasting future claims levels".

In April 2002, the Board closed the 1999 policy year without further call. The supplementary premium estimates on all open policy years remain at nil.

This balance of funds and claims produced a free reserves margin of US$211 million which represents a 28 per cent surplus of funds over liabilities. Although lower than the previous year (US$348 million), they remain within the Board's target band and therefore above the threshold at which the reinsurance with Swiss Re would be activated.

This reinsurance is designed to protect the Club's free reserves margin against erosion - whether by increased claims or a fall in investment values - thereby maintaining the Club's reserves within the target band and greatly reducing the possibility of unbudgeted supplementary calls. The ten-year contract, put in place at the beginning of 2000, has not been called upon.

2002 financial highlights
Total funds	US$ 955 million
Total liabilities	US$ 744 million
Free reserves	US$ 211 million
Surplus of funds over liabilities	28%
Supplementary call	(1999) Nil
Supplementary premium estimates	(2000) Nil (2001) Nil

The Club continued to participate in the International Group Pool, which operates for claims in excess of US$5 million, and the Pool's excess of loss reinsurance arrangements from US$30 million up to US$2.03 billion. For the 2002 policy year the Club has again purchased a special overspill reinsurance to cover approximately 85 per cent of its share of a US$1 billion claim in excess of this figure (see page 7 of this edition).

In his Chairman's statement, Mr. Kairis writes, "Financially, the Club is well placed to deal with future challenges. This means we are not diverted from our key aim of providing top-level service for the membership."

The review of the year also describes the variety and extent of service provided to the membership in the past year. It reports the Club's ship inspection and loss prevention activities; changes in war risks arising after September 11th; award of ISO 9001 certification to the Club's international office network; continued improvement in the quality of member fleets; prospective changes in liability regime for oil pollution and passenger claims; and reviews claims submitted for Directors' consideration.

Copies of the Report and Accounts were mailed to all Members, and their intermediaries where applicable, in July. Further copies are available from Members' usual Club contacts.

Club rating A+ (Strong)

The deterioration in the Club's operating performance caused by the underwriting defict combined with the impact on investment income of weak equity markets has led Standard & Poor's, the credit and insurer financial strength rating organisation, to assign an A+ (Strong)rating to the Club. This compares with the AA - rating, first assigned in January 2001.

Notwithstanding the fall in the Club's reserves, Standard & Poor's takes a positive view of the Club's capitalisation, financial flexibility and business position. Their recent release included the following comments in respect of those strengths.

It was made in the light of a tough year for the P&I clubs and marine insurance businesses in general. Stephen James, chairman of the managers, said: "S&P's decision to maintain a 'strong' rating for the UK Club, albeit slightly reduced since last year, vindicates the Club's long term strategy of preserving financial security through strong free reserves and the Swiss Re reinsurance.

"In a difficult market environment where historically low premium levels have been compounded by mediocre investment returns, the UK Club's continued strong business position means it remains focused on its key aim of providing top level service for the membership."

Standard & Poor's considers the outlook for the Club "Stable", and anticipates a gradual improvement in operating performance leading to operational surplus in 2004.

The Club was the first in the Group to be rated by Standard & Poor's in respect of its 2002 Report & Accounts. The full report can be found at www.standardandpoors.com. The rating will also feature in its forthcoming report on the Marine Mutuals for 2002.

The Club has ranked consistently in the top flight of the International Group since Standard & Poor's began assessing marine mutuals in 1994.

What is the loss ? - The deficit explained

Reports by the press and Standard & Poor's on the publication of the Club's annual Report & Accounts have emphasised the Club's $138 million loss in free reserves.

As a mutual insurer, the Club is a non-profit making organisation. The assumption that a provider of insurance 'at cost' balances its income and outgoings leads to some confusion among observers as to what sort of loss these reports are referring to. In this article Hugo Wynn-Williams, of the managers, explains the nature of the loss, analysing how it has arisen and what has changed since the last Report and Accounts (year ended 20 February 2001) when the drop in free reserves was only $34million.

In place of a conventional profit and loss account the Club provides a statement of operations which this year can be found on page 30 of the Report and Accounts in the 'Financial Statements' section. The key information from that statement and previous financial statements for the years ended 20 February 1999 - 2001 is reproduced below in Figure 1.

The operating defict is a shortfall of premiums against claims, sometimes called an underwriting or technical defict, plus the costs of managing the Club. These costs are chiefly the management fee and Club's general expenses. In the year ended 20 February 2002 the net premiums of US$187 million were insufficient to match the paid claims plus expenses of US$289 million. Whilst this is a considerable sum, the Club has produced deficits in the four previous years. In fact, the operating deficits before the movements in outstanding claims have been remarkably consistent over all the years in the table i.e. $95 million, $99 million, $92 million and $102 million respectively (the years ended 20 February 1999 to 2002).

Also, the level of premiums is not dissimilar from year to year, the steady decline in premium income over the 1990's beginning to be reversed in 2002. During this period the membership of the club remained stable. It follows, therefore, that broadly the same group of members (movement of tonnage at renewal is around 2-3 per cent)has enjoyed a remarkably stable P&I cost environment.

The major difference between the years is that in the years ended 20 February 1999 and 2001 the Club was able to take advantage of an underlying improvement in the outstanding claims for all policy years and reduce the overall claims reserve. The improvement in the latter year was particularly marked, because by that stage, the 1999 policy year had outperformed all the other years during the 1990's. The outstanding claims movements for the four years in this review were -$51 million, $7 million, -$64 million and $10 million.

In simple terms a mutual insurer endeavours to balance the combined cost of claims and management expenses with the income derived from premiums and the investment of its funds to provide insurance to its Members 'at cost'.

When the allowance for management fee and general expenses was discounted from the underwriting of Memberprofitships, it was assumed the resultant premium shortfall would be met by investment income. However, the investment return was not earmarked just for those costs. It is a key variable in balancing the mutual's overall outgoings.

This is very clear from a comparison between the years ended 20 February 2000 and 2002. The years are almost identical in every respect, producing a defict before investment income of $106 million and $112 million respectively. The difference being that in the former, total investment income was $77 million compared to an investment loss in the latter of -$26 million. Similarly in the years ended 20 February 1999 and 2001, although it was possible to reduce the overall claims provision in both years (see line c in Figure 1), the total investment income varied enormously. The former produced a positive investment return of $92 million, whereas there was a small investment loss of $6 million in the latter. This difference turned a similar operating defict into a surplus of $48 million on one year and overall loss of $34 million on the other. The volatility in the investment return as a proportion of investment income is illustrated in Figure 2.

When a mutual produces a surplus of income over outgoings it can use that surplus to build its reserves. Conversely, when there is a defict it can be funded by the free reserves built during those years of surplus. This Club decided to fund the total defict of US$138 million entirely from its reserves.

In figure 3 the key figures of the Club's balance sheet, i.e. its total assets and liabilities, are reproduced. The free reserves are the surplus of Club funds over and above the total liabilities accruing from outstanding claims. The impact of the three previous years' deficits on those free reserves is illustrated in the table. It is important to remember that when the free reserve figure is positive then the Club possesses the funds to pay all outstanding and anticipated claims with more to spare. At 20th February 2002 the Club had a 28% surplus above and beyond those outstanding claims undiscounted.

When there are insufficient funds to cover current outgoings, the traditional mutual club practice has been to levy an additional, unbudgeted, supplementary call. A number of other Clubs have responded to such deficits with supplementary calls.

In 1999 the Club reaffirmed a strategy designed to avoid the need for supplementary premiums (unbudgeted calls). In addition to maintaining a high level of free reserves, the Club negotiated its unique reinsurance arrangements with Swiss Re as part of that strategy. This reinsurance is triggered by an adverse movement in the free reserves. If the ratio of total funds to total outstanding claims falls below 125%, this contract provides for a recovery from the reinsurer of outstanding claims to a value sufficient to restore the ratio to 125%. Claims are recoverable under this contract regardless of whether the fall in free reserves arises from an increase in claims or a fall in assets as a result of investment performance.

The Board does not intend that the benefit of this reinsurance protection should be used artificially to subsidise the cost of the Club's mutual premium to Members. So the Club is taking steps to reduce its reliance on investment income to balance its finances. At the last renewal a 20 per cent general increase was required as part of an effort to restore the equilibrium of premium to claims.

The proportion of equities has reduced to 25 per cent, the remainder of the invested funds being held in bonds and cash. Helped by the weakness of the dollar, investment performance had begun the new policy year with a positive return in the Club's investment portfolio.

Whilst the recent losses were generated by a combination of operating defict and poor investment return, it is important to note that the Club's claims trend has remained . at and continues to perform within forecasts.

Furthermore, despite two years of negative investment return on years with substantial deficits, the total free reserves of the Club still stand at $211 million or approximately three times the average operating defict over the past 4 years. Next year there is likely to be another moderate defict and thereafter the reserves should begin to recover. This view is also taken by Standard & Poor's which explains why they have given the Club an A+ strong rating with a stable outlook.

Posidonia open day

On 6th June, the Club's office in Piraeus invited Members along with brokers and other friends to an "open day" during Posidonia week. Members were able to see the office and meet the team of claims handlers, managers and support staff that look after their interests on behalf of the Club.

More than 500 people paid a visit during the day including Aleco Kairis, the UK Club chairman, and George Gratsos, the departing chairman of the UK Defence Club. As well as Greek members of the Club we also had the pleasure of welcoming a number of overseas Members.

The office balcony was the venue for a barbecue and sushi was served, which proved to be fascinating both in its preparation and consumption. Although it was an open day, the office was still operating and a number of new cases had to be responded to whilst juggling visitors, sushi and faxes. It was a great pleasure for the Piraeus team to welcome so many people to the office at such an important occasion in the Greek shipping calendar.

"Posidonia is a time for those involved in Greek shipping to get together with colleagues based both in Greece and elsewhere. We thought it would be an ideal opportunity for the industry to see personally how we work and to meet the Hellas team" explained Club manager Peter Wright.

There are now nine claims handlers in the Piraeus office with a wide variety of legal and practical shipping experience. Peter Wright is the senior resident manager and Daniel Evans is the Area Director with overall responsibility for the office. Between them, the executives offer specialist assistance on all types of P&I and Defence claims, dual UK and Greek legal qualifications and extensive contacts. All support staff are bilingual English and Greek.

"Having Greek nationals in our office is tremendously important" explains Daniel Evans. "In Athens and Piraeus, Members very much appreciate being able to discuss their claims, seek advice and hear about issues face to face and in their own language".

The Piraeus office has developed significantly since 1996, when it was set up to provide an active representative base for liaising with Members. It began by explaining the Club's policies, providing ad hoc advice and acting as a feedback channel for Members' views and requirements. On 20th February 1998, its role was extended to that of a claims handling syndicate, dealing with all types of P&I and Defence claims worldwide for Greek-based Members. The office has also incorporated the correspondent role.

Philip Clacy, currently the Area Director in London for the claims handling groups L2 and L6, is moving to join the Club's Greek office in October this year. He will be taking over Daniel Evans' role as the Area Director for Greek Members' claims handling in Piraeus.

Philip has both a degree in Nautical Studies and a postgraduate MBA. He joined Millers in 1986 and has built up considerable experience and expertise serving the eastern Mediterranean and Middle East membership. He took his first post as an Area Director in 1995.

Philip and Daniel Evans will be working together in Piraeus until November. Subsequently, Daniel is returning to the London office early in the new year to take up the post of Senior Claims Director with the UK Defence Club.

A practical course for non insurance specialists

The Club's managers held their course "An Insight into Transport Law & Insurance" between the 1st and 4th of July. Subtitled "A Practical Course for Non Insurance Specialists" the course was run at Thomas Miller's City of London office.

The programme consisted of four days of subject lectures and practical exercises covering the main areas of law and insurance as they relate to the shipping and transport industries. Topics covered included

The course speakers were a combination of executives from the managers and other experts invited from surveying and law rms. There was ample opportunity to meet with the speakers, members of management staff and other international participants at a number of social events, including the end of course dinner.

The course has been running annually for six years and has regularly attracted a wide range of participants. Executives new to the industry praised the course as a good grounding in the key areas of transport law and insurance, but equally senior executives enjoyed the opportunity to refresh their knowledge of the subjects covered and catch up on new developments. The breadth of participants, in terms of seniority and geographic origin ranging from Latin America to Middle East to Asia as well as Europe, created a stimulating environment in which to undertake such a course.

In response to the needs and interest expressed by Members of the Club based in the Asia Pacific Region it is planned to introduce and deliver the course in both Hong Kong and Singapore later this year.

Any Member interested in further information on this course can either access the electronic brochure from the Club's website or contact the course administrator Flora Kyprianou, email flora.kyprianou@thomasmiller.com, telephone +44 7204 2559 or fax +44 20 7283 5614.

Overspill reinsurance protection

The last edition of UK Club News reported on the renewal of the International Group reinsurance programme. In that edition Hugo Wynn-Williams explained that the combined impact of the increase on the upper layers of the contract, together with the cost of the option on the first two layers, had resulted in an overall increase in the reinsurance cost of around 28 per cent. These costs were then allocated across the major ship categories and formed part of the renewal for the current policy year.

At the time that last edition went to print it was unclear whether it would be possible to purchase once again the special reinsurance cover which protects the Members from the Club's share of an overspill claim of $1 billion in excess of the Group's reinsurance contract limit. Subsequently, the Directors of the Club decided to buy the reinsurance cover for a substantial proportion of our Club's share of such a claim. This decision was reported to the Members in the circular 07/02 "Overspill Reinsurance Arrangements" that was published last March.

By way of a reminder, if a claim were to exceed $2.03 billion, 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 the $1 billion overspill claim with a specific reinsurance protection. The issue in February this year was whether the market would be prepared to offer that protection once again and, if so, would the price to be paid be economic.

As was reported in the March circular, the decision was taken to buy the overspill protection for a significant proportion of the Club's exposure to such a claim.

This reinsurance would cover just under 16 per cent of an overspill claim on the Pool of $1 billion. This represents around 85 per cent of that portion of the Club's liability.

In the event of an overspill claim in the 2002 policy year, the Club now has available
a. the overspill reinsurance (referred to above),
b. its own Catastrophe Reserve (US$52. 9 million)and
c. the ability to make a recovery under the long term reinsurance arrangements with the Swiss Re.

The Swiss Re reinsurance is designed to maintain the Club's overall free reserves within the Board's target band, and in addition provides a specific protection against an overspill claim at a high level. The extent at which these protections are used to minimise or avoid the need for an overspill call on the membership would be a decision for the Club Board to take in the light of all the circumstances of a potential claim.

Cruise workshop

On 24th April, the Club hosted a three day workshop for its cruise operator Members at the Biltmore Hotel in Coral Gables, Florida.

This biennial event, chaired by Phil Nichols, is mainly attended by senior risk managers and legal representatives from the cruise shipping community entered in the Club, including brokers and lawyers. These informal meetings provide the Club's cruise Members with a unique opportunity to discuss issues of common interest. The agenda is set by the Members themselves and discussion topics are led by a combination of Club representatives, Members' representatives and external speakers.

On this occasion, the agenda enabled each group to contribute from their own areas of expertise and experience leading to lively debate among the thirty participants.

Latest legal developments in a number of key areas were well represented and included such topics as federal criminal prosecution issues in the United States, the Americans with Disabilities Act of 1990 (ADA), Death on the High Seas Act (DOHSA)and the Athens Convention and compulsory insurance.

The Club representatives reported on their recent experience in a variety of relevant fields including corporate manslaughter, medical repatriations and associated cost issues. In addition, explanations were given of the developments in Club service and organisation such as the online claims system ClaimsTrac, the lessons learned from shipboard audits and the pursuit of greater value from suppliers.

Other topical issues led by external speakers included Alaska and its environmental challenges and oil spill management.

Member survey update

The Club's recent Member survey has met with an excellent response. Research International, who were commissioned by the Club to conduct the survey, report that 246 completed questionnaires were received from the Members, equivalent to a 32 per cent response rate.

A sample of nearly one third of all Members suggests the survey should provide an accurate insight on their expectations. It is a highly representative sample with the largest group of respondents being those Members with around ten entered ships, the Club's average size of entry. All the key industry sectors such as wet bulks, dry bulks, general cargo, unit load and passenger are represented. The number of replies matches the geographical distribution of the membership almost exactly. The similarity of geographical distribution of responding Members to the overall pattern of world shipping should provide a useful insight into the expectations of the industry as a whole with regard to P&I.

The process of analysing the questionnaires in detail has now begun. A special edition of UK Club News dedicated to reporting the views of Members on claims handling, underwriting, loss prevention, regional networks and information, as well as overall service satisfaction, is planned for November 2002.

Our thanks to all Members who participated in the survey and spared their time to complete the detailed questionnaires.

Any questions regarding the Member Survey should be directed to Nick Whitear (+44 20 7204 2334) or by email nick.whitear@thomasmiller.com.

New appointments

Louise S. Livingston has joined the Club's San Francisco office as a claims executive specialising in personal injury claims and those concerning cruise and ferry members.

After qualifying as a doctor of laws, Louise has spent more than a decade working in maritime law in San Francisco. She founded maritime adjuster American Maritime Correspondents in August 1990, primarily dealing with personal injury, death and breach of contract claims for international shipping companies and underwriters.

From 1993 to 2001, Louise was with Kaye, Rose &Partners LLP, becoming a senior associate. She was responsible for all phases of litigation across a full spectrum of maritime-related claims and advised on regulatory, licensing and related corporate issues. She co-wrote initial guidelines for investigation of claims of sexual assault for cruise lines. Most recently she was a partner at Emard, Danoff, Pott & Tamulski, LLP where she was again responsible for all phases of maritime litigation. Louise is an accomplished ice skater.

Whilst studying German Literature & Language and Political Science at the University of California she took time out to perform as a member of the "Holiday on Ice" company on a European tour, having previously competed in ice dancing competitions. Louise has lived previously in Switzerland and speaks both German and Swiss-German.

Jason Riley has joined the Club's European underwriting team in London as a lead underwriter.

Jason comes to the Club after ten years with the Britannia P&I Club. Jason joined the Britannia club in 1993. He initially developed his underwriting skills and experience serving the Japanese membership before moving on to spend the next five years serving sixty five Spanish and Portuguese members as their lead underwriter. One particularly enjoyable task was assisting the organisation of the Britannia's Spanish centenary celebration.

During his time at university, Jason was seconded to BP International where he was a member of the IT department implementing new technology for their worldwide offices. After acquiring a technology and business degree, Jason spent four years developing his commercial experience within the retail and leisure industry.

He subsequently spent a year travelling through Africa, Australia and South East Asia on an extended working holiday.

Jason continues to enjoy travel, which he tries to combine with playing tennis, golf and the demands of a young family.

......................................................................................

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

Issue 30 - Autumn 2002

Analysis of the 2002 Renewal

Club Report & Accounts

Club rating A+ (Strong)

What is the loss ? - The deficit explained

Posidonia open day

A practical course for non insurance specialists

Overspill reinsurance protection

Cruise workshop

Member survey update

New appointments


© UK P&I Club 2008. E&OE \| Copyright Notice \| Technical Requirements \| Site Map \| Contact Us	Back to top ^^