Issue 34 - Spring 2004

2004 Reinsurance arrangements

The International Group Pool

The Pool retention in 2004 has been increased from $30 million to $50 million. This increase reflects the long-standing intention of International Group clubs to retain more risk within "the working layer" of the programme so that Group reinsurance is preserved for more serious or catastrophic losses. The increased retention effectively introduces a new third tier within the Pool.

Background

The first or main layer of the Pool is from $5 million to $20 million and the second or "upper" layer is from $20 million to $30 million. Contribution shares for the upper layer are based on each club's proportion of the Group's general excess reinsurance premium; in addition any club bringing a claim at this layer is penalized by an additional retention percentage equivalent to 20 per cent of its normal contribution for 2004. Claims on the new third layer will be shared in the same way as the upper Pool, but without the additional retention. The basis of calculation will be reviewed during 2004.

The limit of individual clubs' retentions, which are the starting level of the Pool, remains unchanged at US$ 5 million.

Group Excess of Loss programme

The upper limit of the Pool forms the starting point of the International Group's Excess of Loss reinsurance programme. For 2004 the premium paid for the first $500 million layer of the Group reinsurance programme will reduce by approximately 20 per cent in exchange for the higher retention by the Pool.

In view of the increase in the Pool retention no increase is proposed to the percentage of risk that the Group co-insures (25%) within the first layer. This co-insurance is, in turn, protected by a policy that covers the Group for losses in excess of an aggregate. For 2004, the aggregate on a 100 per cent basis will be $200 million, a reduction of $50 million from last year. The upper layers of the Group reinsurance, i.e. from US$ 1,050 million to $2,050 million were renewed on the same terms as 2003.

Fig. 1 - Reinsurance rate history 1996 - 2003

War Risks Update The Club's circular 4/04 which advised the terms of the Club's excess war risks P&I cover for the 2004 policy year, also advised that the Board had agreed to try to provide some cover for "Bio-Chem" risks which would otherwise be excluded from underlying market war risks policies as well as the Club's excess cover. This has now been achieved with effect from 15th March 2004 following agreement amongst Group clubs to pool such claims, but cover is restricted to crew risks with a financial limit of $20 million - See circular 9/04 for details.

Reinsurance rates

So far as premium for 2004 is concerned, save for the reduction allowed for the increase in the Pool retention, overall premium will remain effectively unchanged. The rates per gt to be charged to individual members will, however, continue to be based on the 1st layer ($500 million) premium as if the Pool was reinsured in excess of the $30 million so that the reduction following the increase in the Pool retention will be collected by all the clubs on a prefunded premium for the new third layer of the Pool. This pre-funded premium has been ear-marked for the proposed Group captive, Hydra, which it is hoped will be launched during 2004.

Ratings per gt for individual ships are largely unchanged save for a reappraisal of the passenger ship risk exposure to the upper layer of the reinsurance contract and the impact of the reduction in the cost of the war risk excess cover. The ratings have also benefited from the increase in world tonnage with the result the unit cost has come down the price has remained unchanged.

Overspill cover

Although the International Group reinsurance programme extends to a limit of $2,050 million, the potential collective exposure of Group club members extends to approximately $4,500 million. The claims in excess of the Group reinsurance programme fall back on the Pool as an 'overspill' claim. For 2004 our Club has bought reinsurance to cover 100 per cent of its estimated share of the first US$1 billion of such an overspill Pool claim. In addition to the special insurance, our Club also has the ability to call on its catastrophe reserve and to make a recovery under the long-term insurance agreements with the Swiss Re. The extent to which these protections are used to minimise or avoid the need for an overspill call on the membership would be a decision for the Directors to take in the light of the circumstances of a potential claim.

US voyage surcharges

The rates for the US oil surcharges were reduced this year by just under five per cent across the board, the same reduction as obtained for dirty tankers under the general programme. The latest rates which apply to the 2004 policy year can be found in the Club's recently published 2004 List of Correspondents / Rules & Bye-Laws. They are listed in the Addendum on pages 100 and 101 as part of the U.S. Oil Pollution Clause 20/2/2004.

Excess war risk P&I cover

The Group excess war risk P&I cover will continue on the expiring terms and conditions including an 'each vessel each event' limit of $400 million in excess of an entered vessel's proper value (see Rule 5D). The premium rates per ton have been reduced by nearly 25 per cent to 1.73 cents for owned entries and 0.57 for chartered. However, a special limit of $50 million per vessel per incident has been introduced for any passenger carrying vessels employed as accommodation ships in and around Athens during the period of the Olympic (and associated) games.

Category Overall rate Overall rate Change 20041 20032 % US Cents Dirty tanker 63.99 67.24 (4.84%) (3.25) Other tanker 31.28 32.68 (4.28%) (1.40) Dry cargo 27.52 28.58 (3.71%) (1.06) Passenger 73.29 68.41 7.13% 4.88

1 including war risk premium of 1.73 cents owned 2 including war risk premium of 2.25 cents owned

RISC & Hydra

The International Group managers' reinsurance subcommittee (RISC) has worked with a team of external actuarial and insurance consultants to review its reinsurance strategy. The team has proposed a number of innovations and improvements to the Group's risk management including the raised Pool retention and the formation of a Group captive insurer - 'Hydra'.

The implementation of the captive is a complex task as issues such as achieving security between clubs, incorporating individual club's captive capital into their own balance sheets and the various regulatory jurisdictions in which clubs operate. However, the contractual documentation for all the club boards is being drawn up and it is intended that our Board should be in a position to consider it at their April meeting.

Standard & Poor's (S&P), the credit and insurer financial strength rating organisation, has just assigned an A rating to the UK Club. Although slightly down on its previous A+ rating, first assigned in July 2002, S&P considers the outlook for the Club "stable". It anticipates improved operating performance leading to a surplus at February 2004, reversing the decline in the level of free reserves of recent years.

The assessment followed a presentation by your managers to S&P in an interactive rating process which is more searching and leads to less volatile ratings than the public information process applied to some clubs.

Hugo Wynn-Williams, deputy chairman of Thomas Miller, the Club's managers, said: "S&P's decision to maintain a 'strong' rating for the UK Club, albeit slightly reduced since last year, is a continuing vindication of the Club's long term strategy of reinforcing financial security through strong free reserves and the Swiss Re reinsurance.

"The anticipated return to overall financial balance is very welcome. However, S&P shares our view that appropriate levels of premium income rather than strong investment performance are necessary for the long term. The recently observed upward trend in claims reinforces that view and the Club's determination to set the right rate for the risk."

This rating reflects S&P's views of the Club's capitalisation, financial flexibility, business position and operating performance.

Strong capitalisation: Capitalisation remains strong overall, despite some vulnerability to future underwriting losses and volatility in equity markets. The long-term reinsurance contract with the Swiss Re will ensure total funds will remain within the band of 125% - 145% of total estimated future claims.

Very strong financial flexibility: Whilst the Club can, as a last resort, charge supplementary premiums S&P agrees that the Swiss Re reinsurance makes the prospect of unbudgeted supplementary calls very unlikely.

Strong niche business position: As the largest P&I club with around 20 per cent of the world's ocean going tonnage, the Club remains focused on marine P&I insurance. Its membership is acknowledged as being of high quality and geographically well diversified.

Bold investment policy: The Club's investments have produced yields that have historically tended to be slightly above the average for this sector.

Marginal recent operating performance: The Club's underwriting deficit for the 2003 financial year of $31 million was slightly lower than originally forecast of $35 million. It reduced the free reserves to $179 million, although still within the Club's target band of 125% - 145% of total estimated future claims.

S&P expects the Club's capital position to remain strong and operating performance to improve in the medium term and so has revised its outlook upwards from "Negative" to "Stable". Our Club has ranked consistently in the top flight of International Group P&I Clubs since Standard & Poor's began assessing marine mutuals in 1994. It shares the same interactive financial rating and outlook with the Gard and Standard clubs and was one of the first to be rated for 2004 by Standard and Poor's. A detailed rating features in the 2004 report on marine mutuals which was published in Lloyds List in February.

James Baker is a man who enjoys his work. He is a man who likes to find solutions to problems, and a man who likes to use his experience. As a master mariner and a director of Thomas Miller P&I in the large claims group dealing with major incidents involving the UK P&I Club, he has no shortage of complex problems to solve. The problems all involve ships, which have been the common thread through his career, and the Club has a very focused policy of seeking cost-effective solutions to problems.

"It is very satisfying to work in an area where you can build on your expertise," says James. "There is a lot of excellent legal and technical expertise available, and we need this support for the sort of claims we handle. An important part of our job is to know what questions to ask, and having worked at sea on a mixture of different ship types, and also worked in management ashore in different countries, I feel comfortable with that."

The large claims group provides support to the claims executives who are handling claims of over $500,000, or pollution, salvage and collision claims of over $250,000. "We also become involved in claims which may be for lesser amounts but which involve complex issues," he explains. "At any one time, I am probably involved in at least one hundred claim files. Over the past couple of years there has been a trend towards fewer claims but the average value of those claims has risen, especially for oil pollution. We are always seeking best value solutions which work for our members and for the Club. Increasingly today that means using voluntary mediation to avoid costly litigation, and that is a welcome trend."

So welcome is mediation that James has taken himself off to the London Shipping Law Centre and received certification as a mediator. "Of course I can't mediate in the claims of our members," he says. "But training as a mediator helps me to understand how they work, helps me to choose the right mediator for the case, and the skills of listening and understanding people help me when assessing the best way to handle a claim."

James joined the UK Club twenty years ago, and has spent much of his time there working with shipowners from the former Soviet Union and Eastern Europe. "I moved to the large claims group in 1993," he says. "However, I retain my links with our members in those areas."

Given the size and complexity of the claims James advises on, there is almost always external legal assistance required. "We want to get the right lawyer with the right experience involved from the outset," says James. "That way we can be sure we gather all the evidence and facts we will need. We don't want to find out later that we are missing a piece of the puzzle. Under the Club's "Value for Money" programme, we have a very structured approach to the investigation, evaluation and strategy planning process in accordance with best practice claim. We work closely with the Members and their legal advisors to decide on the most effective option to solve claims for the least cost."

An important aspect of this process is to take account of the Members' commercial needs whilst minimising the adverse effects on their business. In providing an evaluation of the legal merits and identifying costed strategy options, lawyers have a key role to play in achieving our objectives.

With around twenty per cent of the world fleet insured with the UK Club, the Club is a major user of law firms. "We have a good window on the legal profession around the world," says James. "Through experience we know the capabilities of the different lawyers, so we can choose the right person for each job. Because a significant number of the cases involve English law and come back to litigation or arbitration, and now mediation, in London, we often choose a London lawyer. However, we also know many good lawyers outside of the UK, and instruct them when legal assistance is required locally in connection with proceedings. Over a year I probably deal with about thirty different law firms in different countries."

How does he choose the right person? "We take a step by step approach. First, we ask ourselves what particular issues are at stake and who we know who has the right legal and technical experience and is orientated towards the types of solution we seek," says James. "We concentrate on solutions and we want a lawyer who knows how to produce a result on the most cost effective basis when the time is right".

James has developed a special interest in oil pollution law and the management of oil pollution claims through involvement in major spills in Korea, Japan and Greece. He says that each incident provides new and unique challenges and the sheer scale of activity means that a team approach is essential. In his spare time, James enjoys sailing with friends on the east coast of England, walking in the countryside and gardening with an organic approach.

This article is adapted from one which first appeared in LawGram, the newsletter of solicitors Lawrence Graham.

Patrick Ruane explains the background to the Club's Extended Cargo Cover and outlines its general terms and conditions.

Developments in maritime transport and increased customer expectations have brought about changes in the way our Members do business. One typical example is the increasing demand by cargo interests on our Members to use service contracts which include terms of carriage more onerous than the Hague/Visby Rules or their equivalent. Traditional P&I insurance, by having Hague/Visby Rules as the standard terms of cargo transportation, may not cover the additional risks posed by service contracts. To address our Members' business needs in a changing market, the Club provides an additional cargo insurance coverage known as 'Extended Cargo Cover' (or ECC) to complement standard P&I cover.

Risks insured by Extended Cargo Cover

'Extended Cargo Cover' provides insurance for Members' cargo liabilities that fall outside the scope of standard P&I cover. Risks covered by 'Extended Cargo Cover' are those excluded by Rule 2, Section 17 provisos (a) to (f). These are categorized as follows:

• Non-standard terms of carriage giving rise to cargo liabilities in excess of Hague/Visby Rules
• Deviation which may prejudice Hague/Visby limits or defences
• Delivery of cargo without production of the bill of lading or at a port other than that stated in the bill of lading
• Ad Valorem cargo in excess of $2,500 per package
• Rare and valuable cargo
• Cargo liability deriving from operations on the inland leg
• Cargo liabilities other than as ship operator
• Cargo liabilities arising

In the container trades, major shippers' service contracts may contain terms more onerous than the traditional Hague/Visby standard and these usually prejudice Members' P&I insurance. 'Extended Cargo Cover' can insure the additional liability assumed by the Member as a result of for example waiver of defences or limits, damage to cargo during storage, waiver of contractual general average or salvage rights, third party liabilities caused by cargo carried on the inland leg of a multi-modal carriage contract, etc. Shipowners are exposed to liability claims outside their standard P&I cover if they deviate from the terms of their contract with cargo. The circumstances of such exposure are varied. If an owner wishes to discharge cargo at an alternative port to that agreed with the shipper, he will need cover for the liabilities arising if the cargo is lost or damaged during transit to the port where discharge was originally intended to take place. Should a ship be dry docked with cargo on board, the owner is deviating from the terms of his contract with cargo and will so jeopardize his P&I cover. The UK Club's 'Extended Cargo Cover' cover reinstates cargo liability protection during the dry-docking operation.

The complexities of the modern transport chain can lead to unfamiliar liabilities for shipowners. Members may well issue bills of lading for cargo which travels entirely or partly on ships owned or operated by other parties for example under consortium or joint service arrangements. 'Extended Cargo Cover' insures cargo liabilities arising in these circumstances. Through bills of lading can expose owners to liabilities arising from cargo on the inland portion of the transport. For example, in the event of incorrectly described containers leading to a handling accident, the owner could be held liable for resulting injury or damage.

A Member might incur cargo liabilities other than in his traditional role of a ship operator. He may, in effect, be acting as a freight forwarding agent, NVOCC or some other transport entity, and incur liability for cargo loss or damage in that capacity. The UK Club's 'Extended Cargo Cover' is there to meet the Member's new business needs in respect of such cargo liabilities which are not covered under the standard P&I policy.

Limits and other terms and conditions

Cover can be provided up to a maximum limit of US$ 50 million any one accident or occurrence, any one event. Higher limits can be arranged if Members require them. Delivery of cargo without an original bill of lading is usually subject to a lower limit.

'Extended Cargo Cover' deductibles are the same as the Member's standard P&I deductibles. The advantage to a Member of having the same level of deductible is that claims which are difficult to categorize as P&I or 'Extended Cargo Cover', can be efficiently dealt with by the managers. The general 'Extended Cargo Cover' exclusion is of all claims recoverable under the standard P&I policy. In respect to claims for cargo loss or damage, 'Extended Cargo Cover' excludes inherent vice of cargo, delay, or loss of market, unless otherwise agreed. With regard to delivery of cargo without production of bills of lading, 'Extended Cargo Cover' is subject to the Club's 'Standard Form of Undertaking' to be given by the cargo owner or by whoever the cargo is delivered to. The manager's underwriting department can advise Members and their brokers on all aspects of the cover including its terms and conditions. Claims under the Extended Cargo Cover are handled by the managers, whose claim handling expertise and loss prevention advice give added value to the 'Extended Cargo Cover' package.

Patrick Ruane has been a member of the underwriting department since 1984. He has special responsibility for organising the Clubs facultative reinsurance.

The Board welcomed the new Directors from our Club's membership at its Annual General Meeting in Bermuda last November.

	Giuseppe Bottiglieri, Bottiglieri di Navigazione SpA Giuseppe Bottiglieri is Managing Director of Bottiglieri di Navigazione SpA and Chairman of Bottiglieri Tankers SpA in Italy. He is an Executive Board Member of CONFITARMA as well as Chairman of its International Oceanic Navigation Committee; a Board Member of INTERCARGO; and a Council Member of INTERTANKO.
	Ian Gaunt, Carnival Corporation Ian Gaunt is Senior Vice President- International of Carnival Corporation with particular responsibility for management of the group's shipbuilding activity. He was a partner in an international shipping law firm from 1982 to 1999, working in the fields of shipbuilding, commercial law and banking law, based in London and the Far East.
	Seyed Seyedan, National Iranian Tanker Company (NITC) Seyed Seyedan was appointed Commercial Director of NITC in 1997. With qualifications and experience in marine electronics and communications, Mr Seyedan has been working for various divisions of NITC since 1977.
	Patrick Decavele, Brostrom Tankers SAS Patrick Decavele is Chairman and Managing Director of Brostrom Tankers SAS in Paris. Prior to this appointment, Mr Decavele worked in the commercial department of Van Ommeren Tankers, which he joined in 1980, managing chartering and operations.
	Ma Zehua, Cosco Ma Zehua was appointed Vice President of Cosco (Group) in September 2001. He started his career in shipping with China Ocean Shipping Company in 1977 and has since then held a number of titles within the group in China, the UK and the USA.
	Ottmar Gast, Hamburg Süd Ottmar Gast has been Deputy Chairman of the Executive Board of the German shipping group, Hamburg Süd, since 1994. Dr Gast comes from an engineering and logistics background.
	Bob Malone, BP Shipping Ltd Bob Malone was appointed Chief Executive of BP Shipping in the UK in November 2002. Prior to this appointment, he was BP's Regional President for the United States. Mr Malone has an engineering background and has held various positions in BP plc since 1974

The Board also bade farewell to three Directors who retired from the Board. Messrs. Pierre Demandolx-Dedons (Feronia), Gwyn Hughes (Carnival) and Albrecht Metze (Hapag-Lloyd).

The Club's January meeting is the traditional time for a presentation to the Board on behalf of the Club's ship inspection team. This presentation provides insights into the quality of Members' ships and their operation. In this article Karl Lumbers focuses on some of the recent findings from those inspection visits in relation to Members' crews and also outlines some of the Club's current loss prevention initiatives.

Experience & expertise

The Club has been including data in respect of Members' crews in its Ship Inspection Reports since 1995. The data recorded on individuals includes qualifications, length of service on board the ship, length of service at that rank, familiarity with the cargo carried and fluency in English. In addition, the inspectors also note information on the age and nationality of officers and ratings, the length of handover and pre-voyage familiarisation training and the crews' ability to speak the "mother tongue" of the ship. The Ship Inspection Reports now draw on data from a sample of more than 16,500 officers. This data shows an improving trend for the time allowed for handovers for replacement officers. Between 1995 and 1997, 10 per cent of all handovers took less than a day. That figure has since fallen to just 0.5 per cent. Now, 50 per cent of all handovers take a day to be completed. Two day handovers averaged 20 per cent of the total sample and three day handovers, 6 per cent.

The length of service data suggests that most officers, including senior officers, are opting for shorter periods of continuous employment. 61 per cent of officers had served less than five years with their present owner and nearly 20 per cent had served less than a year. One to five years seemed to be the most common period of time spent by most ranks with their current employer. Since 1995 there has been a pronounced downward trend in masters and other senior officers who had spent more than 17 years in service with the same employer. It is not possible to draw conclusions from the data on whether the use of third party managers has contributed to these trends.

The human element

The UK Club undertakes many cooperative initiatives with Members with the common aim of reducing risk and promoting good quality operations. Firstly, there is the ship inspectors' findings, some of which are described above. This information is shared with members both directly and through the Club's electronic benchmarking service which is available through ClaimsTracTM. The physical health of crews can be monitored with the UK Club's preemployment medical examinations scheme – the Crew Risk Management Programme - now available in ten crew supply countries. These enhanced preemployment medicals screen out health conditions among joining crew which would impact both upon their effectiveness and the ship's safety and in addition, greatly reduce repatriations due to pre-existing illnesses.

The importance the Club places on the human element is typified by its latest loss prevention initiative – the DVD No Room for Error. This DVD is supplied with extensive supporting training material to assist management, company trainers and operational staff identify risks arising from 'latent failures' using realistic scenarios such as accidents arising in the navigation and cargo areas.

The Club also sponsors the Newslink daily newsletter service which distributes the Club's loss prevention information together with news from home for the major nationality groups of the seafaring community.

The Club supports Members' efforts in raising risk awareness with specific tools. All Members have received "Good Practice" posters, which use problems uncovered by the ship inspectors to warn crews of the pitfalls that can confront their crews. Detailed loss prevention videos have been produced for tankers, bulkers, container ships and passenger ships.

Technical issues

Ships' officers and their operations departments have to manage a great variety of situations and cargoes. The Club's Carefully to Carry book on cargo handling and carriage is a detailed guide for masters, chief officers and shoreside personnel on difficult or potentially problematic cargoes. Updates on both cargoes and regulatory and other problems are distributed through the Club's weekly Loss Prevention Bulletins. These loss prevention initiatives are among those presented in the Club's information sheet "Loss Prevention Initiatives" which is available from the website www.ukpandi.com or from your local Club contact.

Further information on these loss prevention services can be obtained from Karl Lumbers at the Loss Prevention department in London. Tel: +44 20 7204 2307 e-mail: karl.lumbers@thomasmiller.com

Loss prevention subjects feature extensively as a specialist section of our Club website

The site hosts an eBook library of the varied loss prevention titles produced by the Club. These range from strategic reviews such as Analysis of Major Claims to detailed practical assistance such as Carefully to Carry. The Club's pioneering work in this field such as pre-employment medical examinations, the crew risk management programme, educational videos, good practice posters and the investigative unit - Signum Services - all feature in detail on the website.

The UK Club was named "Marine Insurance Provider" of 2003 at an awards ceremony in Shanghai on 4th December 2003. Herry Lawford, Service Director at Thomas Miller P&I, received the award on behalf of the Club from Mr. Zhang Liping, Executive Director of Cosco.

The finalists for this award were drawn from nominations submitted by readers of Lloyd's List Maritime Asia and Lloyd's List worldwide. The final selection was made by a panel of judges based in Asia. They included R Kondoh of the International Association of Ports and Harbours, B Saragih of the Indonesian Shipowners' Association, J Y Yu of the Singapore Shippers' Council and the shipping analyst Matthew Flynn.

Commenting on the award, Herry Lawford said:
"This is a great achievement for the UK P&I Club and one which pays tribute to the commitment and enthusiasm of all those in our offices not only in Asia, but around the world. This past year has been a demanding one for the marine insurance industry, during which the P&I clubs as a whole have shown significant professionalism and resilience. Everyone contributing to the P&I clubs' standing in such times should be congratulated." The UK Club has won the "Best P&I Club" title at previous Lloyd's List Maritime Asia Awards ceremonies in 1999 and 2000. No such category was included in the 2001 and 2002 ceremonies.

The awards ceremony was attended by 450 of Asia's leading shipping industry figures. The award for "Best Tanker Operator" was sponsored by the UK Club. It was presented by Herry Lawford to Hong Kong's World-Wide Shipping.

On 16th February our Club's website was re-launched with a new look.

Many visitors to our website are looking for answers or service on a specific area e.g. an answer to a loss prevention or technical query; seeking out a particular Club contact; guidance on cover or operational issues etc. For that reason we have built 'silos' of information in four key areas:

• About P&I
• The UK P&I Club
• Loss Prevention
• Members' Area

We would greatly appreciate your comments on how helpful or easy to use you find the site. Your opinions would be useful guidance on the future development of our online services.

Any Member requiring further information on this subject should contact Nick Whitear Tel: +44 20 7204 2334 e-mail: nick.whitear@thomasmiller.com

The UK Club made a donation to the international seafarers' charity Missions to Seafarers rather than sending Club Christmas cards to members, brokers and other friends.

The Mission to Seafarers, formerly called The Missions to Seamen, cares for the spiritual and practical welfare of all seafarers regardless of nationality or faith. It operates through a network of chaplains, staff and volunteers in 300 ports worldwide, visiting them on their ships, offering a welcome and whatever help may be needed. The mission run centres in over 100 ports where seafarers can relax away from their ships, get local information, find help with problems and telephone or e-mail home.

More information on the Mission to Seafarers can be found on their website www.missiontoseafarers.org.