Q&A on Board decisions: October 2007

General increase

A. The general increase is set to cover the increase in the expected claims for 2008. The experience of Pool claims in 2006 and the claims figures after six months of 2007 mean that we have to project claims in 2008 at the same level.

A. 2006 Pool claims are now expected to be more than $550 million, at a cost to the UK Club of nearly $90 million. More detailed commentary on the claims picture is in the UK Club newsletter on claims factors.

A. No. Each club is affected proportionately and the UK Club's share is reducing because of its good record (see Q&As 19-22).

A. Although it was generally predicted that the high levels of ship utilisation and the increased world fleet would create an equivalent increase in claims, the dramatic increase, in particular in Pool claims, was not evident in the statistics until the second half of 2006. Early experience on 2007 indicates that 2007 policy year claims may be even greater than 2006.

A. It is true that after only six months it is impossible to predict accurately the eventual 2007 claims outcome. But if 2007 turns out as projected and this level of claims is continued into 2008, the Club would have three consecutive years of heavy deficits. Although the reserves are there to protect the Club against unexpected claims increases, the Board's policy is to set future calls at the level required to cover expected claims.

A. The Club's policy has been to seek to avoid unbudgeted supplementary calls whenever possible. Even if a supplementary call were made to reduce the anticipated deficits on 2006 or 2007, the general increase would still be required to lift 2008 premium levels to match the expected 2008 claims.

A. The Directors have power under the Rules to declare a mutual dividend in respect of any policy year at any time before it is closed. Under normal circumstances, a decision on the 2008 policy year is unlikely to be made until the year is ready for closure (in May 2011).

A. The Swiss Re contract has already provided protection against the effect of the claims experience of 2006 and deficits in earlier years providing a recovery at 20th February 2007 of $54 million. Recoveries under this part of the Swiss Re contract have reached their limit and future recoveries under this contract will depend on the actual experience of large claims in the five years from 2005 onwards. There is currently a reasonable likelihood of further recoveries from Swiss Re if claims in 2007 and 2008 follow the pattern set in 2006.

A. The Group Pool reinsurance programme covers claims in excess of $50 million. Out of a total of 31 claims affecting the 2006 Pool, only four exceed the Pool retention. The record on the Group reinsurance contract remains satisfactory. Conversely, the upper Pool layer (claims between $30-$50 million) which is reinsured by Hydra since 2006 has a bad record. It is therefore expected that there will be an increase in Hydra premium for 2008.

A. Hydra is the International Group's captive in Bermuda which reinsures both the upper Pool layer and the retained proportion (25%) of the first layer of the Group's reinsurance contract ($500 million excess of $50 million).

Hydra charges a reinsurance premium to the Club which is added to the reinsurance costs of the Group reinsurance programme reflected in the fixed cents per ton element of each member's premium.

A. The Club's investment income to 20th February 2007 at 10% exceeded the investment returns budgeted in the Corporate Plan. The resulting surplus (after Swiss Re recovery) was transferred to reserves. Investment income to 30th September (including the impact of the credit market disturbances) is at 5% and the Board is taking steps to consolidate this return for the year end. Targeted investment income for 2008 is 5% in line with long-term investment returns, and was taken into account when the Board set the level of general increase.

A. Renewal rates will be adjusted on record in the usual way after application of the general increase. However, the Pool surcharge will be added automatically to the resulting rate in the same way that any increase in reinsurance costs is added.

Pool surcharge

A. The Pool surcharge is a flat percentage (12%) of each Member's 2007 premium net of fixed reinsurance costs (ie the Club's retained premium).

A. The Pool surcharge will be added to each Member's 2008 rate after this has been adjusted for the general increase and any further adjustments for record or changes in risk. This is the same principle that the Club has applied to increases in reinsurance rates.

A. The application of the Pool surcharge will be automatic in the same way as an increase in reinsurance rates. The actual loss record and other underwriting considerations will still be relevant to the assessment of the renewal rate before application of the Pool surcharge.

A. The Pool surcharge is designed to provide for the expected cost of Pool claims in the lower Pool ($7-$30 million) in the light of the experience of Pool claims in 2006 and the expected continuation of Pool claims at this level in 2008. These claims do not appear in Members' records for underwriting purposes (and most will come from other clubs in the Pool not even our own Members). When allocating this cost to all Members, a percentage of each Member's premium net of reinsurance costs reflects the cost of Pool claims more fairly than either a percentage of total premium (the traditional basis for the general increase) or a fixed rate per ton (the standard basis of charging reinsurance costs).

A. The Pool surcharge is in some ways equivalent to an increase in reinsurance costs just as reinsuring underwriters would increase the reinsurance premium if their loss record was bad as the Pool experience has been. Even though this justifies a common rate of increase for all members, the basis for allocating the increase should still be the underlying risk each Member brings to the Club as reflected in his rate net of reinsurance costs.

Pool operation

A. The Pool is made up of two layers $6 million (2006) $7 million (2007) - $30 million (the lower Pool) and the $30 - $50 million (the upper Pool). Each club's share for the lower Pool is based on the one third formula. This provides that a club's share is calculated as to one third on the basis of the club's percentage proportion of the total tonnage in the Group for the policy years in questions; one third on the basis of that club's percentage proportion of the total premium in the Group for that year; and one third on the basis of that club's own claims as a proportion of all claims on the Pool. The claims proportion of the formula is based on a rolling 20 year claims record. The formula also provides for a loss ratio adjustment which is based on the historical record on the Pool back to inception in 1970.

Contributions to the upper Pool layer are pre-funded and premium for this layer is set by the Hydra Board based upon figures suggested by the Group claims data model.

A. Each club's share of the Pool is calculated on a provisional basis at the start of each policy year and adjusted thereafter at regular intervals to reflect actual data until the final proportions are fixed four and a half years after the policy year.

A. The UK Club's record on the Pool has been improving over the past few years and it will be helped considerably by its own claims experience on the 2006 Pool. The effect of the Club's improving loss ratio has contributed to a drop in the UK Club's Pooling percentage for the 2006/7 policy year from 17.14% in August 2006 to 15.09% one year later. The UK Club's provisional estimated share of the lower Pool for the 2007 policy year is 14.5%.

A. The operation of the one third formula and the loss record adjustment means that all clubs pay proportionately to their share of the one third formula adjusted to reflect their loss ratio. All clubs will therefore be affected by the 2006 claims experience proportionately, subject to these adjustments. The UK Club's actual share of the Group tonnage for the 2007 policy year is estimated to be 16% whereas its proportion of the lower Pool for 2007, adjusted for loss ratio, is 14.5%.

Release call policy change

A. Not necessarily. The policy of the Club is still to avoid making unbudgeted supplementary calls whenever possible. However, in the light of the claims experience in 2006 and its likely continuation in 2007, the Directors decided to change the policy so that the rate of release call reflects the relative maturity of the year's development as is common in other Clubs.

A. The Managers have discretion whether to assess a release call if there are ships remaining on risk within the same fleet. If assessed for a release call by the Managers, the Member may elect either to pay the release and be released from all liability for supplementary premium or to provide a first class bank guarantee for the amount of the release call and remain liable to pay all calls as and when due. The bank guarantee would be reduced as each policy year is closed and returned following closure of the last open year.