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LONDON-Shipowners are winding up with a smaller exposure to catastrophic claims in the wake of E.U. pressure on protection and indemnity clubs.

The International Group of P&I Clubs, which represents 14 of the shipowner mutuals that insure some 90% of the world's merchant shipping fleet, has been threatened with a possible loss of its exemption from E.U. antitrust rules if it does not alter how it pools shipowners' exposures for large claims. Karel van Miert, the E.C. competition commissioner, has expressed concern about the current practice, especially in light of protests by some members.

In February 1996, the International Group introduced a so-called overspill limit of 20% of a shipowner's reserve fund, which under their arrangements for pooling losses created an aggregate exposure for members of the International Group of about $20 billion (BI, Jan. 15, 1996). Overspill refers to general losses that exceed the International Group's reinsurance coverage. Those losses currently are pooled among P&I club members.

Previously, club members had unlimited liability for claims over the reinsurance limit.

However, while the 20% overspill limit was designed to limit that exposure, some individual P&I clubs and shipowners associations balked at the International Group's limit, arguing that it was still too high and could bankrupt a number of shipowners (BI, Aug. 19, 1996).

The Greek Shipping Cooperation Committee, an association of shipowners, wanted an overspill limit of only 1% or 2% and complained to the E.U. competition commissioner about the 20% limit, saying it was not only too burdensome but also that it left shipowners with too great an exposure to the losses of others.

However, earlier this month at one of their regular meetings, P&I club managers agreed to a significant reduction to a 2.5% overspill limit. That would reduce the aggregate liability of the International Group for any loss exceeding the $2 billion of reinsurance to about $2.25 billion.

This lower limit still needs to be individually adopted by club boards, but last week the Steamship Mutual Underwriting Assn. (Bermuda) Ltd. and the London Steam-Ship Owners' Mutual Protection & Indemnity Assn. both adopted the 2.5% limit.

John Riley, International Group chairman, acknowledged last week that the 20% limit was a compromise that was never wholly acceptable to all the group's membership, and he expects the remaining clubs to endorse the 2.5% limit.

John Lean, chairman of Steamship Mutual, said: "We believe that the overwhelming majority of shipowners in all group clubs will feel able to support this revised formula and that, as such, it will be acceptable to the European Commission."

However, the European Commission has not only taken issue with the overspill limits but also with the International Group Agreement, which governs the transfer of shipowners from one P&I club to another.

The agreement means that if a shipowner decides to move to a new club within the group its rates with the new club for the first year will be based on its claims record with the previous insurer. Effectively, the rule discourages movement of shipowners between clubs to obtain a better rate.

Richard Youell, a Lloyd's of London marine underwriter who is involved in the International Group's reinsurance program, defended its overspill limit and its IGA. He said shipowners can still move between clubs and that he believes competition still exists between them, though they are competing mainly on the level of service they offer shippers.

The European Commission has disagreed with the International Group's claim that the agreement is necessary to protect the International Group's system for pooling claims.

The P&I clubs were granted a 10-year exemption from E.U. competition rules in 1985 and, though they have continued to operate normally since this exemption expired, they are now trying to win an extension from the competition commissioner. Last month, the commission issued a "Statement of Objections" to the International Group, saying it breached E.U. competition rules by setting a liability limit, rather than allowing club members to chose their own individual limits.

Mr. Riley said the International Group is preparing its response to the commissioner's objections, though he expected to meet with Mr. van Miert beforehand. He said there is no specific timetable for meetings, but hopes for a meeting by the end of July or early August.