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P&I clubs increase pool retentions to $7 million

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LONDON—Protection and indemnity clubs have increased their retentions in a claims-sharing pool in a move that some of the mutual insurers hope will improve underwriting and help expose substandard risks.

This year's increase in retentions to $7 million from $6 million may be followed by $1 million annual hikes until the retention reaches $10 million in 2010, if the 13 members of the International Group of P&I Clubs agree on that proposal.

Shipowners, meanwhile, are not likely to see any impact on the price they pay for coverage as P&I club retentions increase, market sources say.

The pool, run by the International Group, pays claims above the club's own retention and up to $5.4 billion for the 15 member clubs, which write liability coverage for around 90% of the world's shipping risks.

Whether that retention rises again remains to be seen.

"There is the expectation that it will be revisited, but it is hard to predict if it will move to $8 million in February 2008," said Just Arne Storvik, chief financial officer of Gard A.S., an Arendal, Norway-based P&I club that supports future increases in the retention.

That decision will be made by a working group established by the International Group to review the issue of retention levels, according to Andrew Bardot, the International Group's secretary and executive officer. "No decision has been taken on a further increase for 2008," he said.

Arguments for and against

Among the arguments some clubs put forth for raising the retention is that it will cause the clubs to improve their technical underwriting standards as they take on more risk, Mr. Storvik explained.

The Standard Club supports the increase. "In our view, the arguments for are more persuasive than the arguments against," said Alistair Groom, chief executive of Charles Taylor & Co. Ltd., the London-based company that manages The Standard Club. As for future increases in the retention, "our position is to look at it year by year," said Mr. Groom. "But yes, in principle, we support a gradual increase."

Not all the clubs see it that way.

Charles Hume, chief executive of Shipowners Protection Ltd., the London-based manager of The Shipowners Club, said his club hasn't taken a position on whether future increases are needed. "It's a question of seeing how the increase of $1 million actually works," before taking a position on raising the retention to $8 million and beyond, he noted.

Lars Rhodin, deputy managing director of The Swedish Club in Gothenburg, Sweden, said further hikes in the retention are not necessary. P&I clubs already have plenty of incentive to spot and reject substandard risks, he said. The Swedish Club is "pretty content at this level," Mr. Rhodin said of the $7 million retention. "The level today is enough to give the right incentive for underwriting discipline."

Some protections against claims from substandard risks entering the pool already are in place, Mr. Rhodin pointed out. Claims related to ships that are found not to have met minimum quality standards are subjected to a "double retention" of $14 million under rules put in place by the International Group in February. If deficiencies in the ships are not rectified, further claims will be denied.

In today's active global trade market, "ships are being run hard," Mr. Storvik of Gard pointed out, and some can deteriorate in between surveys that determine their seaworthiness. "It's been very hard to find concrete measures to do something about it," he said of the substandard issue, and that is why some clubs hope the higher retention will lead to more careful underwriting.

Mr. Bardot of the International Group said the increase wasn't entirely driven by the need to raise underwriting standards.

By moving it to $7 million, the group was able to keep the retention in proportion to reinsurance attachment points and limits that have also risen, he noted.

Regardless of whether retentions continue to rise, there is likely to be little impact on rates shipowners pay for coverage.

"All things being equal, it will not make a big difference," said Mr. Groom of Charles Taylor.

"Rates run according to record, capacity and availability" and won't likely be affected by retention changes, Mr. Hume agreed.

Mr. Storvik said the retention increase is expected to have a "neutral effect" with regard to rates and has more value in making sure prudent underwriting decisions are made.