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While it’s hard to predict how COVID-19 will affect marine protection and indemnity mutual insurers, shipowners, including cruise lines that have been hit hard by the pandemic, may incur liability claims and extra expenses that could trigger P&I coverage, experts say.
The 13 clubs that make up the International Group of P&I clubs and between them cover 90% of the world’s ocean-going tonnage may also see investment returns slump more than other insurers, adding impetus to future price increases, they say.
Investment and underwriting losses may lead to higher insurance rates when most P&I accounts renew, they say.
P&I clubs are specialty insurers that cover liability exposures associated with operating ships and other vessels. Most accounts renew on Feb. 20, traditionally the date when the Baltic Sea was deemed to be free of ice and safe to cross.
For P&I cover to be triggered for COVID-19-related exposures, the claims “need to arise from or be incurred as a result of an outbreak onboard a vessel, not just the possibility of an outbreak or the fear of an outbreak,” said Mark Cracknell, London-based head of P&I at Marsh JLT Specialty.
As an infectious disease, COVID-19 is most likely to trigger claims from shipowners arising from their liability to passengers and crew, including illness and death claims, as well as repatriation and substitute expenses, and quarantine expenses, he said.
“A lot of expense has been incurred in many areas, not just crew, which may be covered by the P&I system, depending on the circumstances and willingness of clubs to extend coverage on a discretionary basis,” Mr. Cracknell said.
COVID-19 has exposed some differences in the coverage provided by individual P&I clubs, particularly for quarantine expenses, so shipowners should check the rules of their specific clubs, he said.
Cruise ships are the “most obvious source of COVID-19-related claims,” but not all clubs cover cruise ships and so the impact is likely to be uneven, Mathilde Jakobsen, director, analytics at A.M. Best (EU) rating services in Amsterdam, said in written comments.
Doral, Florida-based cruise operator Carnival Corp., which owns Princess Cruises and the Holland America Line, is under scrutiny and facing passenger lawsuits regarding its response to COVID-19 outbreaks aboard several of its ships, including the Grand Princess and Ruby Princess.
Carnival Corp. is a member of three P&I clubs: Gard, Steamship Mutual and the UK Mutual Steam Ship Assurance Association, or UK Club, Ms. Jakobsen wrote.
The UK Club declined comment for this story.
Passenger risk has received much media coverage and several clubs are handling “significant claims,” Mr. Cracknell wrote in an online briefing on P&I coverage.
In its quarterly financial report filed April 3 with the Securities and Exchange Commission, Carnival said it has insurance coverage for “certain liabilities, costs and expenses related to COVID-19” through its participation in P&I clubs.
This includes coverage for direct and incremental costs, such as “certain quarantine expenses and for certain liabilities to passengers and crew,” Carnival said.
“There is a $10 million deductible per occurrence (meaning per outbreak on a particular ship). We cannot assure you that we will receive insurance proceeds that will compensate us fully for our liabilities, costs and expenses under these policies,” the cruise line said.
Carnival said it has no insurance coverage for loss of revenue or earnings from its ships or other operations.
Liability claims above $10 million are shared between members of the International Group of P&I clubs, through a claims pooling arrangement.
“Additionally, the group buys reinsurance cover up to $3.1 billion in the open market,” Ms. Jakobsen said.
All covered claims up to $100 million are pooled by the clubs and do not affect the reinsurance market coverage under the group excess of loss program, Nick Shaw, London-based CEO of the International Group of P&I Clubs, said in an email.
“Above that the group has an annual aggregate deductible for the first $100 million of any claims which go above the $100 million pool claims limit. It is still too early to say whether any COVID-19 claim will breach this barrier,” Mr. Shaw said in the email.
Aside from claims, investment market volatility will hit the P&I sector’s financial returns because P&I clubs often have a “higher appetite” for investment risk than other nonlife commercial insurers, Ms. Jakobsen wrote.
“The drop in equity markets seen in late February and March 2020 will therefore have a significant impact on earnings and capital for many of the clubs. However, most of the clubs entered this crisis with very strong solvency levels,” she said in a written response.
Both the impact from claims and the hit on investments are “easily manageable within the current financial strength of the system,” Mr. Cracknell said.
Investment losses and claims may put pressure on pricing in the balance of 2020, experts say.
But it “will depend on the exposure of individual clubs to these kinds of claims,” said Joe Hughes, Westport, Connecticut-based CEO of American Steamship Owners Mutual P&I Association Inc.
“Perhaps those clubs that tend to be more heavily invested in the big cruise ship sector might find that they have more exposure in that particular area that might therefore lead them to take a view with regards to the rating of large cruise ships potentially,” Mr. Hughes said.
“We expected the investment losses that many clubs will have suffered to put further momentum behind the positive price increases we were already seeing in the P&I market,” A.M. Best’s Ms. Jakobsen said in a written response.
Most shipowners saw general premium increases at the February 2020 renewal after more of the clubs reported poor results for the prior year.
“We expect further general increases to be announced for the February 2021 renewal, to address both the clubs’ technical deficits and the investment losses suffered so far this year,” Ms. Jakobsen wrote.
Most clubs have been issuing circulars and alerts with advice on best practices during COVID-19 on various issues, Mr. Hughes said.
More insurance and risk management news on the coronavirus crisis here.