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The drive from protection & indemnity clubs to push through double-figure premium increases at upcoming renewals should be tempered by the financial dire straits of many shipowners hit by Covid-19, according to Arthur J. Gallagher & Co.
In a review of the P&I market ahead of February 2021 renewals, Gallagher said mutual clubs looking for premium increases of between 5% and 12.5% cannot make up for four consecutive years of zero growth in the general increase during one renewal season.
Gallagher said clubs should start with an increase at the bottom end of the range this November and follow with four smaller annual increases. Gallagher conceded that premiums are considered by some insiders to be as much as 20% underpriced.
“This cannot be made up in one or even two years in the current environment, where shipowners are probably struggling financially more than the clubs themselves,” said Malcolm Godfrey, Gallagher’s executive director of the marine P&I division.
“As we have been discussing with club management following their results, it is not feasible for all clubs to extend the current terms through to 2022, allowing shipowners/operators to focus on their businesses. Unsurprisingly, this suggestion was met with a rather frosty reception,” Mr. Godfrey explained.
He added that the general increase traditionally used by P&I clubs at renewals has been abandoned by four clubs. Gallagher has heard that a couple more are considering dropping the general increase at the next renewal round.
The broker said that although P&I premium increases are needed over a four-year period, abolishing the general increase “makes this process less transparent”.
“The question of the general increase for the forthcoming year is not so much whether, but how much and for how long? Will such increases be matched with sweeteners such as returns of capital or contingent returns of premium? We would imagine these niceties may be reduced in value or eliminated unless the financial outlook continues to improve,” Gallagher said.
The International Group of P&I Clubs reported underwriting losses of $500 million in 2019-2020, after several consecutive years of zero general premium increases. “Combined ratios have spiralled upwards,” Mr. Godfrey said. They are running at between 115% and 120%, but are higher in some cases. Only Steamship Mutual recorded profits in 2019-2020, with a combined ratio below 100%.
At the same time, P&I losses are running at a record high. Pool losses have exceeded $400 million for the past two years. The first six months of the current year have already booked losses of about $300 million. Pool losses from the active U.S. storm season are still to be added before most clubs’ year-end in February 2021. Gallagher said the record losses at the half-year stage follow just 11 claims by 20 August 2020.
“That already makes it one of the worst years in the past decade and there are still six months to go, including the traditionally costly north Atlantic winter,” Mr Godfrey said.
“On top of the pressure created in the last three to four years by premium inadequacies, the clubs are looking at an explosive start to the year’s pooling losses and curtailed investment earnings due to Covid-19,” Gallagher said.
The broker said P&I clubs’ combined ratios have held up to Covid-19 turmoil in the first six months of their financial year, running at similar levels to 2019-2020 at about 110% to 115%. Covid-19 claims in the sector have yet to emerge with any force.
The International Group of P&I Clubs was saved in the 2019-2020 year by an investment result of $768 million, booked before Covid-19. This offset underwriting losses of $497 million, to record an overall positive result of $223 million.
Gallagher also said P&I clubs largely weathered the investment turmoil storm caused by Covid-19 and recorded net investment yields of about 2% to 2.5% as of September 2020.
Commercial Risk Europe is a sister publication of Business Insurance. More stories from CRE here.
Nine of 13 mutual insurer marine protection and indemnity clubs that are part of the International Group of P&I Clubs will increase rates at the upcoming renewal for shipowners for the 2020-21 policy year, ratings agency A.M. Best Co. Inc. said Thursday in a report.