A.M. Best Special Report: P&I Clubs Under Pressure While Cost of Claims Continues to Increase
February 08 2016 - 3:00AM
Business Wire
Underwriting discipline in the marine protection and indemnity
(P&I) sector will be tested over the February 2016 renewal
period. Free reserves are at record levels, while the clubs’ ship
operating owners still face challenging commercial conditions and
are looking to reduce costs. Competition is intense, exacerbated by
a growing fixed premium market, and rates are under pressure.
The P&I market remains dominated by members of the
International Group of P&I Clubs, which as mutual insurers
operating for the benefit of their members, have to balance the
need to maintain their financial stability with the fiscal
constraints of their membership.
In its new report, “P&I Clubs under pressure while cost of
claims continues to increase,” A.M. Best notes that, historically,
this balance has been supported by the use of investment income,
not only to enhance free reserves, but also to subsidise weak
underwriting results. However, this strategy has been challenged by
changing regulation and an investment environment characterised by
low interest rates and volatile equity markets. Over the past five
years. most clubs have sought to achieve breakeven underwriting
results by pushing through rate increases, introducing minimum
deductibles and increasing deductible levels. As the clubs enter
the 2016 renewal period, pressure from members and brokers to
justify price increases is growing.
Catherine Thomas, senior director, analytics, said: "In general,
the cost of claims continues to increase due to an upward trend in
shipowners’ liability limits and technological advances that now
allow deep water wreck removal. In contrast, A.M. Best has noted
that the frequency of small to medium-size claims has fallen in
recent years. A slowdown in world trade has led to fewer voyages by
ships, lower cargo volumes and less competition for experienced
crews, all of which would be expected to reduce the number of
claims. However, when the global economy begins to recover, there
could be a corresponding increase in the frequency of loss events,
and pricing decisions made now should reflect the prospect of
higher claims frequency, as well as claims inflation."
A.M. Best expects most clubs to enter the 2016-17 policy year in
a good financial position. Reported balance sheets at year-end
February 2015 demonstrated record free reserves and overall balance
sheet strength is likely to be maintained through to year-end Feb.
20, 2016.
P&I clubs have developed a better understanding of their
risk-based capitalisation, encouraged by the implementation of
Solvency II in the European Union. Most have clarified their
appetite for underwriting and investment risk, and clubs now have a
better understanding of the impact on capital of various realistic
scenarios.
Catherine Thomas added: “The next 24 months are set to be a
testing period for the P&I clubs. Overall, capitalisation is at
a robust level. However, faced with the prospect of only modest
investment returns, the sector will need to report near breakeven
underwriting results if current levels of free reserves are to be
maintained. A.M. Best believes that this will be difficult to
achieve with premium rates under competitive pressure and in a
challenging claims environment, characterised by volatile loss
experience and inflationary pressure on the cost of claims.”
To access a complimentary copy of this report, please visit
http://www3.ambest.com/bestweek/purchase.asp?record_code=246035.
A.M. Best is the world's oldest and most authoritative
insurance rating and information source. For more information,
visit www.ambest.com.
Copyright © 2016 by A.M. Best Company,
Inc. ALL RIGHTS RESERVED.
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version on businesswire.com: http://www.businesswire.com/news/home/20160208005223/en/
A.M. BestCatherine Thomas, +(44) 20 7397
0281Senior Director,
Analyticscatherine.thomas@ambest.comorEdem
Kuenyehia, +(44) 20 7397 0280Associate Director, Market
Development &
Communicationsedem.kuenyehia@ambest.comorJim
Peavy, +(1) 908 439 2200, ext. 5644Assistant Vice President,
Public Relationsjames.peavy@ambest.com