Needless to say, it is important that the International Group of P&I Clubs are consistent in their approach to cover, not least for the purposes of maintaining the integrity of the Pool and the wider International Group reinsurance programme. A working group has been set up for the purposes of reviewing associated claims with COVID-19 and, at its heart, one rule should and fundamentally will apply across the industry
Crucially, however, Clubs and Owners should not lose sight of the fact that, as mutual insurers, the members are the stakeholders to whom Club management are accountable. Indeed the very nature of the system is geared to be as inclusive as possible, with discretion pervasive and the Omnibus Rule a cornerstone of this.
Should a loss not fall squarely under the rules, but be of a P&I nature, and one which any member may reasonably face during the course of operation of an entered vessel, an owner may appeal to the Club’s Board to support the loss. We do not expect a deluge of such claims but, in short, the shipping community should be reassured of the support that the International Group have and can provide to them as we all navigate our way through the numerous challenges being faced by the industry.
Over the last few weeks and months a multitude of questions have been raised by our clients regarding the wider implications of the pandemic, not on the shipping community, but on the P&I Clubs themselves. We reflect on a number of these below:
How will my Club be impacted financially by COVID-19, this year and in the future?
The finances of individual Clubs within the 13 will be differently impacted by COVID-19 related market falls and any investment and exchange losses in 2020-21. Most Clubs will have enjoyed good investment returns at the end of 2019, but more important will be the extent to which they de-risked their investment portfolios during that year.
This de-risking may have been because of expectations of the impact of COVID-19, or simply because investment managers felt that equities were overpriced and overdue a fall. Most likely it was the latter, but for example Shipowners Club enjoyed a good investment return in the year to 31 December 2019 whilst reducing its equity holdings from 22.5% to 15% during the year as well. Both Standard and North of England have recently announced that COVID-19 related market losses have been limited to under 2%. It will be interesting to see the market wide experience later in the year.
These challenges also come at a time of increased operating pressures across the board and it is notable the recent announcement from Standard that they will be moving the management in house, and away from Charles Taylor. Furthermore, we understand that the Standard & Poors’ outlook for the Club has been amended from ‘A stable’ to ‘A negative’ which they largely attribute to an unusually high exposure to Pool claims in the 2019 policy year and impact of this on their Combined Ratio. They are not alone in posting a Combined Ratio in excess of 120% and we wonder whether there will be further announcements in respect of how the rating agencies view the Clubs as a whole.
We saw in 2008-09 that there were two Clubs (Britannia and North) whose foresight and/or timing in asset management greatly reduced their investment losses during that crash. Equally during the investment recovery in the subsequent 2 financial years there were some Clubs that missed the opportunity to capitalise on the bounce back by keeping lower levels of equities for longer
We expect a similar pattern in the era of COVID-19 investment losses. Whilst we can reasonably assume that all will have suffered negative returns for the first part of the current year, much depends on how their nerve held in the face of mounting losses in March / April, and their approach to positioning themselves for the, hopeful, recovery as the impact of COVID-19 falls back.
But it is not necessarily all bad news on the financial front. For many years now, the Clubs have been encouraged to reduce operating costs, but the financial statements really do not show much success in this regard. But here is an opportunity, forced upon them by a major pandemic, to address this matter across the board.
We are can envisage meeting costs and allied travel and entertainment budgets will fall dramatically in the new era of Zoom and Teams, including shipowner board meeting costs. This is not an inconsiderable sum, although it is difficult to evaluate how much that sum is, due to a lot of the detail being buried in some cases! This aspect of Club life will no doubt come under review for the longer term future as individuals begin to wonder how much they really need to fly to the Far East, for example, as opposed to arranging a conference call.
Working from home this year may result in additional infrastructural IT costs, but will it make the Clubs consider home working as being the norm rather than the exception? Do they really need expensive central London office space for all staff, or can they be more efficient with smaller hot desking type office space, with most staff working predominantly from home? Unfortunately, given the very nature of long term leases on premises, the benefits of this change may not be immediately available
COVID-19 has brought with it a need for a new way of working, where social distancing is the primary driver. How will the P&I industry, the insurance industry and, indeed, the whole city respond when the immediate health driven pressure is off. Will it go back to how it was just 12 months ago, or will we see permanent changes. Will COVID-19 herald the death of the city meeting, the business lunch, the overseas business trip?
Can I request a premium return for a period of commercial inactivity caused by the pandemic…?
Whilst the Club provisions in respect of lay ups and the laid up Rules continue as usual, we have negotiated reduced exposure rebates for some Owners where the trading environment elicits reduced navigational or cargo risks for a prolonged period of time.
Such negotiations are, of course, on a case by case basis and governed by the individual facts and members circumstances, but we would encourage owners to explore this option.
… and how will underwriting performance be impacted?
As with any downturn in trade, whatever the reason, a reduction in shipping activity, both in terms of numbers of vessels and speed of navigation, will have impacts on both the premium levels and the claims levels.
Lay up returns, premium returns negotiated for reduced trading noted above and a knock on reduction in chartering activity will all lead to declining premium levels for the Clubs exposed to these factors. Vessels will also be put to different uses – for example, in an oil market that is in contango, tankers have been used as floating storage units in fixed positions, not actually moving. So, overall premiums should fall, but so does the related risk, and hence in some cases, routine claims, eg cargo or crew claims. But also we should see less navigational errors leading to big collision and FFO claims.
With combined ratios still well above 100% in almost all Clubs who have reported so far, and 125% in the latest two (Standard and North), it could be that vessels not trading in their normal way could lead to better results than “normal” trading”. For example a 50% reduction in premium may lead to the vessel not having a claim at all, which would plainly improve loss ratios.
Whilst reduced levels of trading may positively impact the loss ratio, its impact on the combined ratio may not be so good. The combined ratio includes overhead costs, which may not fall proportionately with premium. With falling premium there is less base against which to absorb the overhead costs, so it is conceivable that loss ratios could fall but combined ratios stay the same or even rise.
The 2020-21 year ratios will need close examination this time next year as they will feature a unique set of drivers. Quite how the Clubs use these statistics in October / November for setting general increases (or equivalent) is at present a great unanswered question.
Turning specifically to individual claims impacts:
What is my Club’s exposure to the cruise industry and how will this likely affect them?
All Clubs will have some direct exposure to the passenger vessel industry in some form or another, whether small day trip vessels, island hopping boats or the largest of cruise ships.
Whilst an increase in claims has been noted for the initial period of the COVID-19 outbreak, the removal of passengers and suspension of operations has also meant that the subsequent exposure to a Club is significantly reduced;
Whilst passenger numbers and exposures have reduced, many crew remain on board with repatriation proving extremely difficult. There are also mental health ramifications to consider and possible claims in respect of these;
Large passenger and crew claims are expected to remain a key feature of the year but it is important to remember that for the larger cruise ships there is, generally speaking, a higher level of risk retention by the owner (up to $10m). This will go some way to cushion the impact on their Clubs and, from talking to Clubs exposed to the sector, we understand that, for some, the cruise ship portfolios have historically been net contributors to the Club.
Steamship Mutual has the greatest percentage of its entered tonnage in the passenger vessel sector with 12%, followed by UK (5%). Swedish, Skuld, Gard, Standard and West of England have less than 3%.
Shipowners Club has 14.3% of its membership in the passenger sector, but, as a small vessel specialist club, this will be predominantly ferries or small pleasure craft, rather than the more exposed large scale cruise ships.
How concerned should I be about the impact of shipowner insolvency on the financial resilience of my Club?
An unfortunate consequence of the extremely difficult trading conditions has been the announcement that some companies have entered insolvency or restructuring proceedings. Whilst this is the case:
- i. It is unlikely that the impact on the insurers will be too dramatic since, if the owners are insolvent and vessels inactive, the normal P&I risk will be fairly neutral;
- ii. As is common under Global insolvency regimes it is also usually mandated that insurance cover must be in place and premium payments prioritised by the administrator; iii.In the case of restructuring, by design the process should actually leave the owner in a more financially robust position as they come out the other side;
- iv.There is arguably a bigger premium credit risk in the associated industries, shore based facilities etc, service companies, crew agencies (furloughs may be tricky) and bunkering companies.
We should, however, also consider the insolvency impact on the indemnities given by owners to the Clubs in respect of MLC risks and Blue Cards. In the case of Bunker and CLC Blue Cards, the Clubs remain liable for these for three months following cancellation so it is conceivable that they may have additional prolonged exposure here, albeit hopefully relatively remote.
Has there been a significant increase in FD&D claims?
Even prior to COVID-19, many opined that 2020 would prove a testing time for the Clubs in terms of FD&D claim volumes and quantum.
Issues surrounding the IMO 2020 Sulphur Cap were anticipated and, whilst some disputes have arisen, as anticipated, the current situation has given heightened exposure to disputes in respect of;
- i. New building delays & delivery
- ii. Safe port
- iii.Force Majeure related
Whilst this is the case, the likely reduction in trade will also likely lead to a reduction in fixture volumes and newbuilding orders. As such, there will arguably be a reduction in potential contracts under which disputes may arise.
By and large FD&D has been a modestly successful class of business over the past 3 or 4 years, as evidenced by those Clubs who produce full financial information split by class, and this view is at least partly corroborated by policy year data from other Clubs. 2020-21 may well be the year when this trend reverses.
To use a somewhat laboured expression, these are indeed unprecedented times but, as each day passes, new precedent is set. It is unlikely that an owner will be entirely without peers in any challenge they may be facing. You are not alone, and we must all remain engaged with each other, whether owner, Club or broker to ensure consistency and to collectively work through those problems that may be encountered. With one of the largest footprints in the market, we are confident that we have a comprehensive overview of difficulties being faced and unparalleled insight into the resolution of them.