Author: Wayne Godfrey
One of our leading Marine P&I insurance specialists, Wayne Godfrey, caught up with Mr. Shizuo Takahashi, Director General of JPI, to discuss all things JPI, International Group Agreement (IGA) Clubs in Japan and the ever-changing market conditions.
Q: Can you explain the rationale about the change in loss record format and the benefit this will bring to Members of the Club?
Takahashi: JPI will change the insurance loss record index for ocean-going vessels that will take effect from the policy year 2022. The purpose of these revisions is to provide more clarification and transparency to the Members, so that they obtain a more comprehensive loss record.
The Club will no longer use the gross loss ratio as an index for calculating the insurance risk of each Member. Although this index shows the claims trend of individual Members, it does not indicate the direct and indirect costs for underwriting, and therefore does not indicate the net loss record including the costs. Instead of gross loss ratio, the Club will use the net loss ratio as a new loss record index. Net loss ratio makes it possible to understand not only individual Members’ claims trends, but also their contributions towards the expenses needed for placing their insurances more clearly.
The Club will also introduce a risk sharing system called ‘Abatement’ as a formal operational rule. In this Abatement system, all Members of the Club share and contribute towards the insurance claims payments in the Abatement layer, which is an amount set within the Club for large and unpredictable accidents. This system is based on the principle of mutual insurance. While the Members have already been contributing towards the payment for large and unpredictable accidents, the Club is making these contributions more transparent. The advantage of sharing a risk by Abatement is mitigating a sudden deterioration in the loss record of an individual Member that caused a large accident, as well as avoiding sudden fluctuations in premiums despite the accident.
A loss record previously covered the total of five and a half years, including the five policy years most recently completed and a half year of the ongoing year. A loss record will now cover the six years most recently completed, and the record of the ongoing year is indicated separately. If there is a major change in the loss record in the ongoing year, it will be taken into consideration at renewal for the next policy year.
We believe these revisions will bring benefits to the Members, providing more clarification and transparency.
Q: With so many IGA Clubs in Japan, your home territory, what are your thoughts on the Japan Club developing international business?
Takahashi: Last year, the Japan Club marked the 70th anniversary since its establishment in 1950, specialising in dealing with P&I accidents for its members. In the P&I insurance market, where competition is intensifying year by year, we are truly grateful for the support and cooperation of all of our Members in our position as the one and only IGA Club head-quartered in Asia. We will continue to strive to improve our services with new determination, so that we will become the P&I Club of choice, supported by Members for a long time to come.
We have started laying the foundation for further development and improvement in the future. The need for P&I insurance has diversified in recent years as the shipping industry has undergone structural and qualitative changes due especially to stricter environmental regulations. We must respond to this change in need swiftly and appropriately so that we can continue to be the P&I Club of choice, not only in Japan but also in other parts of the world. One of our strategic purposes is to increase the number of high quality contracts in the international market. The ratio of sales generated outside of Japan has increased steadily in recent years, and now accounts for roughly 17% of the insurance premium for the P&I mutual insurance, especially with a strong customer base in Asian countries including China, Korea, Taiwan and Singapore. Although our efforts to develop and expand international business have been temporarily hindered by the COVID-19 pandemic over the past two years, we are determined to pursue this strategy steadfastly going forward.
Q: The effects of pool claims in the past few years are being highlighted across the industry - how is the Japan Club dealing with this?
Takahashi: The magnitude of each pool claim has been increasing throughout the IGA recently, with claims exceeding the Club retention of USD10 million. We recognise fewer but heavier Pool Claims as an alarming trend, which is partly attributable to factors such as the growth of mega-sized ships, authorities' punitive stance towards ship-owners for incidents, and increasingly expensive wreck removal costs. Our Club is not an exception to this trend and there has also been an increase in the number of, not only medium and large sized claims within the retention, but also Pool Claims received by the Association. As a result, costs due to pool contributions, as well as retained claims within the Association, have both been on the rise in the past few years. To combat this trend, the Japan Club has been focusing on raising its members' safety awareness through various loss-prevention seminars and publication of safety circulars. To this end, we will also continue to work closely with the IGA going forwards.
Q: Due to the previous soft market cycle leading into the current market environment and intensifying competition, premiums have been eroded over the past several years. How is the Japan Club dealing with this?
Takahashi: While the amounts of Pool Contributions are on the rise, insurance premium income has been decreasing. One reason for this is a drop in average insurance premiums for newly entered vessels due to competition with other Clubs in the market. These factors forced many Clubs to increase their insurance premiums from the policy year 2020 due to deterioration of their underwriting results. It also led Japan Club to take a step, which was not taken lightly, to introduce general increases in ocean-going vessels insurance for 2020 to 2022 renewals inclusive. By doing this, we wished to ensure the balance of revenue and expenditure for the Association, and thus our financial soundness. We understand that the general increase might have been a burden on the Members, but many Members were very understanding and supportive in the past renewals, which is greatly appreciated. We hope we will be able to complete the up-coming renewal successfully as well.
As a result of these efforts, S&P Global Ratings recognise the Japan Club has strengthened the capital by the added reserve. In order to provide stable insurance services to our Members, we will endeavour to improve our capital further and acquire an A rating, and will do our utmost to stay the Club of choice well into the future.
For further market analysis and an overview of the individual P&I Clubs, read our 2021 Marine P&I Pre-Renewal Review.
The opinions and views expressed in the above articles are those of the contributor and author only and are for guidance purposes only. The authors disclaim any liability for reliance upon those opinions and would encourage readers to rely upon more than one source before making a decision based on the information.
