Underwriting discipline in the marine protection and indemnity (P&I) sector will be tested over the February 2016 renewal period due to market and competitive forces buffeting the sector, according to report published by A.M. Best.
Free reserves are at record levels, the ratings agency said, while the clubs’ ship operating owners still face challenging commercial conditions and are looking to reduce costs. At the same time, the report added, insurance market competition is intense, exacerbated by a growing fixed premium market offered by insurance companies – all forces that are putting rates under pressure, A.M. Best added.
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, said the report titled “P&I clubs under pressure while cost of claims continues to increase.”
A.M. Best noted that, historically, this balance has been supported by the use of investment income, not only to enhance free reserves, but also to subsidize weak underwriting results.
However, this strategy has been challenged by changing regulation and an investment environment characterized by low interest rates and volatile equity markets, the report said.
Over the past five years. most clubs have sought to achieve break even 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, A.M. Best noted.
“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,” according to Catherine Thomas, senior director, analytics.
“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,” she continued. “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 expected that most clubs will enter the 2016-2017 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 capitalization, partly as a result of the implementation of Solvency II in the European Union, the report said. “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.”
A.M. Best said the International Group benefits from the “clearer articulation of risk appetite,” as well as the “improvement in governance and enterprise risk management standards.”
Thomas added: “The next 24 months are set to be a testing period for the P&I clubs. Overall, capitalization 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, characterized by volatile loss experience and inflationary pressure on the cost of claims.”
Source: A.M. Best