P&I Clubs Must Overcome Investment Addiction Says Aon Report

August 25, 2009

In a new report Aon suggests that P&I [ Protection & Indemnity] clubs only “need to increase premiums by 0-7.5 percent despite the surge in high value claims in 2006 and 2007 and the steep decline in investment income for 2009.”

In its “P&I Mid-Term Review” Aon said it “believes the unprecedented effects of the global credit crisis have acted as a warning for clubs to increase underwriting discipline and cut their over reliance on investment income. Reduced shipping activity should also reduce claims levels and bring more stability to ship owners’ premiums.”

The Review explains how the inflated incidence of high value claims (individual claims in excess of $7 million) in 2006 and 2007 “were random and not aligned to a particular trend. The values for 2008 and 2009 have dropped considerably but the inter club pooling mechanism failed to cater for the volatility of a concentrated surge of activity followed by relative inactivity over a short space of time.”

In addition this trend “was coupled with the credit crunch,” which has created an adverse effect on the P&I clubs investment performance. Many clubs are over exposed to equities and are reporting substantial losses.

Stephen Hawke, head of Aon’s marine liability team, commented: “The flight from equity to cash and bonds was for many clubs too little too late: the P&I landscape resonated to the crashing of barn doors as the horses disappeared over the horizon.”

Some clubs have decreased their investment portfolio risk profile and while future returns will be low single digit, they should be positive. Despite this remedial action, 7 out of the 13 clubs have made unbudgeted refinancing calls over this last year.

“P&I clubs can’t be blamed for the unpredictable but can grasp control of their own underwriting and investment strategies. The inability to predict the inherent volatility of the modern world – random years of very high value claims and falling investment markets – is excusable. What is not is a persistent inability for clubs to control the controllable by continuing to run underwriting deficits, while the comforting safety net of investment income had been rudely cut away,” Hawke continued.

“Aon has consistently preached the virtues of underwriting discipline and warned of the addictive vice of investment income dependency. More accountability needs to be placed on offending operators rather than relying on the easy socialistic opt out of general increases. This should be effected through our recommendation of more modest general increases of 0-7.5 percent at the 2010 renewals.”

Source: Aon – www.aon.com

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