Aon’s Mid-Term Review on P&I Clubs Highlights Earnings Turnaround

October 12, 2010

“In a massive reversal of fortunes, P&I clubs [Protection & Indemnity] have seen a collective investment return of $619 million for the year ending 20 February 2010, compared with a more than $800 million loss in the 2008/9 policy year,” according to Aon’s P&I Mid Term Review.

As a result Aon forecast that, barring “any external factors of seismic proportions, market conditions are likely to restrict the upper level of any general premium increase at the February 2011 renewal to 5 percent.”

Aon added, however, that, “while most P&I clubs have ridden the wave of a bullish equities market to rebuild their Free Reserves, which collectively stand at an all time high of $2980 million, storm clouds on the financial horizon could threaten to capsize this recovery.” In consequence “most clubs are taking a ‘steady as she goes’ investment approach so far with no knee-jerk reactions to the European sovereign debt crisis.”

Aon continued to warn, however, that, “while investment income is a useful source of capital to enhance free reserves, it is a poor substitute for underwriting discipline.”

Stephen Griffiths, director of Aon Risk Solutions’ marine team, commented: “It is hardly surprising that a sharp downturn in world trade during 2009 should have produced fewer ‘routine’ P&I claims. What is more difficult to explain is the sudden relief in the number and magnitude of so called ‘pool’ claims (individual claims in excess of $8 million) in 2008, even while the shipping markets and ship employment remained and even reached their peaks.

“This reduced trend in pool claims was repeated in 2009, albeit with the year starting fairly badly and seeming set to level off some way north of 2008, but well below 2006 and 2007.”

In this context the very poor results of 2006 and 2007 appear to be more random in nature as opposed to a “new norm”, as some were predicting.

He added that “looking forward to the 2011 renewal, much improved P&I market conditions on the back of more than ten successive years of general increases indicate a more benign renewal season.

Those clubs with sound technical underwriting results and restored free reserves should be in the position to set their general premium increases at or near zero. Some will undoubtedly argue the need for modest general increases to counter the effects of general inflation and will Endeavour to ‘talk up’ future claims as the shipping markets continue their apparent to return to relative normality.”


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