5 minute read
The cost of sustainability
Sustainability costs money
Like ignoring ESG challenges, the idea that P&I clubs have too much money is very ‘last decade’ argues Ed Davies Chief Financial Officer, North P&I Club
There are few organisations with histories as long as P&I clubs. The mutual P&I system seems almost by definition sustainable and one which we all may take for granted at times.
Through the years, some clubs have been lost along the way, leaving us with the inauspicious number of 13 - the question of whether 13 is too unlucky a number and that there are too many clubs is best left for another day.
Yet when news of major shipping casualties hit the screens of our various devices, we know that the mutual P&I system will respond with alacrity and proficiency to protect the environment, shipowners and other third parties along today’s hugely complex global supply chains, notwithstanding the financial cost.
CALL THAT VOLATILITY?
And the financial cost is real. The incidents that P&I clubs are involved in where the environmental and social consequences are severe – the types of incidents that many people are aware
In 2019/20, only one club out of 13 avoided an underwriting loss. For any other sector of the insurance market, a “hard” market would have been triggered some time ago.
of from the news – are relatively rare, albeit not rare enough.
They are also very expensive and a small number of such incidents can dominate results across the market. Standard & Poor’s signalled their alertness to the market experience of 2020, and, if the events so far are anything to go by, 2021 looks like it will offer little comfort.
We might think of the natural catastrophe reinsurance markets as volatile and of course they are, triggered by those supposedly one-off “1 in 100-year” events that seem to happen every two or three years.
P&I clubs are a blend of insurance for outsized claims that occur a few times each year and attritional claims that happen in their thousands. This explains how combined ratios across the International Group for 2020/2021 ranged from 101% to 150%.
The year 2019/2020 saw results nearly as stomach-churning to the financially minded of us – from the just-over-theline 99.8% to 137%. That variability in results means that P&I clubs require healthy levels of capital.
By way of comparison, the headline-worthy experience following COVID-19 interruption claims and an “abnormally high frequency of natural weather catastrophe events” pushed Lloyd’s of London’s property line to the dizzying heights of 135% on an accident year basis.
The Marine, Aviation and Transport line reported results over the last five years between 90% and 119%, much better and less volatile than P&I clubs have been reporting yet sufficient to put marine liabilities under the spotlight.
TIME FOR A “HARD” P&I MARKET
Underwriting results in the P&I market for 2020/21 were consistent in one sense – we all lost money on our underwriting books. In 2019/20, only one club out of thirteen avoided an underwriting loss. For any other sector of the insurance market, a “hard” market would have been triggered some time ago.
If we are honest with ourselves, we all saw this coming. As rates steadily reduced by more than 30% in recent years, even as exposures grew, we have often returned to our essential raisons d’etre and supported our shipowner members as they navigated difficult times themselves.
And shipowners are also club-owners. They have every right to demand value and support from their P&I club. Equally, shipowners recognise the unparalleled role that the P&I system plays and that it is too important to be imperilled.
A “hard” market in P&I terms means fair premiums which support the clubs and the wide-ranging support they provide, as well as share the risks and financial consequences of incidents that could happen to any shipowner. Expensive pool claims and reinsurance programmes are essential to the system but becoming increasingly costly to maintain.
INVESTMENT INCOME UNDER PRESSURE
Ed Davies, North P&I Club
income only just kept the P&I system afloat. And that was a year when a typical P&I club achieved 6% to 7% in investment returns. At this point in the cycle, even a P&I club portfolio – typically rather “racy” compared to the mainstream insurance market – has nowhere to go to seek those levels of return.
The 10-year average for returns is closer to 4%. In very rough numbers this represents a US$300m shortfall for our market compared to last year when clubs earned something near to $700m yet nonetheless lost money overall.
It would take a brave CFO at present to forecast more than 1% to 2% in their business plans with equities uncertain and rising yields pushing down the value of our extensive bond portfolios. This is not a funding gap for the market to plug by tinkering with operating results but more of a yawning gulf of $500m to $600m.
SUSTAINABLE INVESTMENT
The whole industry is judged on the response to major incidents which are on public view worldwide. That response relies on the network of support that today’s P&I system provides. This comes from correspondents and on-the-ground response teams through to the expertise and financial resources that P&I clubs make available combined with the backing of a unique reinsurance programme.
P&I clubs work together through the International Group to promote sustainable objectives, improving safety at sea and protecting the marine environment. It is a unique system of collaboration – amidst ruthless underwriting competition – which could only have grown up over many years of continual support and guidance from shipowners.
Whether we call it a “General Increase” or not, we hope that shipowners will understand the need to support their P&I club – an investment in the club that they own and in the sustainability of the P&I system as a whole.
