Report and Accounts
Over the past twelve months the steps we have taken to ensure further strong progress in our financial performance have proved successful. Enhancements made over the last two years to the way we estimate and project the cost of claims have meant that claims have developed overall within earlier forecasts. At the same time our decision to maintain our existing investment strategy while market conditions remained uncertain has helped us achieve an overall investment return of more than $45 million (8.7%) on our liquid assets. Together these measures have been the principal reasons for an increase in the Club’s net assets to a record level of $693 million and an increase in our free reserve to nearly $183 million. These highlights also reflect other factors which have not only contributed to a more robust financial position for the Club than for some years but which also give us confidence that the momentum of our improving financial performance will be sustained in the longer term. Of particular note is our decision to continue the process of the last two years of strengthening our financial provisions for claims that have either not been reported fully or reported at all. This has already had a positive impact on our combined ratio for 2010. Of similar impact is our on-going determination to improve policy year underwriting performance. For this year’s renewal Members with high risk exposure and persistently adverse records were not renewed where the required premium levels were not met. This has resulted in improved underwriting prospects for 2011. The consequent reduction in entered tonnage has been more than outweighed by the resulting significant strengthening in the Club’s capital position and overall risk profile for 2011. Our strategy remains to grow our mutual business conservatively from year to year, but your Board sees little merit in growth in entered tonnage or size as an end in itself especially if the risks associated with any new business are not compatible with the interests of our long-standing Members.
The claims experience for 2010 has been positive when compared with the very high cost years in 2006 and 2007. Claims numbers for the Club’s Members have continued at the lower levels experienced during 2009 although the frequency of larger losses has increased. This trend has been observed by a number of Clubs and so may reflect a recovery in trading prospects and freight rates in a number of sectors during 2010. Early indications for 2011 appear more in line with 2009. Claims numbers remain low and the frequency of larger claims is down. So far as other Clubs’ Pool claims are concerned, there seems little sign for now that costs are again rising. After a benign year in 2008, 2009’s figures have stabilised at about $230 million, well below the comparable levels for 2006 and 2007. Current indications for 2010 are also satisfactory. In the meantime, the impact on Group Clubs from the destruction of the ‘Deepwater Horizon’ oil platform in the Gulf of Mexico has been limited. Reinsurance costs for the Group’s excess of loss reinsurance arrangements were barely affected by the disaster for the 2011 renewal, and there has been no discernable demand for any increase in the $1 billion limit of cover for oil pollution that has applied for many years. So far demands in the United States for substantially increased limits of liability for pollution claims have not materialised.
The generally positive recent claims and investment experience does not mean that volatility is any less of a challenge as we move into a new decade. As always your Board will continue to keep under close review whether or not our investment strategy continues to be the most appropriate and robust to preserve our capital. The detailed strategic analysis conducted in 2009 and reaffirmed this year concluded that a diversified asset portfolio should be retained with no change in the neutral position for fixed income and cash of 65% with 15% for absolute return funds and 20% for equity. Sovereign debt risk in a number of European Union countries and concerns about growth and inflation in major world economies will continue to contribute to uncertainty in investment markets at least in the short term.
So far as claims volatility is concerned, little can be done to counter the effect of the random incidence of larger losses although the impact can be moderated by effective reinsurance arrangements. The Club’s commitment to the Pool and the International Group’s reinsurance programme remain fundamental so long as the cost-effectiveness and scope of cover that they provide continue to be without commercial equal. For 2011 there has been no further uplift in the Club retention following the increase to $8 million in 2010. This means that the Club’s own reinsurance arrangements for limiting volatility within the Club retention have been renewed for 2011 on similar terms as applied for 2010.
The operation of the Group’s reinsurance captive, Hydra, has also been largely unchanged. It continues to undertake risks on behalf of the Group by reinsuring 25% of risks within the first layer of the Pool’s reinsurance programme, and by reinsuring risks which affect the upper layer of the Pool. That participation has been increased for 2011 from $20 million to $30 million reflecting an increase in the Pool retention to $60 million.
A significant concern this year, in relation to the International Group’s claims sharing arrangements through the Pool and reinsurances nevertheless continues to be the European Union’s enquiry into aspects of the operation of the Pooling Agreement and the International Group Agreement (IGA). At a recent conference in London, the head of the EU case team observed that the Commission’s investigation is not intended to destroy the Group or to question the mutuality of Group Clubs: the aim, we are told, is to ensure that all ship owners benefit from effective competition and to improve the system. Quite what this may mean in practice is not known. Group Clubs have already provided extensive data in response to requests for information and have been acknowledged for their full and effective co-operation with the case team, but what conclusions if any will eventually be drawn will not be clear for some time. We must, however, hope that the manifest benefits of the system will not be jeopardised as a result of this enquiry.
During the year we have made good progress in the steps we are taking to meet Europe’s new solvency rules (Solvency II). These are not now scheduled to take effect until 2013 at the earliest, having originally been scheduled for 2010. A fifth quantitative impact study (QIS 5) was carried out in 2010. QIS 4, conducted in 2009, had been expected to be definitive in calibrating solvency requirements and it is probably unrealistic to hope that there will be no further modifications before implementation. Calculations from QIS 5 demonstrate that the Club’s capital position at February 2011 comfortably exceeds its capital requirement.
As always, ship owners continue to face sustained external threats to their business and to the welfare of their seafarers. Most obvious for some time now is piracy. Industry’s efforts to eradicate the activities of Somali pirates have been largely unsuccessful due largely to the geo-political complexities of the area. Although there has been a reduction in piracy in the Gulf of Aden, the number of attacks has escalated further afield into the Arabian Sea and Indian Ocean. Most seriously, some attacks have now resulted in loss of life amongst those held hostage and ransom demands have increased substantially. Close adherence to recommended best practice when transiting the region, and now, it appears, the use of armed guards which hitherto has been resisted may have some impact in reducing the risk. However, in the absence of determined and unified political and military will from flag state governments to enforce the right to ‘freedom of the high seas’ the threat will not be eliminated.
During the course of 2010 the imposition of sanctions has increased. Not only have sanctions regulations been tightened by the United States and European Union in relation to Iran, but new sanctions have been applied to the Ivory Coast and Libya. The legislation has been confusing, complex and wide-ranging and the impact varied. The clear consequence for ship owners and their insurers is
that trading with prohibited persons or in prohibited cargoes cannot be continued. This has required us to limit or cancel cover for a number of long-standing and valued Members of the Club.
In last year’s report, I made reference to attempts from the salvage industry to increase payments made under the 1989 Salvage Convention to make better provision for salvor’s efforts to protect the environment. The International Salvage Union (ISU) has proposed that salvors should be entitled to a separate award for operations in relation to ships or cargo that prove a threat to the environment. A similar concept of ‘liability salvage’ was debated at length when the Salvage Convention was being negotiated but rejected in favour of Articles 13 and 14 of the Convention and the subsequent introduction of the Special Compensation P&I Clause (SCOPIC). SCOPIC itself is an effective mechanism for paying salvors for preventing or minimising damage to the environment. The International Group and International Chamber of Shipping have repeatedly stressed their support for maintaining a robust and viable salvage industry and have long felt that the present regime works well in providing it, but the ISU, in 2010, sought a review of the Convention through CMI - the Comité Maritime Internationale. Generally speaking, there is little appetite or perceived need for change within the industry for a system that appears to be working well. It is not clear how much progress has been made but the Club’s view remains unchanged. The initiative is unnecessary and misconceived.
The intractable nature of some of these problems makes the role of international maritime organisations as important as ever. Your Club and indeed all Group Clubs have through the International Group continued to play their part in seeking solutions. Other maritime organisations like the International Chamber of Shipping and BIMCO, who are international in character and represent a wide cross section of the world’s owning community, continue to play an important part as well. They do so in close co-operation with the IMO so that coordinated pressure can be maintained on national governments where appropriate to minimise the consequences of poorly thought through initiatives that adversely affect ship owners.
Last year I made clear that the strategic development of the Club in the coming years is to continue to be conservative in uncertain times. As usual your Board considered this year whether or not our plan should be modified. We concluded that the nature of our business requires us to remain focussed on continuously improving our capital base and aiming for excellence by delivering the very best cost-effective service for our Members. This means that any growth in our business must be consistent with these objectives. As I have said, it also means that we are prepared not to renew Members at premium levels which do not reflect their risk exposure. Furthermore, we still see no advantage in providing alternative products for our Members which are widely available elsewhere and which would require separate and additional capital.
During the year we have made further progress in re-shaping our claims teams in London and in our offices in Hong Kong and Piraeus. We have upgraded our website and more particularly, launched our extranet last September. We are confident that the comprehensive on-line access to data about claims and records for our Members and their brokers is the best that is available in the industry.
During the year Ludwig Criel retired from the Executive Committee and from the Board. He deserves special mention because as Vice-Chairman since February 2003 and Chairman of the Audit and Risk Committee since February 1996, he has made an outstanding contribution to the Club. His measured and forensic approach to our affairs for more than 20 years will be greatly missed. Messrs Humoud Al-Ajlan, Chen Hongsheng, Hristo Donev and Kevin Sheehan also retired during the year. They too contributed their time generously to the Club for which I and my colleagues are grateful. Since my last report, Birgit Aagaard-Svendsen, Francis Sarre, Nick Notias and Mohammad Al-Otaibi have joined the Board. We are delighted to welcome them and look forward to benefitting from their knowledge and experience in the coming years.
As always I would like to express my thanks to all my colleagues for their continued support for the Club during the year, and in particular to all our Members whose steady commitment to the Club in uncertain times is very much appreciated by us all.
Finally, on behalf of the Board, I would like to extend a word of thanks to Peter Spendlove for his untiring commitment to the Club and to his team of Managers who have continued to work with skill and dedication. I remain confident they will enable us to meet the challenges of our industry and our Club with determination and enthusiasm.