Report and Accounts 2012
In my review last year, I described some of the measures that we have been taking to further strengthen our financial performance and in particular our underwriting results.
It is gratifying to report that this year’s figures clearly demonstrate that they are proving effective with a further significant improvement in our overall combined ratio to below 109%. Of particular significance was our decision not to renew a number of Members with high risk exposure and persistently adverse records at the February 2011 renewal. The positive effect on the frequency and severity of claims from our Members this year has been remarkable. Not only have we recorded fewer claims for the 2011 policy year than for any year since 2000, but we have also seen a substantial reduction in the number of larger claims, a trend which appears to be on-going in 2012. This satisfactory outcome has been complemented by continuing stability from earlier policy years. Our Members’ claims, particularly for 2009 and 2010, have developed favourably and have enabled our projected claims costs for those years to be reduced without compromising the strength of our projections for claims that have not been reported fully or reported at all.
On a less positive note, two incidents which have received widespread publicity even outside shipping circles had a disappointing effect on our performance. The two large casualties from other Group Clubs involving the containership RENA and cruise vessel COSTA CONCORDIA are of such severity that each is a full claim on the Pool. Together they also absorb the entire extent of risks that Group Clubs retain within the first layer of the Group’s excess of loss reinsurance contract. As a result Pool claims from other Group Clubs for 2011 are more expensive than initially expected.
The investment market was also particularly difficult. Unresolved anxiety about sovereign debt in the Eurozone and in particular the economic and political fate of a number of euro States created great uncertainty as the year progressed. These factors combined with increasing demands for a more conservative investment policy resulted in a modest return of only 2% on our assets overall.
Despite these concerns, the overall free reserve at year end has been maintained at a little under $180 million, a reduction of only some $3 million from the figure a year ago. The improved underwriting position and lower risk profile which results from our planned reduction in entered tonnage in 2011 mean however that the Club’s overall capital position is now stronger than a year ago. Our coverage of solvency margins under existing rules, and, more importantly, under Solvency II which we still expect to enter into effect within the next two years has again increased in line with the financial objectives we have set in our business plan.
Looking ahead it is difficult to see when some of the external financial challenges affecting our business might moderate. As usual your Board has kept our investment strategy under close review. During the year we decided to reduce our exposure to risk assets by lowering the overall level of equities that we held at the beginning of the year. The commitment to maintain a diversified asset portfolio has not however been radically changed reflecting the conviction from our investment advisers that all asset classes carry significant downside risk in such uncertain times.
Your Board, as usual, has also reviewed the Club’s long term business strategy. The need to further improve the underwriting result remains central to this strategy, but growth, service quality and diversification are important on-going themes. Notwithstanding the reduction in tonnage at renewal last year, the Club has since seen organic growth in mutual entries from existing members and new business of about 5%. The continuing provision of high quality service has been a key component in the choice of the West of England for this new business, particularly from existing Members. Nevertheless there is no doubt that premium levels across our industry remain under pressure and in particular continue to be affected by the rating of new tonnage at lower rates than for tonnage that is replaced. Therefore, diversification in terms of new products and new services built around core P&I cover features strongly within the Club’s longer term strategy, but only where it contributes positively to the Club’s financial strength and meets Members’ cover and service needs. Diversification for its own sake or into markets or activities which are already over-subscribed will not add value especially if the risk threatens to erode the Club’s capital position.
Financial considerations apart, other issues have preoccupied us over the past twelve months. A year ago, I commented on the European Union’s enquiry into aspects of the International Group’s claims sharing arrangements through the Pool and the International Group Agreement (IGA). It had been hoped from remarks made publically by the head of the enquiry team last summer that the review would be concluded by the end of 2011, but that expectation has not been fulfilled. As things stand today the enquiry remains in progress and is in the hands of a new case team. However, there are indications that a conclusion will be reached during the next few months. It must be hoped that the outcome will be satisfactory and will not jeopardise the very real benefits that the Group’s claims sharing system has delivered so successfully for so many years.
During the year piracy has continued to present a serious and intractable threat to the welfare of seafarers and the commercial interests of Members whose vessels regularly need to transit areas of piratical activity. Industry efforts to eradicate the scourge particularly of Somali pirates have not been successful reflecting the extreme difficulties in policing so wide an area of lawlessness and the inability of governments to agree a common policy. Close adherence to recommended best practice when transiting the region has had some impact in reducing attacks, but more practically, it appears, the recent more widespread use of armed guards is continuing to have a positive deterrent effect. The successful adoption of the BIMCO sponsored standard form contract (GUARDCON) for the engagement of on-board guards has also materially benefitted the industry by outlining in a single clear and internationally acceptable form the basis on which guards, whether armed or not, may be deployed on commercial vessels. Attacks against vessels sailing with armed guards have so far
Another difficult subject has been whether or not Group Clubs should delete the war risk exclusion in standard Club cover and provide primary cover for war risk and terrorism liabilities from the ground up. For many years Group Club cover has included excess war risk P&I protection, but the risks have been fully reinsured with the commercial market as part of the Group’s excess of loss Pool reinsurance programme. The issue has become more pressing in part because of the perception that the threat to world shipping from terrorist acts has been increasing steadily. At the same time, despite the fact that primary war and terrorism risks are excluded from Club cover, Clubs are in reality already exposed to them through the provision of certificates of financial responsibility (“Blue Cards”) for the CLC and Bunkers Conventions. If a Club is in fact liable for losses by virtue of issuing certificates, there is an argument that it would be better that it should provide the cover as well, or, alternatively, should it rely on the Member or his war risk underwriter to indemnify the loss guaranteed by the Club in accordance with the Blue Card? Group Clubs have not so far answered the question but the demand for Blue Cards will increase as new Conventions take effect. The assumption by regulators and others is that Group Clubs will automatically continue to respond to those demands regardless of the wider implications. The assumption may prove to be wrong as Clubs carefully consider the complex issues surrounding this debate in the coming months.
In last year’s report I made reference to the increased imposition of sanctions against a variety of countries by the US and European Union. Measures taken a year ago against Libya and the Ivory Coast have been relaxed, but more stringent prohibitions against Iran are set to enter into full effect by July 2012. Specific provisions to prohibit the trade and transportation of crude oil, petroleum and petro chemical products have already had far reaching consequences for individuals and companies in the EU and on board EU ships. The prohibition of any form of insurance or reinsurance by any EU insurer will also have a significant impact on shipowners from outside the EU. Measures of this kind are often confusing and complex, and their impact is varied, but the consequence for practically all our Members irrespective of the flags they fly is that trading with prohibited persons or cargoes cannot be maintained. At a time when trading prospects for virtually all shipowners are already under strain, this additional constraint will not be welcome however laudable the political objective.
On a more positive note, I referred two years ago to the likely revision by the IMO’s Legal Committee of the limits of liability under the 1976 Limitation Convention. Momentum for the review was largely as a result of pollution caused by the PACIFIC ADVENTURER off the Australian Coast in 2009. Australia had proposed that the tacit amendment procedure within the Convention to increase limits of liability should be used to maximum effect. Support for their position was provided by New Zealand following the loss of RENA in 2011, but rather than applying the permitted maximum adjustment compounded since 1996, a compromise uplift was agreed in April this year. The compromise was based in part on statistical evidence from the International Group to the effect that of all reported claims that were subject to the Convention since 2000, only 2% had values that exceeded the existing convention limits, so the necessity for the maximum adjustment appeared unsupportable. The benefit of the outcome for shipowners is obvious; but equally beneficial is the evident success of the co-operative approach that characterised the debate with the IMO. As I have noted before, your Club and indeed all Clubs through the International Group strive to play a part with other international maritime organisations like BIMCO and the International Chamber of Shipping to maintain pressure in appropriate circumstances on national governments to make initiatives that affect Shipowners measured, sensible and achievable.
Since my last report we have continued the process of re-shaping and enhancing our claims teams in London and in our offices in Hong Kong and Piraeus to support our objective of delivering the very best cost-effective service for our Members. The upgrading of our claims department in Tower Bridge Court in London was completed last Autumn. It has been very well received by our claims teams and our Members. Our extranet, which provides comprehensive on-line access to Members’ claims and underwriting data through the Club’s website continues to set the industry standard.
During the year Anthony Cooke retired from the Executive Committee and the Board, having served with distinction as Chairman of the Audit and Risk Committee. His dedication, widespread knowledge of all aspects of the industry and indeed his sense of humour will be missed by us all. In May Tomas Dyrbye also retired from the Executive Committee and the Board. He was generous with his time on behalf of the Club and his wise contribution greatly valued. Geoff Woodford also retired from the Board at our meeting in May. However, in accordance with the Club’s Corporate Governance Charter, on the recommendation of the Board, he has allowed his name to go forward to the Annual General Meeting in September for re-election as a Director whose abilities and knowledge may make a significant contribution to the work of the Board. This unusual procedure reflects the fact that the Board considers his particular experience and knowledge of P & I issues will continue to be of great benefit to our Members for at least another year.
I am pleased to welcome Kiril Domuschiev, Iakovos Perantinos and Liu Guoyuan who joined the Board during the year. We look forward to benefitting from their advice in the coming years.
As always, I would like to close by thanking all my colleagues for their continued support and guidance in what continue to be demanding times. I would also like to express my appreciation on behalf of the Board to our excellent team of Managers. They represent the face of the Club around the world and their skill and dedication in providing excellent and responsive service in an increasingly complex maritime world is key to the success of our Club.