September 22, 2006.
WEST OF ENGLAND CLUB SETS COURSE TO DOUBLE FREE RESERVES AND COMPLY WITH “SOLVENCY 2” AHEAD OF TIME.
The Board of the West of England Ship Owners Mutual Insurance Association (Luxembourg) agreed earlier this week a number of initiatives to secure the Club’s long-term future funding requirements and protect members’ interests well ahead of the European Union’s proposed “Solvency 2” directive.
“Solvency 2”, which is likely to be fully implemented by 2010, will significantly increase the levels of capital likely to be required by mutual insurers.
The West of England P+I Club estimates that the Club’s current free reserves of some USD 133 million will have to be nearly doubled to meet the revised regulatory requirements.
Peter Spendlove, the West of England’s Managing Director, states that “The Board has decided that a policy of ‘wait and see’ will be neither effective nor appropriate in addressing the new regulatory requirements in the two or three years which remain before they apply”.
He also comments that long term claims trends are likely to be affected adversely by increasingly volatile liabilities – larger more complex ships, higher cargo values and more costly third party liabilities. The prospects for investment income also look uncertain.
Set against a background of an increase in industry tonnage in the past 6 years of some 30%, yet a largely unchanged position so far as total net assets and free reserves for the P&I industry over the same period, he believes that the time to act is now if owners are to expect a soft landing as “Solvency 2” comes into force.
Accordingly, the West of England Club has decided that current “Release Calls” set at 15% for the open policy years 2004, 2005 and 2006 will now be called as additional calls.
As set out in the Mutual’s Report and Accounts, dated 20th February 2006, these releases were set at USD 21.1 million and USD 22.7 million for 2004 and 2005 with a forecast of approximately USD23.0 million for 2006. Traditionally, individual policy year release calls are not usually charged as underwriting shortfalls are met out of investment income or reserves in line with industry practice. These calls in aggregate are calculated to increase the level of the Club’s overall free reserves by more than USD65 million at February 2007.
The West of England Board has also decided not to make further allocations of investment income while the initial steps to meet future funding requirements are taken.
Additionally, to bring the Club’s capital and reserves to a position that is calculated to more than adequately meet the forecast requirements of “Solvency 2” a further “Release” call will be set equating to some USD 55 million. The Board has decided that this call, which represents around one third of this year’s current net premium income, will not be payable at this stage but periodic reviews of the overall financial position will be made in the run up to 2010, particularly future underwriting results, which may make all or part of the call unnecessary.
Releases set traditionally for unforeseen contingencies remain in place and are unaffected by these initiatives.
Peter Spendlove concludes that “The steps we have taken will, I believe, provide the Board with the maximum flexibility in the run up to “Solvency 2” to determine what level of call will eventually be required to fully protect today’s Members’ interests, and ensure that the Club is well positioned to comply with long-term regulatory demands.