Report and Accounts.pdf
Chairman's Statement 2007
For the past two years I have made reference to two concerns which continue to have an immediate and direct effect on both our own Members and the P&I industry as a whole. The first, which is of particular impact, is that the substantial rise in both the frequency and severity of large claims in the industry has continued. The second, which is reflected in regulatory change anticipated within the coming years, is that most, if not all, Group Clubs will have to carry progressively higher surplus capital margins than have been considered necessary or appropriate in the past to cover claims liabilities and operating risk.
The financial measures which your Board implemented last September are a major step towards meeting these challenges. Not only have total net assets increased this February from $551.9 million to $658.8 million, but, more significantly, free reserves are up by more than $72 million from $132.5 million to $204.7 million. Your Board will continue to keep the Club's required capital margin under careful review. In particular, future underwriting and investment results over the next two years will determine whether or not all or part of any remaining call set last September for 2006 will be necessary.
Also on the positive side, the overall investment return on total assets for the year at more than 12% was very satisfactory and exceeded our expectations.
On the other hand the cost of claims involving the International Group's Pool for 2006 is projected to exceed our original forecasts substantially. Indeed, it now seems inevitable that for 2006 Group Clubs will be faced with the most expensive year in the Pool's history. This follows 2004 and 2005 which are likely to be the second and third most expensive years, and confirm your Board's view that since 2003 P&I claims appear to have undergone a step change when compared with the start of this decade.
The reasons for the escalation in the cost of claims can be complex and varied. Two elements are no doubt of particular significance. First, the increase in the size of ships and the extraordinary strength of the world's freight markets, sustained now for a number of years, has greatly increased the values of the world fleet and the cargoes that are carried. Although sustained profitability is a cause for satisfaction for shipowners, where either cargo or vessels are damaged or lost, liabilities based on their increased values and any loss of use are substantially higher than in the past. At the same time regulators and governments are less tolerant of any environmental impact or damage that is associated with the operation of ships. It is no longer acceptable anywhere in the world to avoid the consequences of any kind of maritime casualty especially where loss of life, personal injury, wreck removal or damage to the environment are concerned.
The on-going strength of world freight markets and the increasing volume of world trade make it highly likely that the overall cost of claims will continue to rise for the time being. Long-term weakness in the value of the US Dollar also continues to have a negative impact not only because some 30% of the Club's claims are incurred in non-Dollar currencies but also because annual administrative costs are largely in sterling. The result is that premium income in future will have to continue to increase to levels that meet these new demands. As advised in December, when setting the Club's strategy for the 2007 renewal and future policy years, your Board reaffirmed that the level of premium to be charged shall as far as possible balance forecast claims costs and operating expenses. Investment income shall then be available to further strengthen the Club's overall free reserves. Implementation of the strategy was applied rigorously for the 2007 renewal with the result that premium income on renewed entries is about 10% higher for the year. A consequence of a more stringent approach to renewal is that mutual tonnage entered in the Club for 2007 is down by about 12.5% from about 63 million GT to about 55 million GT. However, your Board believes that this reduction in the Club's relative size may prove beneficial if it ensures that premium rating levels for all our Members will match the likely cost of future claims and expenses now and in the long-term.
Apart from the direct and immediate impact of more frequent and more severe claims, we continue to face other less immediate but nevertheless profound challenges to our mutual system. For a number of years national and international initiatives have been underway which will inevitably increase the liabilities to which our Members are exposed. Changes to the Civil Liability (CLC) and Fund Conventions were finally implemented during 2006 with the introduction of a new voluntary agreement from shipowners to share equally with oil interests in much higher levels of compensation for the victims of an oil spill (TOPIA).
In October 2006 revisions to the 1974 Athens Convention, which relates to the carriage of passengers, were formally agreed at the IMO. Under the 2002 Protocol per capita liability limits for passenger claims have been substantially increased. Significantly, mandatory certificates of financial responsibility from insurers and direct action for claimants against insurers are likely to be introduced together with the provision that shipowners shall be liable for claims caused by terrorism. This presents Group Clubs with a question to which there is, for now at least, no answer. Can we provide certificates on behalf of passenger vessel operators for war or other risks which we do not cover? A solution to the problem will not be of interest merely to the passenger vessel community. Draft international conventions governing wreck removal, hazardous and noxious substances (HNS) and bunker pollution are set to contain similar provisions. Once in force all three conventions are likely to require certificates without an exemption for liabilities caused by terrorism. Each convention will apply to all vessel types wherever it is implemented and so expose all shipowners to these difficult issues.
Also during 2006, deliberations about the Athens Convention caused Group Clubs and shipowners to focus more clearly than ever on the significance of increased limits of liability generally and their possible effect on the value of the Pool and the International Group's excess of loss arrangements at a time when Group Clubs have retained more risk within the Pool. Your Board has been concerned that account should be taken of the fact that liabilities at the lower end of the Pool are escalating at the same time as the risk of an overspill liability at the upper end of the Pool is increasing. Overspill exposure today extends from $2 billion, the limit of the Group's reinsurance programme, up to about $5.7 billion based on the volume of tonnage entered in Group Clubs and the value of the US Dollar. For this reason, your Board has felt for some time that it is essential that the arithmetic of overspill should be looked at again. Increased liabilities for passenger risks and the substantial increase in passenger capacity for new passenger vessels have had a similar effect on other Group Clubs. A number considered last year that the possible scale of loss of life and injury from a casualty involving a large passenger vessel made the passenger risk disproportionate when compared with other mutual risks to the extent that they considered such claims should no longer be covered for overspill at all. For some Clubs the concern was as much in relation to the risks associated with large numbers of crew on passenger vessels as to the number of passengers.
Given the diversity of thinking amongst shipowners within our industry, not all Clubs shared these views, but what was clear by the end of 2006 was that, in order to ensure that the Group's claims sharing system through the Pool was not put at risk through a lack of consensus, a compromise had to be reached. For 2007 Group Clubs have now agreed that two key changes should be made. For all vessels entered in Group Clubs a new $3 billion limit of Club cover has been introduced for passenger and crew risks combined with a sub-limit of $2 billion for passenger risks alone. To ensure that such claims would not be the subject of an overspill liability, the Group also agreed to reinsure the first $1 billion of overspill exposure in excess of the Group's $2 billion excess of loss reinsurance programme up to $3 billion for all P&I liabilities. For those Clubs that considered the passenger and crew risks to be too extreme to be accommodated within the claims sharing system, at least for overspill, the new limit of cover provides an acceptable solution. For those like the West of England who have long argued for a reduced exposure to the risk of an overspill claim of any kind, there is also some satisfaction. The overspill obligation for 2007 is technically unchanged but the first $1 billion of the overspill risk for all claims is now reinsured so that effectively the financial exposure of shipowners to overspill has been substantially scaled back.
The imposition of higher limits of liability and a number of well publicised casualties has continued to focus attention on ship standards. The eradication of sub-standard shipping remains an industry wide priority. As I have said before, certificates of entry from an International Group Club are tickets to trade worldwide. We will continue to support any practical measures that may be taken to discourage poor quality operators from having access to them. Consequently, with effect from February 2007, any Club which provides cover to a vessel which has been designated by the International Group as being in unacceptable condition is obliged to bear a double retention of $14 million in the event of a major claim.
In my last report I mentioned that one consequence of the drive to improve ship standards is that liabilities arising from discharges of oil residues or oily water overboard are not likely to be reimbursed even in cases of accidental discharge. Since then it is disappointing to note that cases of this kind have continued to occur despite the probable absence of Club cover. Where efforts are being made on behalf of shipowners to challenge what appear to be questionable initiatives by national legislators, for example to criminalise seafarers, the industry's ability to counter unilateral measures such as those proposed by the European Union is undermined if basic lessons are not apparently being learned.
Your Board and our Managers will continue to work hard on these difficult issues in the coming year. In the autumn we shall complete a new five year business plan. It is not likely to contain any radical proposals, but will aim to further enhance our ability to meet the different demands on our industry and our Members in the future. We shall also complete a review of our Corporate Governance principles and practices. There may be changes to the way the Board and its committees are structured so that we meet the highest standards now expected of corporations in many parts of the world.
Since my last report Messrs George Coumantaros, Khalil Al-Gannas, Bernard Sire, Li Shao De and George Kynigos have retired from the Board. On behalf of the Directors I would like to thank them all for their valued service to the Club. In particular I would like to express my great appreciation to George Coumantaros for his commitment and dedication for over 34 years as a Director, 29 of which he has served with distinction as Vice-Chairman. My colleagues and I will miss not only his wise counsel, but also his excellent and irrepressible sense of humour.
During the year Mary Sloan, and Messrs Humoud Al-Ajlan, Kishore Rajvanshy and Sergey Terekhin have joined the Board; we wish them a very warm welcome.
Finally, may I also thank our Managers on behalf of the Board. Their continued professionalism and dedication will help to ensure that the Club is fully prepared to meet a challenging future.
Stephen Van Dyck