In what may seem a break with convention I feel it is appropriate for me to begin this year with a personal tribute to my predecessor, Stephen Van Dyck, who retired in February after 32 years of service as a Director, 22 of which were as Chairman of the Board.
My colleagues and I are greatly indebted to him for his considerable contribution to the success of the Club for so many years. When first appointed to the Board in May 1976 he brought a refreshing sense of vigour, vision and vitality to our organisation which has enabled the Club to develop and thrive through, occasionally, difficult times into the 21st century. Stephen’s strength of personality, clear thinking and integrity made him eminently qualified to prepare us for the challenges that our industry has had to face in recent years and will continue to face. We wish him a long and very happy retirement.
The past year has been far from easy. Although early indications suggest that claims levels for both the Club’s Members and for claims involving the Pool may not be as high as for 2006, which appears the most expensive year on record so far, there seems little reason to believe that the adverse claims cycle which started in 2003 is likely to moderate. This is not surprising. The strength of world freight markets and the increasing volume of world trade in most major commodities and manufactured goods continue to drive asset values to higher levels. These in turn result in higher than ever liabilities which are also adversely influenced by the expectations of national governments and the increasing demands of environmentalists around the world. No one should be surprised if P&I premium levels therefore continue to increase for the foreseeable future.
Increased claims costs have had inevitable consequences for the Club’s financial affairs. Over the past twelve volatile months, it is not surprising that performance has been mixed but there are some optimistic signs. Although since February 2007 the absolute level of free reserves has reduced, the Club’s policy to ensure that premium increases progressively to balance forecast claims costs and operating expenses - even if it means a reduction in the size of the Club - already appears to be showing positive results. Following a reduction in entered mutual tonnage of some 8 million GT between 2006 and 2007 there is some early evidence that total net claims costs may be stabilising. Indeed net outstanding claims at 20 February 2008 have reduced from the total of twelve months ago so that the ratio of free reserves to net outstanding claims over the period is in fact little changed. This is encouraging, especially if the trend can be maintained in 2008. Significant increases in premium levels over the past two renewals have also made a positive contribution to the Club’s capital. Assuming the modified capital margin requirements of the new European Union solvency rules announced in July 2007 remain as they are when they come into force in four years time, this premium growth together with the financial measures taken in September 2006 will enable the Club to maintain those capital margins for 2012 and beyond.
Nevertheless the pressures which our Members and hence the Club will continue to face are not likely to reduce. Uncertainty in financial markets is obviously a real concern. The effects of the credit crisis in both the US and now Europe together with the escalation in the price of oil and other commodities are causing exceptional volatility in investment markets. During 2007 it looked likely that the Club’s investment return would be well in excess of the forecast for the year but extreme volatility in January and February 2008 brought the overall return down substantially as the year came to an end. Persistent weakness in the US dollar also continues to have a negative impact: some 30% of claims and all administrative costs are incurred in non-US dollar currencies. During the next few months the Board will review whether or not the Club’s investment strategy which has served us well for a number of years should be modified, and to what extent the level and scope of external specialist advice which we currently take should be supplemented.
A booming shipping market creates a number of its own challenges. It is increasingly clear, for instance, that a shortage of trained and experienced seafarers is adversely affecting ship operations across most sectors of our industry. This is a serious cause for concern since projected growth in the world fleet is sure to result in continued demand for skilled personnel who cannot be adequately trained overnight. Furthermore, the problem will be exacerbated by the attitude of some legislators. In the European Union the directive to criminalise seafarers for ship source pollution is still set to become law. Fear of criminal prosecution will do nothing to stimulate recruitment in an under-resourced industry. It is therefore a matter of particular regret that the European Court of Justice recently rejected arguments that have been put by a number of international bodies representing shipowners which persuasively make the point that unilateral actions of this kind and which are contrary to existing international conventions will do nothing to improve standards of safe and reliable ship operation. Group Clubs have done much to eradicate sub-standard ships in recent years. All of us support any practical measures that can be taken to discourage poor quality operators. The latest statistics published by EQUASIS suggest that quality initiatives by Group Clubs may be having a measurable impact. Based on data supplied by the US Coast Guard and from states which are signatories to the Paris and Tokyo MOUs it is clear that detention records for vessels entered in Group Clubs are far more positive than for non-Group vessels for every category of commercial shipping.
At a time of volatility in our industry generally, and with what are likely to prove to be uncertain times ahead, it is encouraging that our reinsurers both for the Group as a whole and for the Club continue to provide us with substantial reinsurance support. Our relationships with our reinsurers, developed over many years, have been of particular value in 2006 and 2007. The strength of an entry in a Group Club is closely linked to the very high limits and comprehensive scope of the cover that is provided. A sustainable and economically satisfactory relationship over the long-term with our reinsurers is therefore essential for our future success. The development of the Group’s captive, Hydra, is a crucial part of that relationship. Commercial reinsurers will not be happy to provide high limits of reinsurance protection if Group Clubs are not themselves prepared to absorb day to day or working layer claims within the Group system. Since 2004 working layer claims have escalated substantially, especially those involving the Pool. Hydra’s initial operations have coincided with this change in experience with the result that the captive’s capital base has had to be increased substantially during 2007 to well beyond the levels that were initially anticipated. The positive effect for the Clubs is that, although reinsurers have also experienced a significant increase in claims in line with the Clubs themselves, their results have not been so adverse as to create uncertainty about their future commitment to our industry. That commitment should not be underestimated particularly as new international conventions take effect and with them new levels of legal responsibility for shipowners.
During 2006 and 2007 much was said about the revisions to the Athens Convention that have been formally agreed at the IMO. The 2002 Protocol increases per capita liability limits for passenger claims substantially and makes it likely that, once the Convention enters into force, mandatory certificates of financial responsibility from insurers will be required together with rights of direct action against insurers. The iminence of the revised Athens Convention led to a radical decision by Group Clubs to introduce special limits of cover for passenger and crew claims for 2007 which have been maintained in 2008.
The Athens Convention, once implemented, may not be of direct relevance to a large proportion of the shipowning community. However, in November 2008 the Bunkers Convention will enter into force. Although the limits of liability are not set at levels that are as high as for Athens, the Bunkers Convention will have more or less universal application to all commercial vessels, and will also make mandatory the provision of certificates of financial responsibility by insurers together with rights of direct action. In time, the Wreck Removal Convention is also likely to enter into force followed by the Hazardous and Noxious Substances (HNS) Convention. Both these Conventions will have similar wide application and each will involve further escalation in the levels of responsibility to be borne by shipowners. There can be no doubt that an ever increasing level of risk is going to fall on Clubs in the future.
Your Board and our Managers will continue to address all these issues in the coming year. Last autumn we completed a new five year business plan which, as indicated in my predecessor’s statement a year ago, proposes that the present strategic direction for the Club should be maintained. For many years our aim has been to be an excellent mutual Club providing the very best quality and added value service to our Members. That philosophy has not changed and will continue to prevail. For the present at least there seems to be no case for again considering whether or not our Managers should make available other market products alongside Club cover, especially where we cannot be the capital provider for such products.
As part of our annual five year review, we have this year also completed a revision of our Corporate Governance principles and practices to ensure that they will continue to be aligned to best corporate practice in both the European Union and elsewhere in the coming years. A new Corporate Governance Charter setting out the principles in full was approved by the Board at their meeting in May 2008, and will be published at the time of the Annual General Meeting of Members to be held in Luxembourg on 24 September 2008.
Since last year’s report only Stephen Van Dyck has retired from the Board after many years of dedicated service to the Club about which I have already commented. During the year Mr Loucas Tsangarides and Mr Zhang Denghui have joined the Board; we wish them a very warm welcome.
I would like to express my thanks to all my colleagues on the Board. Their commitment to the Club’s affairs through the year indicates a great level of dedication to the needs of our Members and I personally value their support and advice.
Finally, I would like to thank our Managers on behalf of the Board. As always they are the face of the Club for our Members in our offices around the world. They continue to work with great dedication on our behalf with a level of knowledge and expertise that has been developed over many years. They will continue to ensure that the Club is ready for the challenges ahead.