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Blue water thinking and P&I clubs


Towards the end of last year, S&P produced an overview of the marine protection and indemnity sector that pointed to some of the major opportunities – as well as significant threats – that P&I clubs face in a post-COVID world. International Group of P&I ClubsMr. Andrew Cutler shared his thoughts on the pressures affecting the sector and future prospects. By Paul McNamara


Even the most cursory review will show that the marine protection and indemnity sector (P&I) sector has had a difficult few years.

Towards the end of last year, S&P published a report (Global Marine Protection and Indemnity Clubs) that said, “The P&I sector has struggled to post a technical profit since financial 2016, with large claims and inadequate rates resulting in combined ratios of significantly above 100%. The ratio peaked at 117% in financial 2020, before moderating to around 108% in financial 2021. Thanks to an unusually low frequency of high-severity claims so far in 2022, the sector’s technical performance has improved materially compared to that in the past few years. We expect net combined ratios in the 105%-107% range over the next two years.”

The P&I segment faces a complicated future, but one that holds the prospect of significant growth.

S&P enumerated some of the factors that could help improve the sector’s operating performance including: General increases at the February 2022 renewals, with expectations of further increases at the February 2023 renewals; revised terms and conditions increasing deductibles in the event of a claim; some diversification into fixed-premium and charter lines, offsetting the P&I lines’ poor performance; and enhanced risk-management frameworks and loss-prevention programmes that should help control the sector’s technical performance in the longer term.

International Group of P&I Clubs

In order to get a current practitioner’s-eye view of the market, we spoke to London-headquartered International Group of P&I Clubs chair Andrew Cutler. The 12 clubs that comprise the group collectively provide marine liability cover for around 90% of the world’s ocean-going tonnage.

Mr Cutler sees three main factors influence influencing the marine insurance industry on a global scale.

“The first major force is the continuing move out of COVID-19 and how the world is adjusting to that,” Mr. Cutler said. “The second is how the world is adjusting to Russia’s invasion of Ukraine, the political fallout of that conflict, including the energy security debate. The third, which in part comes out of the first two, is inflationary pressures worldwide.”

Profitability is another challenge facing the marine insurance sector. “It’s about pricing. To ensure that your pricing model is sustainable going forward, you need to have balanced underwriting,” Mr. Cutler said.

Sustainability

The issue of sustainability is rarely far from the top of the agenda and is an area that affects the marine industry profoundly.

“You need to recognize what clubs do,” Mr. Cutler said. “We enable world trade. It sounds very grand, but that’s the truth of it. We are an enabler and facilitator of world trade on a massive scale. We provide unparalleled extent and range of cover for insurance to enable ship owners and operators to trade.

“The most visible example of how we do that is by issuing and standing behind Blue Cards - the tickets to trade that allow ships to respond to conventions, whether it’s wreck removal, pollution and so forth. That financial stability and cover is a bedrock of world trade in the context of sustainability,” he said.

There is also an impact on the investments managed by marine insurance businesses.

“There’s also ESG at the forefront of considerations as to where you hold your investments,” said Mr. Cutler. “All clubs will have capital underpinning them, which they will be investing. How that capital is invested will also have sustainability considerations. And I’m sure that all the clubs are looking at that quite carefully, balancing their role as insurers with their sustainability hats on.”

Returning to profitability

How can the sector move from a position where it is sustainable from a profitability point of view?

“You need to separate the economics a little bit,” Mr. Cutler said. “There’s no denying that for the clubs there is insufficient premium coming in to cover for the claims going out. You need to move to more balanced underwriting.

“You need to put that in the context of two things. The first is that the clubs are mutuals. We are a non-profit making organization so we’re not looking to make a profit from our members. Over the long run you’re looking for a balanced equation which is different from the commercial market although we operate in a commercial environment. Providing insurance at cost is one of the greatest strengths of mutuality. The second is that most of the clubs are in either a strong or a very strong capital position.”

Importance of China

China’s travails during COVID affected the marine sector significantly.

“In terms of Asia, the biggest pressure has been on China,” Mr. Cutler said. “The old analogy is that if America sneezes, the world catches a cold. But in terms of world trade now, China is absolutely dominant in the marine sector. It is either an importer of a massive amounts of material or it is an exporter of huge amounts of goods. The COVID restrictions clearly had an effect on some of this world trade.”

Trade data emanating from China in mid-April indicate that total exports from the nation surged 14.8% in March on the back of the sale of electric vehicles and their components as well as trade with Russia. This was the first data to signify export expansion since September 2022.

“China is coming out of COVID restrictions, having lifted those before Christmas, which has seen a significant change in terms of a very high level of trade going forward,” Mr. Cutler said. “Any time that China puts a fiscal stimulus package in place, that tends to be a good thing for the marine industry. Anything that promotes trade is a good thing.”

A global business

“The main driver of growth will be demand,” .Mr Cutler said. “If the world economy is growing, then ship owners and operators will respond to that. If the world economy isn’t growing for whatever reason, then the ship owners will have to respond in the opposite way.”

“The main driver of growth will be demand,” .Mr. Cutler said. “If the world economy is growing, then ship owners and operators will respond to that. If the world economy isn’t growing for whatever reason, then the ship owners will have to respond in the opposite way.”

He is equally realistic about the impediments holding back growth.

“The restraints on world growth going forward will be a combination of macroeconomic factors,” Mr. Cutler said. “If you have inflation at rates that are beyond central banks’ appetites in the 2% to 3% range and, depending on where you are in the world, you’re running at 7% to 10% inflation - all of the central banks are looking for a balance to avoid recession.

“The most obvious lever that’s being used is interest rates, which are high. That is designed to stop people spending money. They want to constrain consumption. They want to reduce inflation. They want businesses to contract and find efficiencies that will act as a handbrake on world trade. You can’t have world trade blossoming and seek to control inflation,” he said.

Sustainability Report 2022

The marine industry is often placed at the centre of the ESG debate that is taking place around the world. From both a marine insurance point of view and also from a P&I club’s point of view, ESG considerations are often paramount.

“There are a number of aspects to this,” Mr. Cutler said. “The first is in terms of individual club’s appetite for what you might call ESG-type investments. That’s for the individual clubs to take a view on but we do insure members who carry oil or coal or other items that are contrary to the direction of travel.

“The reality is that until such time as we have alternative viable energy sources that meet the world’s needs, those are essential cargoes. You need to approach it from that angle. As an insurance company, to have an ESG investment policy that excludes these cargoes might conflict with you insuring them. If you’re not going to invest in them, that that might be a bit contradictory. However, that’s for individual clubs to take their own view on.”

The International Group of P&I Clubs published its first sustainability report last year (Sustainability Report 2022) which said, “The marine industry’s move to meet ambitious targets concerning the reduction of greenhouse gas emissions from shipping is vital … This report explains how the group understands ESG in the context of its activities and where it contributes to a more sustainable shipping industry.”

Mr. Cutler provides more context. “It’s not quite the same as a normal corporate sustainability report,” he said. “It very much approaches it from the point of view of what the group is and what we do. It’s looking at protecting the environment, responding to casualties, safety at sea, which includes seafarers and carriage of cargoes, all those things which fit into ESG. We have a part in the debate, but no one has all the answers so we very much focus on doing our things correctly as insurers,” he said.

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