2012 REPORTING SEASON PREVIEW

The International Group of P&I Clubs has enjoyed an almost unprecedented two years of growth and a universal improvement which has seen collective free reserves rise from $2bn to $3.8bn. There has been a low claims environment, with modest rates of investment return. Last year all the clubs reported surpluses and only three of the thirteen reported underwriting deficits. This was a valuable breathing space which allowed the clubs to rebuild their reserves after the large underwriting deficits in 2007 and 2008 financial years and the investment losses in 2009 and prepare themselves for the introduction of strict capital requirements under Solvency II.

A difficult year

The shipping market has had a difficult time in the year with lower rates caused by a continuous increase in capacity and slow demand. The industry has also been beset with external issues including piracy in parts of Africa, sanctions against Syria and Iran, not to mention a whole host of new conventions. Against this background there has been a slow deterioration in the P&I underwriting, mostly mentioned in the clubs' interim statements which reported an increase in the cost of claims, particularly large claims and a general increase in claims inflation.

The increasing cost of large claims was graphically illustrated by the over publicized wreck of the Costa Concordia and to a lesser extent the loss of the Rena which received more than their fair share of media attention and will doubtless prove very expensive.

In their interim statements few clubs were forecasting underwriting surpluses and most were expecting to break even overall with either a small surplus or a small deficit.

Investment performance

The underwriting has clearly not been helped by the investment managers, who have not been able to produce the levels of income that they have managed over the last two years. The investment markets have become very difficult with a global recession, dramas in Greece, historically low interest rates, bail-outs in the euro periphery and fears of contagion.

The markets have lost confidence in the ability of the EU member states to control their own economic destiny and acted accordingly. Most clubs have decided on the side of caution and reduced their investment risk by shedding equities and increasing their quality bond portfolio, which has paid dividends during the year and helped their regulatory capital ratios. A massive improvement from the old days when clubs held asset allocations of 30 per cent to 50 per cent in equities regardless of market conditions.

As a consequence of these adverse conditions investment returns have been lower, but it will be these conservative policies that may well help them to avoid losses in the post year end equity sell off.

Risk mitigation

Many clubs have also attempted to reduce risk further by diversifying away from P&I into other areas, but staying within the marine market and taking cautious steps into offshore and energy markets, hull and even a Lloyd's syndicate. It is hoped that these ventures will reduce the fluctuating fortunes of being a mono line insurer, but only time will tell.

After two good years the 2012 reporting season will probably see higher claims, weaker underwriting and low investment income and a more mixed selection of results, but hopefully no major shocks. The clubs are now more risk conscious and after a bout of reserve building will be better prepared for future challenges.