Claims and financial climate force up P&I premiums

4 November 2008

- Supplementary premiums of 20 and 25 per cent respectively for 2006 and 2007
- Supplementary premium of 20 per cent estimated for 2008
- General increase of 12.5 per cent in mutual premium for 2009, plus any increase in the cost of the International Group reinsurance premium
- General increase for fixed premium rates of 7.5 per cent

Against a background of unparalleled uncertainty in financial markets and substantial claims deficits on the 2006 and 2007 policy years, the UK P&I Club Board has levied supplementary premiums on both years, issued an estimate of a supplementary premiums on the 2008 policy year, and announced a general increase for the 2009 policy year.

With investment income for the current year likely to be negative and unable to help reduce the deficits for 2006 and later policy years, the deficits have increased following the latest actuarial review at 20th August. The 2006 and 2007 deficits are currently estimated at $61 million and $83 million respectively. However, the Board believes that in the current climate of uncertainty, it would be “inequitable and unsound to carry them forward into future years”.

For the 2006 policy year, therefore there will be a supplementary premium of 20 per cent of mutual premium. For 2007, the supplementary premium will be 25 per cent of mutual premium. As it is only eight months old, it is too early to form a clear view of the ultimate claims outcome for the 2008 year. Nevertheless, Members are warned to expect a 20 per cent supplementary premium, to be decided in October 2009.

However, the 2006 and 2007 claims have been associated with high shipping activity. If the recession deepens, claims costs may fall but it is not clear how soon the situation could improve. If it does, it might be possible to reduce the supplementary premium.

These measures, taken by the Directors at their meeting on October 27th in Hong Kong, “should ensure the Club moves forward without significant burden from past years.”

It remains imperative that the mutual premium level for 2009 is set with minimal reliance on investment income – although the Board will take every opportunity to achieve a positive return without taking unacceptable risks.

Accordingly, the general increase to be applied to mutual premiums before adjustments for individual risk and record, will be 12.5 per cent, plus any increase in the cost of the International Group reinsurance premium for 2009. For the time charterer and other fixed premium rates, the general increase will be 7.5 per cent.

The Board believes that in a period of change and uncertainty, the financial strength of the Club will be even more important. Consequently, the Directors decided that deficits should be funded by supplementary premiums to prevent erosion of reserves to an unacceptably low level. Although unwelcome to Members, this should mitigate any pressure to protect reserves by increasing future premiums to excessive levels.

The UK Club Chairman Dino Caroussis said: "This was a very serious issue for the Board to address at my first meeting as chairman but after careful consideration of the options, I believe we took the correct decision. I am very conscious this may cause pain to all of us as mutual Members but the Board was fully convinced that action had to be taken. Making this tough decision now will put the Club in a really strong position for what could be very turbulent times ahead.”

This decision was necessary even after the steps taken over the past year by the Board to preserve and maintain funds. In October 2007, equity holdings were substantially reduced, which has largely insulated the Club from the collapse of the equity markets and in August 2008 the Club issued hybrid capital which strengthened its solvency by $100 million in anticipation of more stringent EU regulatory requirements under Solvency 2.

The circular to members and supporting Questions and Answers are published electronically in the Club Circulars section on the homepage of www.ukpandi.com

Source: UK P&I Club