P&I premiums to continue rising, adding to shipowner opex woes
IG Clubs posted general increases averaging 11.5% across the Group this time around, while FD&D rises averaged 10.9% (see chart). However, there were wide variances in general increases, ranging from 5% to 15%. And the introduction of “target increases” in some Clubs indicates that the sector is moving away from a one-size-fits-all approach. Instead it is adopting an emerging model that prices risk according to each member rather than the strict mutuality that previously underpinned Clubs’ approach. This trend is worth watching. While Clubs remain mutual some are clearly moving to a hybrid model of strict mutuality and individual risk.
Clubs continued to face pressure on claims in 2021, suggesting that they are likely to face record Pool claims over the near term, in addition to the feed through of claims arising from sectors that continue to be disrupted by Covid-19. Loss ratios are still riding high in the sector. Only Gard reported a 2021 combined ratio anywhere near the breakeven threshold of 100%, at 102%. And six of the 13 Clubs saw decreases in free reserves, although they all posted a profitable set of investment returns to boost flagging underwriting performance.
Clubs have begun to adjust their response to claims by examining their deductibles and five of the 13 raised the cost to assureds demanded by deductibles. That is a clear sign that some Clubs have begun to adjust a greater proportion of risk towards their members and will expect them to shoulder greater costs when claims are incurred.
Underwriting performance is being supported by healthy investment returns and gaps are being plugged by adjustment of deductibles and increased costs to assured. This situation is not sustainable and combined with record Pool claims suggests that owners should prepare for further hikes in P&I cover.
As anticipated the market is consolidating with North P&I and Standard Club announcing merger talks to create a group with scale to rival Gard. Once concluded the merged group together with Card will have combined market share of around 40%, representing unprecedented market power. But such scale may better equip the merged group to support members through an emerging area of climate change related claims, as it has Gard.
However, the secondary consequence is that there will be fewer Clubs and less apparent choice for owners, but in some respects the P&I market has presented some dubious false choices in recent years. When most Clubs raise general fees in lockstep and more than half appear happy to sit on reserves, owners have very little actual choice. Drewry’s view is that further consolidation is inevitable as the benefits of scale in the face of rising disruption become ever more apparent.
Meanwhile, this renewal round may mean that some Clubs start to stabilise their positions. But we continue to see this as part of a hardening cycle that may take several years to play out, especially given the size of emerging Pool claims.
P&I insurance costs are forecast to increase by 10-15% in 2022/23 on a combination of general calls and increases in FD&D premiums, which will further inflate overall ship operating costs. This will not be uniformly applied either across the IG Clubs or owners. Instead it will reflect the recent, emerging fashion for target increases that will benefit vessel owners with a better claims record.