In its new report, “P&I Clubs under pressure while cost of claims continues to increase,” A.M. Best notes that, historically, this balance has been supported by the use of investment income, not only to enhance free reserves, but also to subsidise weak underwriting results. However, this strategy has been challenged by changing regulation and an investment environment characterised by low interest rates and volatile equity markets. Over the past five years most clubs have sought to achieve breakeven underwriting results by pushing through rate increases, introducing minimum deductibles and increasing deductible levels. As the clubs enter the 2016 renewal period, pressure from members and brokers to justify price increase is growing.
Catherine Thomas, senior director, analytics, said: “In general, the cost of claims continues to increase due to an upward trend in shipowners’ liability limits and technological advances that now allow deep water wreck removal. In contrast, A.M. Best has noted that the frequency of small to medium-size claims has fallen in recent years. A slowdown in world trade has led to fewer voyages by ships, lower cargo volumes and less competition for experienced crews, all of which would be expected to reduce the number of claims. However, when the global economy begins to recover, there could be a corresponding increase in the frequency of loss events and pricing decisions made now should reflect the prospect of higher claims frequency, as well as claims inflation.”
A.M. Best expects most clubs to enter the 2016-17 policy year in a good financial position. Reported balance sheets at year-end February 2015 demonstrated record free reserves and overall balance sheet strength is likely to be maintained through to year-end Feb. 20, 2016.
P&I clubs have developed a better understanding of their risk-based capitalization, encouraged by the implementation of Solvency II in the European Union. Most have clarified their appetite for underwriting and investment risk, and clubs now have a better understanding of the impact on capital of various realistic scenarios.
Catherine Thomas added: “The next 24 months are set to be a testing period for the P&I clubs. Overall, capitalisation is at a robust level. However, faced with the prospect of only modest investment returns, the sector will need to report near break-even underwriting results if current levels of free reserves are to be maintained. A.M. Best believes that this will be difficult to achieve with premium rates under competitive pressure and in a challenging claims environment, characterized by volatile loss experience and inflationary pressure on the cost of claims.”
Source: A.M. Best