For about 130 years, many of the world's shipowners have bought their liability insurance through mutual organisations known as Protection & Indemnity (P&I) clubs . Today about 95% of the world's gross bluewater tonnage is covered by clubs belonging to the International Group of P&I clubs. A recent competition enquiry by the European Commission has been seen off, many clubs are financially stronger than ever before, mutual reinsurance buying through the International Group is getting cheaper, and, perhaps most important of all, shipowners have control over the system, down to the last detail. In short, the mutual system is working.
Despite its success, mutual marine indemnity insurance is being challenged. After massive consolidation through mergers and acquisitions in the commercial sector, a raft of large, respected insurance companies have entered the P&I market, offering fixed premium indemnity policies that may, for some owners, appear to be less expensive than their mutual alternative. However, in the long term, even over a few years, these facilities cannot be beneficial to owners.
Insurance companies, unlike P&I clubs, exist to make profits for their shareholders. Clubs exist to provide insurance to their members at the lowest possible price – cost plus expenses. Insurance companies currently try to tempt owners by offering premiums at “below cost pricing” to gain market share, but their rates will be determined in the long run by profitability and, like the P&I mutuals, by the reinsurance markets. Rates will also be effected by individual shipowners' performances – we all know this from our experience buying hull insurance. However, periods of low rates are inevitably followed by years of higher insurance costs. In the end it is down to simple mathematics: to satisfy their shareholders and stay in business, insurers must receive more income to cover claims and costs, plus profits.
It is a fallacy to state that through the P&I system better-managed shipping companies subsidise the poorer performers. It must be pointed out that an owner with a bad claims record, first of all, will not necessarily be thrown out of the Club but will be required to contribute and pay in direct relation to his record – in that respect P&I clubs underwrite each risk diligently. Furthermore, P&I clubs offer a claims service that will be very difficult to be matched by commercial insurers. The cost of claims handling can easily be overlooked when calculating a possible insurance saving. As an example, shipowners can review how their hull claims are handled through the commercial markets. On many occasions hull and machinery claims take months to settle. In the world of third party liabilities, where assets are threatened by arrest, quick placements of security are essential. It must be questioned whether the commercial markets are able to match this service.
Often owners, or their managers, think in terms of short-term savings in the prevailing competitive insurance environment, and overlook the long-term benefits of the mutual system. Those who have a clean claims record, but experience one serious claim and a rise in P&I club premiums, may, as a result, be tempted to look for a “better deal” in the fixed premium market, but to do so is to leave a substantial credit behind. With shipping rates at healthier levels, it is difficult, in our opinion, to justify short-term savings in the face of the longer-term consequences of abandoning the P&I system.
Beyond these obvious benefits of mutual P&I lie several more subtle advantages. The International Group Agreement, the contract that binds the 13 clubs in the International Group, provides valuable guarantees that allow our vessels to move freely. This is highlighted by a recent case where the crew of a ship insured under a fixed-premium P&I scheme by a private insurer was detained because the insurer refused to put up a guarantee that the International Group would have provided automatically. In July, a fixed premium insurer would not provide a $3 million guarantee to the West African country Gabon in connection with the sinking of the bulker Peter.
The guarantees offered through the International Group have other benefits. For example, bank lending to shipowners could be threatened without the financial might of nearly the world's entire fleet behind them. In addition, no organisation represents a larger portion of shipowners than the International Group does, and none could perform more effectively in lobbying for the interests of the shipping community as a whole. It is up to shipowners themselves to lever the mutual system to our own advantage, and recognise the value of the International Group as a vehicle to improve our own position in the longer term.
As hull commercial underwriters attempt to provide so-called “one-stop shops”, a number of P&I clubs are providing hull insurance. Ironically, this trend is contrary to what is happening in the retail market, where consumers are demanding increased choice through speciality providers. Likewise, very few owners wish to limit their choices by opting for “one-stop” shopping.
The move by commercial insurers into fixed premium indemnity insurance is an example of evolution for its own sake. This has had a knock-on effect on some P&I clubs where clubs have undertaken a review as to whether they should follow this trend and reinvent themselves. If we take a step back and look at nature, several of her most successful species did not need to evolve at all, and continue to be efficient to this day. The transformation of commercial insurers and some P&I clubs into multi-line insurers can be likened to the development of dinosaurs, a group of animals that proved particularly unsustainable. A similar metaphor could be applied to the banks and insurance companies that seem intent on spreading their tentacles into all areas of financial services, including P&I. In the end, they may realise that doing what they do well, and focussing on it, would be far more successful in the long run. Whilst mergers and acquisitions are normally seen as a means of cost cutting and streamlining, it is also an easy way out of a very competitive environment and can often be a short term “fix”.
The mutual system of P&I clubs has a very long history. It has a proven track record for both simple and very complex claims, it works efficiently, and it serves the financial interests of members. It is incumbent upon supporters of the P&I system, and upon all shipowners, to participate in their P&I club, and thus strengthen the benefits they bring to the members. If the system of mutuality is eroded it will be very, very difficult to re-establish, and can only result in further weakening of the posture of the shipowner.
Robert Ho is President of Fairmont Shipping (HK) Ltd, and Vice-Chairman of the London Steam-ship Owners' Mutual Insurance Association.