The P&I industry is undergoing such fundamental change at present that if one does not read the industry press on a regular basis, it would be easy to assume that it is “business as usual” for the clubs. Nothing could be further from the truth, says Stephen Barton.
The last 12 months will prove to have been a watershed for the P&I industry; things will never be quite the same again. On the one hand there was great consternation when it appeared that the International Group Agreement (IGA), by which the major clubs pool and reinsure their largest claims, might lose its dispensation from the European Commission's DGIV. However, the chairman of the International Group, George Greenwood brought a very patient campaign to a successful conclusion.
The euphoria that was then felt did, perhaps, mask some new currents and trends triggered by the lengthy debate. Certainly, the prospect of losing the commercial advantage of the pooling agreement and collective reinsurance contract, had led a number of clubs to consider how they could best operate in a more competitive environment that appeared to be around the corner. The respective managers of the Standard and Britannia Associations investigated the possibility of merging their operations to create a much larger unit, presumably more capable of efficiently retaining risk. We had thought that these discussions were shelved following the successful conclusion of negotiations with the European Commission, but it merely proved to be a temporary deferral, a situation to which I refer later.
A further apparent boost for the International Group occurred with the demise of the independent Ocean Marine Mutual. This independent club had long been a thorn in the side of the group, particularly in its relationship with Brussels. Many owners were attracted by lower limits of liability and generally a competitive pricing structure. Eventually, it proved impossible for the Ocean Marine to conclude successfully a long and increasingly acrimonious dispute with one of its key reinsurers and certain insurance brokers. This, combined with a very competitive position being taken on their business by members of the International Group, led to the appointment of liquidators. Many market observers with longer memories will see comparisons with the demise of the Oceanus Club some 15 years ago.
The 1999 renewal season saw the launch of a new fixed premium product by the J. L. Jones Syndicate at Lloyd's, which appears to have been successful in marketing their product. Stuart Todd, who has over 30 years P&I underwriting experience was recruited from the UK Club to lead it. This product has proved to be of genuine interest to a number of owners in the Greek market, for whom it was originally intended, as well as on a more international basis. This is a strategic move on the part of the J. L. Jones Syndicate, aimed at offering a more comprehensive package to selected shipowners, leading ultimately to the realisation of a single policy covering all of a shipowner's marine and potentially non-marine exposures - the so called “one stop shop”.
Following on from the successful launch of this facility, there was much talk of de-mutualisation of the club market, which many observers see as being inevitable in the longer term. The Liverpool and London Club has stated a clear intention to demutualise, but it has yet to find a partner to realise this ambition. It remains to be seen how this particular club will be constituted in the future, but it does seem unlikely that it would wish to continue operating in its current constitution. There has been speculation that a “run off”scenario might be the most economic solution for the membership.
Much more successful has been the demutualisation of non group club British Marine Mutual (BMM) which is now going ahead, providing further evidence of this independent insurer's ability to innovate and compete for business in a very competitive market.
At the end of May this year the respective managers of the Standard and Britannia Clubs, Charles Taylor and Tindall Riley, announced that they had signed heads of agreement with a view to merging their two organisations, through the acquisition by Charles Taylor of Tindall Riley. It was proposed that the clubs should also merge, subject to the approval of their respective boards, and a timetable had been set to enable a new merged entity to operate from 20 February 2000.Despite the fact that it was widely known that these club managers had discussed this possibility much earlier, this news came as a great shock to the market. The newly merged association would have become a major force in the market and vie with the UK Club for the position of largest club, both in terms of tonnage and financial assets.
This euphoria was short lived, however. Less than two months after the formal announcement, it was stated that the proposed merger between the two clubs would not happen. The shipowning committee of the Britannia announced that the proposal would not proceed due to “insufficient support”, although there appears to be an underlying tone of “no immediate benefit”.
If this interpretation is correct, then the Britannia board has taken a very uncharacteristic, i.e. short term position. While both clubs remain relatively strong and well positioned within the existing market framework, there is, no doubt, great disappointment at a management level that a strategic opportunity was not taken. Despite this setback, I am of the opinion that this can only be the start of further frenzied activity between the mutuals generally to find suitable partners with which to expand their activities.
Not to be outdone, it would seem, the managers of the UK Club, Thomas Miller, announced the launch of a new hull underwriting facility, which will be underwritten by the Chartwell Group at Lloyd's and supported by the Swiss Re. Initial reaction in some quarters was that this was the UK Club's response to the launch of the J. L. Jones product and to a lesser extent to the initial Standard/Britannia proposal.
However, there was dismay from some at the prospect of new hull capacity after four years of over capacity in all markets with the inevitable consequences to profits thereof. These reactions and criticisms are wide of the mark. A proposal such as this does not come to fruition overnight and we can understand that discussions have been going on for at least 18 months between the interested parties. Indeed, it seems that we are not seeing new capacity coming in to the direct hull market, but perhaps a partial re-alignment of existing capacity.
With its truly global membership, comprising something in excess of 20% of the world's shipowners, the UK Club has a distribution network second to none, and this is clearly a major attraction to the new partners. The new hull facility, which we understand will commence underwriting in October 1999 for January 2000 attachments, also gives the opportunity for Thomas Miller to exercise its considerable claims handling talents in a new arena.
The UK Club's move into the hull market might not be regarded as that revolutionary by the North of England, which has long been associated with a mutual hull club, Marine Shipping Mutual, and, indeed, both the BMM and the Swedish Club have long operated hull mutuals that have, perhaps, been more substantial than their respective P&I books. The real difference is that this is a marketing exercise marrying the distribution and claims handling skills of one party with the underwriting skills of a respected Lloyd's entity. This is not writing hull insurance on a mutual basis. In the same way, with the diverse adjusting and claims handling skills already evident in certain clubs, is it not logical to assume that they may go ahead to look to write other classes of business?
At the beginning of the year it was thought that the Liverpool and London Club would demutualise with the backing of US St Paul Companies. However, this did not materialise due to insufficient support from the club's shipowning directors. Despite this setback, it has come to light that the St Paul has arranged to offer surety bonds to the International Group clubs to secure their liability to share in each other's claims. This will offer IGA members the opportunity to increase their investment returns by making better use of the funds, which would otherwise have to be pledged as collateral. This involvement by a big insurance company has further demonstrated how the two markets can work together.
Lastly, the Steamship Mutual has announced a joint venture with the Brockbank Group at Lloyd's to promote a facility for the insurance of ports and port authorities, a field in which Brockbank has been a substantial participant in the past.
On the European front, Axa in Paris, has announced that it is to enter the P & I market possibly as early as next year. For the moment it appears to be content to offer fixed price insurance to existing hull clients, but it can only be a matter of time before Axa begins to make in-roads to the London market. There is also talk that fellow French insurer, AGF, may be entering the fixed priced market.
All of these events give much food for thought. Even for the most clairvoyant observer, it would be difficult to see how this wide range of new activity could have been predicted 12 months ago. The International Group, having survived the endurance test of negotiating with the European Commissioner, may now find itself under pressure through internal stresses, which may yet see a reduction in influence of the group, if not its complete break up. These stresses can only intensify as mergers, acquisitions, new product lines and competition develop. Change in the industry is inevitable, as is perhaps the eventual demise of mutuality and therefore the International Group?
Stephen Barton is chief operating officer, Willis Marine.