P&I Clubs remained surprisingly quiet over the recent renewals.

This year, the marine markets, so beset with doubt and red ink from the long, strength-sapping soft market, look to the protection and indemnity (P&I) sector as an example of stability and continuity. It is the turn of the P&I Clubs to raise rates, thin out the outrageously bad members, which do nothing but deplete the funds of their respective clubs, and to make plans for the future.

With rates going up by at least 20% from the traditional renewal date of February 20, it might be thought that competition for new or free business would be fierce. But curiously this year, recalling The Hound of the Baskervilles, the atmosphere is muted. The dog isn't much barking and the largest and most solvent clubs, with one exception, are keeping the salesmen at home and tending their groves.

Why this sense of stasis? Is it merely the 2002 version of the old adage that it takes a lot of time for nothing much to happen in P&I? Why the sense that this year's renewal season is a bit of a non-event?

Supplier surplus
First of all, this is an industry with too many suppliers chasing a commercial market which is itself in low freight turmoil. With each passing year the proportion of world trade by value, which is vanned and carried in container ships, goes up. The average size of said container ships keeps getting larger.

The consolidation of the shipping industry can be easily seen by noting how the earlier generation of container ships, which used to be thought to be pretty large (in the 2,000 twenty foot equivalent (TEU) range) have been relegated to feeder services, bringing in cargo to the 5,000-6,000 TEU post panamax range. The implication of this trend for the 12 P&I Clubs and the various fixed market P&I underwriters is clear. Fewer, larger ships need bigger, more-capitalised liability insurers.

Second, the challenge of the fixed market P&I underwriters, typified in previous years by the efforts of JL Jones and others at Lloyd's, has somewhat abated. As long as it lasted it was wondrous to observe. A few players in the fixed marine market made the running in offering combined hull and P&I products to shipowners. Many of the clubs can now say "me too" when asked whether they have some sort of hull product to offer their members. But it is not certain that the receding of the fixed players is anything other than a symptom of a turning market? AXA has a perfectly serious-looking P&I offering and there is talk of a QBE/Swiss Re backed facility opening in Hong Kong this year. The Holland-based Raets-Club, backed by German professional reinsurers, is also a relatively new player. For now, these ranks are rather thin and a millennial quality attended their efforts in recent years. Fixed marketplayers like Independent, HIH, Ocean Marine, Cotesworth, Sphere Drake and Dragon were all engraved on the panels of history.

Cartel restrictions
Third, the workings of the International Group Agreement (IGA), a cartel approved by Brussels, greatly restricts price competition. The rate set by the holding club must be adopted by any club which accepts a new member from another club. This means the scope the owners have to leave their liability records to be settled by their peers in the club is limited. This practice, known as record-dumping, is not encouraged in the club system; it tends to preserve the lives of many clubs which by any other logic observable in the marine market should have long ago been folded into another operation by any of the usual M&A routes.

Fourth, the saturated P&I market, well-researched and supplied by historic organisations, does not produce much by way of organic growth for the clubs. Many are biding time and watching for opportunities in the area of merger and acquisition. It is conceivable that the divisions, which have hitherto existed between the fixed and mutual sectors, will blur somewhat in the years to come. In fact, this blurring has already arrived in some places. The British Marine Mutual became demutualised with the help of funds supplied by the Zurich-owned Capital Z. The managers of the oldest P&I Club, the Britannia, signed a deal with Allianz AGF-MAT selling it to the European giant. Others like the UK Club have in effect capped their mutual exposure using the financial strength of Swiss Re. It is hard to avoid the feeling that this proud industry looks more and more set to be acquired by the large well-funded European insurers at costs which hardly amount to a shirt button to those entities.

Fifth, the crisis in the ideology of mutuality has led to a certain melting down of inner confidence in the clubs. Some have made a poor fist in recent times of balancing the interests of their stakeholders. The interests of the managers and the boards of management have tended to predominate over those of their staff and of their individual members. A few clubs have resembled broking houses by ordering large-scale redundancies and by turning inwards towards the consolations of extended internal office political warfare. This loss of composure has very little precedent in the industry. And, of course, the erosion of mutual ownership in modern economies is an established fact in most countries where the notion has flourished.

But for now, the Gard Club waits, with the Standard and the Britannia. The UK Club, the largest of all of the bigger clubs, alone among them seeks greater market share and hopes thereby to bring to an end the process of atrophy, which began at the tail end of the 1970s. The other clubs fight for scraps and hope their mono-line businesses, the workings of the IGA and the doctrine of mutuality will see them through the next insurance cycle. But hope, as all who studied the subject know, is desire in circumstances of reduced probability.

By Arthur Fenmann

Arthur Fenmann is an insurance journalist with particular interest in the marine market.