While the balance sheets of clubs operating in the marine protection and indemnity (P&I) sector are generally strong, underwriting discipline will be tested over the February 2018 renewal period, according to a report by A.M. Best.
Intense competition, exacerbated by a growing fixed-premium market, will add to pressure from members and brokers to reduce rates ahead of the Feb. 20, 2018 renewal deadline, said the report titled “Balance Sheets of P&I Clubs Strong but Pricing Under Pressure Amid Strong Competition.”
Historically, clubs were able to use investment income to enhance free reserves and to offset underwriting losses, said Catherine Thomas, senior director, analytics. In recent years, however, this strategy has been challenged by changing regulation as well as a climate of low interest rates and volatile equity markets, she added.
“Consequently, there has been a greater focus on underwriting performance, and most clubs have increased rates, introduced minimum deductibles and expanded deductible levels in order to achieve break-even technical results,” Thomas said.
In the coming year, performance is likely to be adversely affected by downward pressure on rates, the report said, adding that, in general, the average cost of claims continues to grow due to a number of factors such as higher liability limits, an increase in the size of ships and stricter liability regimes.
At the same time, A.M. Best said, the frequency of attritional claims has trended down in recent years, while increased use of deductibles by clubs is likely to have an impact on both the average cost of claims and claims frequency.
Improved underwriting performances in recent years have increased free reserves and strengthened the sector’s overall risk-adjusted capitalization. The report noted, however, that modest investment returns, due to the ongoing low interest rate environment, “means that clubs must achieve close to break-even technical results if current levels of free reserves are to be maintained.”
Such results will be difficult to achieve with competitive rate pressures and the challenging claims environment, which is characterized by volatile loss experience and inflationary pressure on the cost of claims, the report cautioned.
Sounding a positive note, the report said there is a buffer in current levels of capitalization that will help absorb the impact of these challenges on performance and free reserves.
“A slowdown in world trade has led to fewer voyages by ships, smaller cargo volumes and less competition for experienced crews, all of which would be expected to reduce the number of claims,” said Filippo Novella, associate financial analyst.
“Additionally, longer-term trends such as improved risk management practices, more stringent regulation, a fall in the age profile of vessels and technological advances in navigation are likely to have reduced claims frequency,” he added. “However, as the global economy recovers, the number of loss events could increase, and pricing decisions made now should reflect the prospect of higher claims frequency as well as claims inflation.”
A copy of this report can be downloaded via A.M. Best’s website.
Source: A.M. Best