Inferior underwriting results and inadequate or even negative investment income continue to haunt P&I clubs, says Lloyd's broker and P&I specialist
HSBC Insurance Brokers in its Protection & Indemnity Review 2003.
HSBC says the market environment for the traditional February renewal will
be hard. "Realistically," it notes, "there is some way to go before the clubs move back into an underwriting surplus, or even underwriting balance."
HSBC says the clubs relied too heavily on investment income made during the
long bull markets of the 1990s which, rather than being regarded as a bonus
and employed to bolster free reserves, was instead used to subsidise new
underwriting business. It adds that the clubs were more assiduous in their
quest to attract new business or tonnage at the expense of existing and
established members, whose money had been used to earn the healthy
investment returns in the first place.
Nigel Russell, Managing Director of the Marine Division of HSBC Insurance
Brokers, concludes, "The plain and simple fact is that the clubs must
improve underwriting performance. They must also bolster free reserves, and
cannot rely on investment income."
HSBC also predicts that, if there is a serious stand-off between the
International Group of P&I Clubs and the lead underwriters of the Group
reinsurance contract, it is quite probable that the pool limit will be
increased from its current level of $30m. "Even the smaller clubs should be
able to withstand an increase in pool limit, even if it were to be doubled,"
says the broker.
"The smaller clubs would find it far harder to withstand a significant
increase in retention. Only four clubs do not buy separate reinsurance to
protect their retention of $5m, and these four are amongst the strongest in
financial terms. All the smaller clubs buy reinsurance to protect their
retention. This low level of reinsurance is costly and is likely to be more
costly and harder to buy in the immediate future. A significant increase in
retention could be detrimental, especially to those clubs with a lower
capital base."