Ten Questions about the International Group of P&I Clubs

by Gavin Ritchie

In the article and Q&A below our Underwriting Director, Gavin Ritchie, takes a closer look at the operation of the International Group of P&I Clubs, the (IG) and explains why a system that is widely accepted as being of benefit to shipowners can be a poor choice of home for many charterers.

In our travels we encounter real confusion as to what the IG stands for, particularly from a Charterer’s perspective. One of the most common misconceptions is that it is preferential for a charterer to be insured by a Club that is a member of the IGv on the grounds that their security is superior and they will get better service. This thought process is fundamentally wrong for two key reasons:

1. The IG cartel exists because the individual clubs do not have strong enough balance sheets to independently offer the very high limits that some shipowners require; and

2. The IG also operates exclusively for the benefit of shipowners and actively promotes the interests of shipowners to the detriment of charterers. At its very core the IG is essentially hostile to charterers.

In global financial terms even the largest of the owners P&I Clubs are completely dwarfed by the insurance industry giants. The individual balance sheets of the IG Clubs are seriously under-capitalised to support the limits of cover that they offer and as a result the IG Clubs are totally reliant on reinsurance support from the commercial insurance market.

When competing on new business we have occasionally been told that a charterer has elected to insure with an IG Club on the grounds that the Charterers P&I Club is not part of the IG. This is very confused thinking, because the real value that we offer to our charterers is that we are not part of the IG. This permits us to work exclusively from the charterer’s perspective.

Furthermore, we do not underwrite owners P&I on a mutual basis and therefore it would not be appropriate, or even possible, for us to join the IG.

We also do not underwrite the sort of risks which require the very high limits that the IG Clubs must offer to owners of VLCC’s or Cruise Vessels. We have the capacity to underwrite limits up to USD 500 million with security that is rated AA- by S&P, which is a better rating than that enjoyed by even the most financially stable of the IG Clubs.

What is the International Group?

Apart from its key role as a risk-sharing mechanism, the IG is also the ‘de facto’ trade association for the mutual shipowner P&I Clubs. At a central level the group secretariat coordinates how the IG responds to issues affecting shipowners internationally.

What is a Shipowners’ P&I Club?

A P&I Club is an association of shipowners run by professional managers on behalf of the shipowning members. As a mutual association the capital is provided by the balance sheets of those shipowners who insure with the Club. The basic equation is that the premium generated by the entered ships plus investment income should equal all claims and operating expenses. If the premium is insufficient then it’s the shipowners who have to pay the shortfall out of the Club’s reserves or by way of a supplementary call.

The shipowner often gets a slightly broader cover and higher limits of liability cover from a Group club than are available from the commercial insurance market. The Club’s Board of Directors is drawn from the membership. The biggest/most prestigious shipowners are always well represented. It is the Directors who provide direction to the Club’s managers.

What is the IG Reinsurance Contract?

The IG’s General Excess Loss Reinsurance Contract is part of the very large reinsurance programme shared by the group Clubs. The Clubs purchase the cover from Lloyd’s and the commercial market. Without the benefit of the IG reinsurance contract none of the IG Clubs have strong enough balance sheets to offer the high limits of cover that they provide. Claims such as the COSTA CONCORDIA (current estimate USD 744 million) and the RENA (current estimate USD 300 million) are effectively transferred back to the commercial market in excess of the holding Club’s retention and the intermediate “pooled” excess layers shared by the Clubs through the structure of the IG.

Why do the IG Clubs offer such high limits?

Most commercial ships only need a level of cover in the hundreds of millions of dollars because of the nature of the risks they present. However, the Club system must also accommodate ships with a significantly greater risk profile, such as oil tankers and cruise ships and hence the very high limits under the Group’s reinsurance contract.

The “worst case” scenario is often described as that of an oil tanker colliding with a cruise ship (causing extensive pollution and loss of life). Such a claim would put an enormous strain on the resources of all of the IG Clubs working within the cartel, particularly because of the way they are structured, with the need to make significant supplementary and catastrophe calls from the shipowner members in the event that the limit of the reinsurance contract was exceeded.

What is the difference between an IG Club and a commercial Insurer?

For practical purposes there is little difference. Both have to generate enough premium to cover claims and expenses. In the commercial world poor performance by an insurer over a period of time will often result in the company withdrawing from a particular class of cover or looking for more competent staff. In the IG system it may be said that such poor performance is capable of being subsidised by the shipowning members through unforecast (or greater than forecast) supplementary calls and explained away as a reflection of the state of the “current market”.

How do International Group Clubs feel about Charterers?

Many of the Clubs see charterers as an easy source of additional P&I income and therefore they have for many years aggressively targeted pure charterers’ business.

The Clubs buy some additional reinsurance for their Charterer members (eg Damage to Hull) from the commercial market. In the event that the Club loses money from this class of business either through poor underwriting results or an unresponsive reinsurer, it will be the mutual Members i.e. the shipowners who will pick up the bill. Many shipowners are not aware of the exposure of their Clubs (and indirectly themselves) to this class of business. An examination of a particular Club’s Report and Accounts generally fails to show whether the contribution of the Charterers’ fixed premium business is of financial benefit to the mutual members or not.

Why do International Group Clubs target Charterers in the first place?

The market for owners’ P&I is highly competitive. In fact, the acquisition of new owners’ business is so competitive that it is generally thought that the Club acquiring the new business will often be subsidising each new entered ton. Charterers’ business is seen as a balancing source of income. At times it may be the easiest way for the Clubs to show any premium growth at all from year to year. In some Clubs, Charterers’ business can be a very significant percentage of its premium income. As this business is almost always fixed premium business, it is possible that in bad times, the mutual members will be required to make good any shortfall in the charterers’ account. A mutual Club which is “overweight” in terms of its fixed premium (and particularly Charterers’) business carries a greater solvency risk than does a Club with a smaller fixed premium account.

To what Extent do Charterers have a say in an International Group Club?

The Boards of the Clubs are very largely drawn from the shipowner members, some of whom operate chartered tonnage. Unfortunately, pure charterers are rarely represented on the boards of the Clubs. It is hardly surprising, therefore, that it is the interests of shipowners, rather than those of the fixed premium charterer members which are uppermost in the minds of the Directors. Much attention is paid at Board level to the management of the Club and to the levels of Advance and Supplementary Calls. Statistics about the size and financial contribution of the charterer membership of the Clubs are hard to discern from the Annual Reports and Accounts of the Clubs.

Is it true that the IG Clubs offer better service levels than their competitors?

No, it would be a complete misrepresentation to say that the IG clubs offer superior service. Certainly, service standards are generally high within the IG, however some Clubs actually have a relatively poor reputation for service. The same holds true in the commercial market and the fact is that both the IG Clubs and the commercial underwriters draw their staff from the same pool of talent as the rest of the market. This includes lawyers, former mariners, adjusters, accountants and other marine specialists. Everyone therefore has access to the same professional talent.

Are Clubs more claims friendly?

It is a widely accepted view, promoted by the Clubs, that because they are mutual they will always try to find a way to pay a claim. This may to some extent hold true as far as shipowners are concerned; However, It is certainly not true from a Charterer’s perspective for two very good reasons. Firstly, most Charterers’ business within the IG is written on fixed premium commercial contracts that are in essence no different to the offerings of commercial insurers, and secondly, the discretion to consider ‘ex gratia’ settlements will normally reside with a Board of shipowners, who are unlikely to favour a Charterer. We have in fact come across situations where a Charterer has had serious problems getting a claim properly handled and settled by an IG Club when the claim has also involved a shipowner that is on the board of the same club.

Conclusion

The IG clubs have evolved to provide high limits of insurance and service to Shipowners. It is debatable whether the IG in its current form is the best structure but it is a system that has stood the test of time. From a Charterer’s perspective the IG must be seen as a hostile organization: the needs of shipowners inevitably prevail and the IG actively promotes the interest of shipowners to the detriment of Charterers.

It is nonsensical for a pure Charterer to regard an IG P&I club as a logical home for his insurance. The Charterers Club is the longest standing specialist in the Charterers market and has an excellent reputation for service built up over decades. Our security is rated higher than any of our competitors – including all the IG clubs – and we are the natural home for professional Charterers that want high-class, bespoke service and the best financial security available.