PROTECTION AND INDEMNITY - Willis

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INvESTMENT STRATEgY vARIANCES BETwEEN CLUBS The reliance on investment income combined with a very uncertain economic climate has naturally led to considerable focus on how each Club chooses to invest their reserves. We have included below a graph (Investment Allocation) which compares each of the Clubs’ investment allocation, rather crudely, under the headings: Cash, Bonds (including any fixed income vehicles), Equities and Others (e.g. property, commodities etc). The allocations are as at the date of the Clubs’ last Report and Accounts. For most Clubs this would be the 20 February 2008, but the Swedish and American Clubs reported on 31 December 2007. Reviewing this investment allocation more recently (Autumn 2008) the pattern remains relatively similar, with only a small percentage difference between any of the types of investment (usually a 2 to 5 percent reduction in equity holdings). Notable exceptions to this are the London Club and North of England. The North of England as at October 2008 held no equities, 62 percent in cash, 25 percent in bonds and 3 percent in other investments. The London Club as at 20 September had reduced their equity holdings from 39 to 22 percent, with corresponding increases in Cash and Bond investments from 16 to 26 percent and 40 to 47 percent respectively. Focussing on the percentage of equities held by each Club, it is perhaps not surprising that the London Club, with the very highest percentage of equities in the market, have been forced to make unbudgeted calls. The UK P&I Club by contrast appeared to have made the right decision in late 2007/08 to withdraw almost completely from equities, further emphasising that their rationale for unbudgeted calls is less straight forward than simply the crash of the financial markets. iNvesTmeNT alloCaTioN 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% American Britannia Gard Japan London North of England Shipowners Skuld Standard Steamship Swedish UK Club West of England Cash Bonds Equity Others <strong>Willis</strong> P&I Review 2008/09 | 3
FUTURE TRENDS CLAIMS LEvELS – whERE NExT? In previous reviews we have discussed the key potential drivers pushing up P&I claims levels. The principle factors highlighted in last year’s review are reiterated below: — Increased use of ships and pressure on turnaround as a result of the positive freight market, resulting in a greater number and size of claims. — Higher commodity prices pushing up repair costs and size of cargo claims. — With shipyards working at full capacity and very little scrapping, there are simply more ships operating. — Lack of qualified and experienced crew, potentially leading to more human errors. — Technological advancements make what was previously impossible, now possible (e.g. wreck removal/cargo removal from deeper water etc). — The general background of increasing limitation on ship owners and an increasingly onerous operating environment compound the above factors. Over the next year, the factors affecting claims levels are likely to evolve. In the existing economic climate it would be anticipated that trade would be reduced and freight volumes would correspondingly diminish. It would also be reasonable to predict that commodity prices would decrease. In a period of reduced demand for shipping it would similarly be predictable that older ships would finally be scrapped as they no longer prove to be economically viable to operate. Consequently we would expect that in a recessionary economic environment the impact of the factors highlighted in the first three bullet points above would be lessened. The crewing shortage will not be addressed over night, but if fewer ships are operating the pressure should be reduced. The current escalated crew costs will however be harder to redress imminently. Similarly the dramatically increased limitation environment that has developed in recent years looks likely to continue in the same onerous direction. The political climate seems stacked against ship operators for the foreseeable future. New claims drivers will also be introduced. In a less buoyant freight environment, it will be less likely that relatively minor disputes will be resolved commercially. Similarly in a more difficult commercial world the potential for moral hazard is increased when dealing with less reputable trading partners. | <strong>Willis</strong> P&I Review 2008/09 On balance, it would be expected that P&I claims, with a natural time lag, would decrease as the world economic recession develops. However, due to the increased levels of limitation the cost of major causalities would be unlikely to diminish, consequently a similarly volatile profile of large claims is likely to continue. In the short term, due to the nature of long tail claims it is expected that paid claims will continue to increase following broadly the same pattern as the increase in outstanding claims since 2004. Similarly for the current policy year there appears to be no imminent abatement in the increase of attritional claims costs. One aspect that appears almost inevitable, even if P&I claims reduce, is that commercial disputes covered by Freight Demurrage and Defence (FDD) will increase. IMPACT OF ThE FINANCIAL CLIMATE ON INvESTMENT INCOME? The key wild card at the moment is the impact that the global economic crisis has had on Club reserves and will have on future investment income results. In an attempt to indicate how fundamental and unpredictable this is, we have projected forward two theoretical outcomes for the market by the end of the 2008/09 financial year. These are shown in the graphs on the opposite page. The first graph estimates the overall result for the market assuming no investment income at all. The second graph looks at a scenario which projects the outcome if all Clubs lost approximately 30 percent of the value of their equity holdings, but achieved a 3 percent return on all other investments in 2008/09. Clearly neither outcome is positive, but the second scenario would wipe out just under 20 percent of the market’s free reserves in a single year. The probable result is somewhere between the two.
Page 1 and 2: PROTECTION AND INDEMNITY MARkET REv
Page 4 and 5: SUMMARY
Page 6: LOOkINg FORwARD The main wild card
Page 9 and 10: OvERvIEw From a pure underwriting p
Page 11 and 12: USD Millions 300 200 100 0 -100 -20
Page 13: UNDERwRITINg vARIANCES BETwEEN CLUB
Page 18 and 19: REINSURANCE AND POOLINg
Page 20 and 21: When translated to direct premiums
Page 22 and 23: POOL AND RETENTION DEvELOPMENT INTR
Page 24 and 25: 1999 2000 including Hydra Insurance
Page 26 and 27: In 2006 the four largest claims,
Page 28: 27 | Willis P&I Review 2008/09 Will
Page 31 and 32: 2008/09 OvERvIEw General increases
Page 34 and 35: AvERAgE ExPENSE RATIOS
Page 36: Japan Britannia Gard London North o
Page 39 and 40: INTRODUCTION TO CLUB FINANCIAL PAgE
Page 41 and 42: AMERICAN CLUB www.american-club.com
Page 43 and 44: BRITANNIA www.britanniapandi.com hI
Page 45 and 46: gARD www.gard.no hIghLIghTS - Total
Page 47 and 48: JAPAN P&I CLUB www.piclub.or.jp hIg
Page 49 and 50: LONDON STEAM-ShIP www.lsso.com hIgh
Page 51 and 52: NORTh OF ENgLAND www.nepia.com hIgh
Page 53 and 54: ShIPOwNERS www.shipownersclub.com h
Page 55 and 56: SkULD www.skuld.com hIghLIghTS - Ow
Page 57 and 58: STANDARD (BERMUDA) www.standard-clu
Page 59 and 60: STEAMShIP www.simsl.com hIghLIghTS
Page 61 and 62: Uk P&I CLUB www.ukpandi.com hIghLIg
Page 63 and 64: wEST OF ENgLAND www.westpandi.com h
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LIvERPOOL & LONDON hIghLIghTS - Clu
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SUPPLEMENTARY CALL hISTORY
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Over the last fifteen years the mar
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The analysis is broken down as foll
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100% 80% 60% 40% 20% 0% 50% 40% 30%
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PERCENTAgE vARIATION FROM INITIAL E
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40% 30% 20% 10% 0% -10% -20% SwEDIS
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The intention of release calls is t
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P&I FIxED PREMIUM MARkET
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BRITISh MARINE www.britishmarine.co
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OSPREY UNDERwRITINg AgENCY LTD www.
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OThER MARkETS There are a number of
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ChARTERERS ONLY FACILITIES The only
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This Review is published for the be
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