TSC Triton no 1-2013 - The Swedish Club

THE SWEDISH CLUB TRITON 1-2013Risk & Operations | RenewalThe ”off records” renewal!As always the P&I renewal was challenging this year.It was even more so because of the un-supportivefreight markets. To add further insult the effectof the recent years’ catastrophic claims filteredthrough the system in the form of significantincreases in the International Group’s Excess Reinsurancecost. This is a cost which all clubs pass onto their members. The features of this renewal wereall about the principle of mutuality and the impactof large claims on the mutual system.All Clubs were exposed to very difficult renewals this year.Compared with previous years, the big difference with thisrenewal was that even though some owners could rationallyappreciate the long-term benefits of mutuality, some of themfelt compelled to take action as they simply had no other wayof meeting their overall”...there is a lack of fundsto cover the cost of allrecent catastrophic claims.”financial goals.Large claims betweenUSD 9-70 million aretreated differently thanother claims from arecords point of view. They are different in the sense thatwe only take into account a maximum of USD 3 millionon members’ records. The additional “off records” exposure(USD 67 million excess USD 3 million) is supposed to becovered by “P&I Pool Claim Allowance” and “P&I Abatement”.The former is there to also cover the exposure of otherclubs’ larger claims.Off records exposureIn a perfect world the charges applied by all clubs should sufficeto cover the expected claims. The problem is that recentlythe reality has been far worse than even the most conservativeestimates in this respect. The unfortunate consequenceis that there is a lack of funds to cover the cost of all recentcatastrophic claims. They have “outperformed” expectations,particularly in relation to severity.This additional “off records” exposure is intellectually challengingto “sell” to those owners with a benign loss ratio. TheLars A. MalmDirector,Risk & Operationsmajority of the Club’s members have a loss ratio below 70%.Whilst this is considered in the renewals, the fact remainsthat “lucky guys” need to contribute towards the misfortunesof the “unlucky guys”. It’s an important job that needs tobe done when we explain to our members that as far as theClub’s large claims go the principle of mutuality works andthat everyone needs to contribute.To argue that owners also need to approach other clubs’larger claims with the same open mind is equally importantbut due to a perceived greater remoteness of those claims,slightly more difficult.The principle of mutualityThe fact of the matter, which most owners will appreciateand accept, is that the International Group’s pooling mechanismis a most cost-effective way of sharing risk and over timethe cost will be even between clubs. It’s also a fact today thatmany members place their business in different clubs andto that end they are affected on a direct basis by more thanone club’s individual performance. The way to look at a largeclaims exposure for members has less to do with the individualclub entry and more to do with the overall level of largeclaims in the International Group system. It is clear fromhistoric data that pool claims in their nature are random andvolatile. The short-term effect on a single club can therefore besignificant. The long-term effect will be less and as mentionedpreviously will level out over time.The Swedish Club’s P&I renewalTurning to the Club’s own renewal this year you will appreciate,which is understandable, that most members wanted theClub to give due consideration for long standing loyalty and4