03-01-2017

Top 13 P&I Clubs Review.Which One Would You Choose?

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An important decision that shipowners should take on annual basis is the P&I Club that they will enter their ships. There are shipping companies which enter their fleet in one or more P&I clubs and remain members of these clubs for years, while others evaluate the various parameters on annual basis and may switch to the club which covers their needs in the best possible way each time. Here, we will focus on the parameters that may influence shipowner’s decision of which P&I club to choose and will provide interesting recent information about the Club’s costs, size and financial performance.

Fixed premium vs Mutual Association

P&I Clubs which are formed from mutual associations of shipowners, are the traditional way used by shipowners to insure the P&I risks of their vessels. 13 of these mutual associations are members of the International Group of P&I Clubs which cover more than 90% of the world fleet (the China Mutual Association & the Korean P&I Club are not members of the IG). Mutual Associations usually offer covers with standard liability limits of billions, while the fixed premium insurance which is offered by Independent underwriters offer standard liability limits of millions. Therefore, the limits of risks covered via a mutual association are higher than those in a fixed premium cover. On the other hand, since Mutual Associations rely on their members for funding, and can only meet their claims as long as members continue to pay, they may usually ask their members for supplementary calls during the year, so the final cost is not only uncertain but it also may go higher than the cost of the fixed premium cover. Furthermore, fixed premium covers may provide tailored services and, at the end of the day, they can give more specific services for shipowner’s money instead of what the standard cover provides. Due to the lower limits of liability, the Independent underwriters have specific restrictions on the size of vessels they can cover, which is not the case with the mutual associations and especially Group’s clubs. For example, the British Marine club, which seems to be the largest independent club, cover vessels up to 10,000 GT, do not cover transatlantic and transpacific routes or US trading and offer a maximum standard limit of $500 million. Raets Marine cover vessels up to 40,000 GT which are not loading dirty oil products, are not crossing the Atlantic and the Pacific and they are not trading in the USA. Its standard limit is $50 million only.

Rates/ Cost

Nowadays, this is maybe the most important aspect for Owners’ consideration. A few years ago the P&I Club premiums were only a small proportion of Owner’s OPEX budget, however the increased expenses of the Clubs due to the higher claims increase also the annual premiums. Below is a table with the increases on the annual rates of the Group clubs from 2012 to 2016 showing cumulative increases ranging from 10% up to around 45%! The highest increases were taken by the London Club and the North of England while the less came from the Shipowners club, which specializes in small vessels, followed by Gard and Japan Club with increases of around 20% in all 5 years.

However, the annual increases or decreases of the annual rate does not give a clear picture of the actual cost since, as mentioned above, there may be supplementary calls during the year in order to cover the Club’s expenses. Therefore it is usual for some clubs to offer attractive annual rates with minimum increases, however then to ask for higher supplementary calls during the year resulting in a higher total cost. In order to compare the average cost of the P&I Clubs, we see below, in table 2, the average cost per metric ton of GT (as per the 2014/15 policy year). Since the fixed-cost insurance is provided by underwriters upon request and since it represents less than 10% of the market we will focus here on the 13 clubs of the International Group. The cheaper clubs seem to be the Britannia and the Japan P&I followed closely by the London Club and the Swedish Club while the more expensive are the American Club and the Shipowners club.

Free Reserves

The P&I Clubs build their own cash reserves in order to be able to cover claims in excess of the reinsurance arrangements or claims falling outside the scope of reinsurance and maybe the losses of a bad year. Each club has its own philosophy in regards with the reserves and the shipowners should evaluate and choose according to their preferences. Some shipowners seem to prefer clubs with high reserves in order to feel safe that all their risks will be covered, while others go with the clubs which keep lower reserves in order to avoid high supplementary calls during the year. Table 3 summarizes the reserves of the IG P&I Clubs. The clubs with the highest reserves are those of Shipowners Club, the Gard, Steamship Mutual and Britannia while the least reserves are kept by the Japan Club. Taking into consideration that Britannia’s cost was also one of the cheapest among the clubs, seems that the combination between cost and reserves makes it as the one of the best options.

Size

Also in this case, shipowners may have their personal preferences on whether they will go with a large club or a smaller one since each one has its advantages and disadvantages. The clubs with more vessels will attract the bigger shipowners which may improve the club’s prestige and reputation. Also the larger the club is, the more the income from premiums will be, which may decrease the need for supplementary calls. On the other hand, this is not always the case since the larger clubs also attract major tanker owners (e.g. 36% of Gard’s members are tanker/gas carriers, while 28% bulkers and 36% other vessels) in which case the risks for environmental incidents and bigger claims is higher. Furthermore, the smaller clubs may have a more personal relationship with their members and since they usually concentrate on specific markets, they can offer special knowledge to their members. From the 13 clubs the largest one is Gard which holds about 206 million Gross Tonnage (19% of the total GT) followed by North of England (12% of the GT) and Britannia (10% of the total GT). The American Club with about 16.5 million GT and Shipowners Club, which specializes in small vessels, with about 23 million GT (each holding about 2% of the GT) along with the American Club with the Swedish club (each with about 4% of the GT) are the smallest in size. From the non-IG Clubs the largest ones are the mutual clubs of China Shipowners with about 31.7 million GT and Korea P&I with about 22.80 million GT, which are mainly consist of local members, followed by the fixed-premium underwriters of Raets Marine with about 15.50 million GT and British Marine with about 10.00 million GT.

Financial Performance

One of the most important factors for choosing a P&I Club is its financial performance and stability. The credit rating agency Standard & Poor’s evaluates the P&I clubs’ financial performance and rate them especially basis their liquidity, assets and reinsurance condition making it easier for Owners to evaluate and understand their financial condition. From the 13 IG P&I Clubs, Gard with “A+” has the highest rating. Britannia, North of England, Skuld, Standard Club and UK P&I Club have an “A” rating. Steamship Mutual and the Shipowners Club have a rating of “A-“, while a lower rating have the Japan Club, the Swedish Club and the West of England with a “BBB+” rating and the London Club along with the American Club with a rating of BBB and BBB- accordingly.

OpenSea is taking care of shipowner’s challenges and tries to make their daily routine easy so as to have more time to analyze the strategic aspects of their business and take appropriate decisions in regards with issues, like the P&I clubs that they will enter their vessels, in order to minimize the costs and risks of their business. We created the first ship chartering marketplace, where shipowners can find new clients and suitable cargoes based on actual open ship’s positions.

Source: OpenSea

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