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Willis: P&I Market Posts Record Financial Results in 2011

Posted on 28 Dec 2011

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It was the best of times, it was the worst of times. Such is the case for the Protection & Indemnity (P&I) market, which delivered a blockbuster financial performance last year, but when faced with fragile investment income and increased claims in 2011, is proposing rate and deductible increases for the 2012 renewal, according to the 2011 Protection and Indenmnity Market Report from Willis Group Holdings, the global insurance broker. The annual review, published today, comments on the unpredictable nature of the P&I market, offering both an encouraging and cautionary view of the sector in the run-up to 2012.

A benign claims year in 2010/11 (paid claims were down by over 11 percent against 2009/10, said Willis) combined with stable income levels, produced an overall market underwriting surplus of three percent. While appearing relatively modest, this is significant as it represents the highest underwriting profit ever recorded by the market. Meanwhile, a respectable 6.5 percent investment return, which, combined with the positive underwriting result, propelled free reserves to a new record level at 20 February 2011, representing a 22 percent increase from the position at the end of the previous year, found Willis.

Nevertheless, Willis reports that next year’s renewal will see a higher average rate general increase of 4.25 percent versus the 3.42 percent average rise in 2011. The increases have been triggered primarily by the dramatic fall and subsequent fragility of world equity markets since August 2011, and increases in claims and their volatility in the current policy year.

These factors have produced a climate of apprehension within a number of clubs, said the Willis report. With no realistic expectation of anything better than nominal investment returns, the pressure to balance the underwriting result is inevitably increased.

Ship operators, by contrast, are facing one of the most challenging economic periods in a generation, with many of them being forced to implement austerity plans. As the 20 February 2012 renewal approaches, the pressure to cut costs is likely to create tensions between buyers and underwriters, according to Willis.

Commenting on the report, Ben Abraham, Head of Willis P&I and author of the P&I Market Review, said: “When faced with decisions that potentially affect the survival of their companies, the pressure on most ship owners will be at least as great as that on their underwriters. Despite the relatively modest increases proposed, the 2012 renewal has all the early signs of being confrontational.

“It continues to be a notable feature of the general increases that they do not necessarily reflect the underwriting performance of each individual club. While the range of figures announced is modest, with two percent variance across clubs able to write ‘large ships’, there is a 36 percent variance between the best and worst underwriting results. The most obvious implication of the variance is that, rather than making the assessment purely on technical underwriting requirements, competitive market pressure is a major influencing factor.”

Some key market highlights in the Willis P&I report for the 2010/11 financial year include:

  • Owned tonnage increased by 5.7 percent
  • Premiums increased by 2.6 percent
  • Gross and net paid claims reduced by 11 percent and 11.4 percent, respectively
  • Estimates for outstanding claims increased by USD $30 million
  • Total incurred claims reduced by 4.6 percent
  • Market underwriting surplus was USD $97 million
  • Investment income was USD $537 million
  • Overall surplus was USD $634 million

Assets increased by 15.3 percent, free reserves increased by 22.7 percent. Willis’s annual P&I Market Review analyses the financial results of the market in general and each individual club. The difference between individual clubs’ performance is significant and this report only touches on the comparisons. Willis P&I clients have access to more expansive information upon request.