Estimates of worst-case marine losses have been made since ships first took to sea. It cannot have been much later that calculations of shipowners' potential third-party liabilities began. The collision in the English Channel last summer between the cruise ship Norwegian Dream and the container vessel Ever Decent proved that serious marine accidents are a real danger with a potential for vast losses.
Fortunately for ship owners, Lloyd's of London has an immense appetite for marine liability risk. The world's most venerable marine market is at the forefront of providing such cover – known as protection and indemnity (P&I) – primarily through reinsurance.
All but a tiny fraction of the world's ship owners purchase their liability cover from a mutual P&I club. In 1899, six such clubs got together to form a mutual pool that exists to this day as the International Group (IG). This pool provides liability cover to approximately 95% of all the ships at sea.
There are now 14 mutual clubs each retaining losses of up to $5m. The IG retains the next $25m, and any claims above that – up to $1.03bn for oil pollution and $2.03bn for all other claims – fall to the IG's reinsurance programme, said to be the largest ongoing insurance contract in existence. Without doubt, it is Lloyd's largest single source of premium. Claims exceeding $2.03bn – called “overspill claims” – would fall back to the IG, to a maximum of $4.25bn. Beyond that, shipowners are on their own.
Lloyd's is involved at every stage. Most P&I clubs have all sorts of reinsurance covering their share of various club and group retentions. The marine indemnity market remains one of the last bastions of Lloyd's-style arbitrage. It has also been the staging-ground of a handful of fixed-premium P&I facilities – so called because they offer a fixed rate for a year's cover, without the possibility of supplementary calls (top-up premiums regularly levied by P&I clubs).
Fixed-premium facilities are not mutual, and are thus operated on a for-profit basis. The most successful of these is run by long-time Lloyd's hull underwriter Jonathan Jones. In the past 18 months, his syndicate has attracted vessels of about 10m gt. However, the future of the facility has been called into question by a parting of ways between JL Jones and the syndicate's backer, Markel Corporation – which inherited the business through its purchase of Bermudan insurer Terra Nova.
The split comes as something of a surprise. US insurer Markel appears destined to retain the small-vessel indemnity facility still widely known as Terra Nova P&I, which is run by former staff of the West of England P&I. However, the Jones facility looks set to continue without Markel. Mr Jones is said to have secured a backer for 50% of the capital he requires, and a commitment for another 40% pending.
The other major Lloyd's fixed-premium facility, Dragon, has made almost no inroads. In the grand scheme of things, the tonnage in this facility is fairly minuscule (“diddly-squat,” according to one broker). Then again, they do provide an alternative to the mutual club system.
Lloyd's fixed-premium writers have attracted tonnage for three basic reasons, not the least of which is competitive pricing. Nevertheless, the Jones facility in particular is said to have turned away a great deal of business in order to maintain prices.
Secondly, other insureds moved out of the mutuals with all, or more usually part, of their tonnage because they had bad experiences with clubs. In some cases, they paid substantial, unexpected supplementary calls, but ended up with no cover at all.
Thirdly, many ship owners opted to test the Jones facility and others outside the Lloyd's market because its underwriter leads their hull insurance. Such owners hoped for a lower total insurance spend.
Combining hull and indemnity insurance is a growing trademark of the P&I market, but it is difficult to achieve under the International Group Agreement (IGA) – the contract that governs the competitive behaviour of member P&I clubs. Mr Jones can do it because he is outside the mutual system, but some clubs are looking to combine liability and hull insurance within the mutual framework, and in one case by tying a Lloyd's hull insurer to an established P&I club.
Swiss Re, Trenwick (formerly Chartwell Re), and Thomas Miller P&I, which manages the UK Steamship Mutual, have teamed up to form a Lloyd's hull insurance operation called Dex. Mark Carter, chief operating officer, said the new box at Lloyd's, fronting syndicate 2241, seeks to bring new levels of claims service to the hull market. Traditionally, this market has left shipowners to their own devices until it came time to pay or decline a claim. “We offer a P&I-style claims service for hull,” he says.
Dex and the UK P&I are a long way from offering a single policy, or even a one-stop shop. But since Thomas Miller manages both, shipowners can enjoy fewer entry points for their insurance business. “The UK Club has sponsored Dex, and they are looking for some kind of single marketing effort,” one club manager says.
Outside Lloyd's, the North of England P&I has a small hull facility; the Scandinavian club Gard has linked up with the Skandia/Storebrand joint venture If...; the Britannia club is in the latter stages of attempting a marriage with AGF MAT (and its owners Allianz); and the Swedish Club has said it will issue joint policies, although it is not yet clear how the mechanics of its policies would fit with IGA rules.
Some P&I watchers predict these new alliances could cause the collapse of the IGA. “There are reasons to suspect the IGA won't last,” a broker said. “P&I clubs will want to do hull, but they will find it difficult to write hull and P&I under different stamps. There may be conflicts between the dual deals.” However, it is prudent to remember that the century-old P&I mutual pool system has survived despite 99 years spent predicting its collapse.
But the bread and butter for Lloyd's remains the reinsurance of P&I clubs, and the IG reinsurance programme. Lloyd's took on an extra $500m of IG oil pollution reinsurance this year, as the total was raised from $500m to $1bn. In the past, tanker operators had protected themselves for excess pollution liabilities with private contracts. A facility written by Lloyd's Agnew syndicate, offering a layer of $200m and an excess of $500m, was remarkably successful. But clubs proved willing to increase the pollution layer at the last renewal, perhaps due to pricing.
The IG reinsurance programme got cheaper in 2000, despite including a two-year lock-in and the extra oil pollution cover. The actual reduction is difficult to calculate, but conservative estimates begin at 7%, and range up to 24%. The programme is led, as it has been for many years, by Lloyd's agency Janson Green. The agency forms a part of Limit, which is set to be sold to Australian insurer QBE.
The structure of the programme is extremely complicated. The IG retains 10% of the first $500m (excess of $30m group and club retention). Another 15% is split out for placement by reinsurance brokers Benfield Greig. The remaining 75% of the first excess layer of $500m, and the three higher layers of $500m each to $2.03m, are placed by the traditional broker Miller Marine. Lloyd's syndicates underwrite 72.3% of that $375m portion of the primary layer, giving the market an exposure of $271.125m. Supporters are a who's who of the reinsurance world. Munich Re is notably absent.
Lloyd's syndicates are major players on two of the three higher layers – excluding the so-called “Bermuda layer” at the top. That $500m is underwritten by Ace, Star Excess, and EXEL in a 95% consortium. Swiss Re UK has the remaining 5%. Most Lloyd's syndicates who do any marine participate on the slip. For some, it is the majority or even the sum total of their P&I business.
John Charman's Ace syndicates are absent this year – in part because of the rating, but also because Ace, through Charman, is said to have been the driving force behind a proposed alternative $1bn oil pollution facility offered by Aon at the end of 1999. This happened just as the IG renewal, which occurs annually on February 28, was underway. Mutual club reinsurance insiders insist the Aon/ACE facility did not provide the impetus for increasing the IG's own oil cover to $1bn. But other market insiders disagree. In the end, the Aon facility attracted little attention, beyond the press release, and no business.
Lloyd's is also the lead market for P&I clubs' overspill reinsurance – the layer above the IG's $2.03bn. Most clubs buy an extra £1bn, but the cover is proving harder to get, as marine liability appetite dwindles in Lloyd's and London. “The market is running out of capacity for overspill,” one underwriter says. “The Britannia Club had to go outside London for its cover.”
For marine underwriters who have for years complained about – and abetted – the soft market conditions, that's good news.