AM Best anticipates that Protection and Indemnity (P&I) clubs will see improved underwriting results in 2023, though the challenging investment environment will likely offset any profits.
Best explains that the P&I segment is dominated by the members of the International Group of P&I Clubs (International Group), which collectively insures approximately 90% of the world’s ocean-going tonnage.
For the 2021/22 financial year, the International Group reported an underwriting deficit of $267 million, based on the combined accounts of the principal clubs.
AM Best suggests that this reflected an improvement compared with the previous year, where there was a deficit of $531 million. The combined ratio also improved to 107% from 117% in the prior year.
Technical performance is expected to see a further improvement for 2022/23, helped by the combined effect of general increases and lower pool claims.
For the fourth consecutive year, the majority of P&I clubs have announced general increases ahead of the February 20, 2023 renewal date for ship-owners.
Nine clubs have announced that they will apply a 10% increase to P&I premium rates, slightly below those of the previous year, when several clubs applied increases of 12.5%.
AM Best considers the level of general increases fair, given the improved underwriting performance projected for 2022/23, and expects less need for substantial rate adjustments prospectively as most of the clubs forecast that they will reach price adequacy with the 2023/24 increase.
However, AM Best believes that it is likely that the large majority of the clubs will report negative investment results for the 2022/23 year, driven by the reduction in the market value of fixed-income securities caused by the uptick in interest rates, as well as by the volatility seen in equity markets.
These investment losses are expected to offset any modest underwriting profits, leading to overall losses for 2022/23.
AM Best notes that in recent years, the clubs’ investment results have been driven by the performance of equity investments, while fixed-income returns were limited, due to a low-interest rate environment.
Going forward, investment income from fixed-income investments are expected to contribute more to the clubs’ bottom lines as a result of a higher interest-rate environment.
However, investment earnings are likely to continue to be affected by volatility in financial markets.
On the reinsurance side, clubs in the International Group cede around 21% of premiums written. As part of the International Group pooling arrangement, participating clubs mutually reinsure one another by sharing claims in excess of $10 million.
Additionally, the group buys general excess of loss (GXL) reinsurance cover up to $3.1 billion in the open market.
AM Best explains that by negotiating as a group, the clubs can achieve better terms on their reinsurance protection than would be possible on an individual basis.
The rating agency writes, “Despite the challenging renewal environment globally, the International Group has successfully renewed its reinsurance programme for the 2023/24 policy year.
“Both the individual club retention and attachment point of the GXL contract remain unchanged at $10 million and $100 million, respectively.
“The upper limit of the GXL programme, as well as the capacity of the overspill protection, also remain unchanged.”
AM Best observes that reinsurers concerned about the exposure to systemic risks have sought to introduce pandemic and cyber exclusions into many reinsurance contracts since the 2020 renewals.
However, wholesale exclusions have not been introduced to the International Group’s programme.
In the 2023/24 renewal, the International Group managed to expand free and unlimited cover up to $650 million excess of $100 million (from $450 million in the prior programme) for risks in respect of malicious cyber, COVID-19 and pandemic.
