According to analysts at global credit ratings agency, AM Best, Protection and Indemnity (P&I) clubs will seek further price improvements at the February 2024 renewal, to keep up with claims inflation.
In advance of the 2024 renewal deadline, seven clubs have announced that they will apply a 7.5% increase to P&I premium rates, while five will apply a 5% increase.
Best explains that the general increases overall are slightly below those of the previous year when some of the clubs applied increases up to 10%.
At the same time, the agency considers the level of general increases necessary for clubs to maintain the breakeven underwriting results seen in 2022/23 and expected for 2023/24, in the face of inflationary economic conditions, as well as the potential for a worse pool year to emerge in the future.
Moreover, for 2023/24, Best noted that it expects underwriting performance to be in line with 2022/23, with most of
the clubs likely to achieve around breakeven combined ratios.
The general increases applied by the clubs have been offset by an inflation-led increase in cost, in addition to a negative run-off on prior year claims.
Current-year claims have remained in line or below budget for most clubs, helped by another benign year in terms of pool claims.
Importantly, there have been a number of factors that have influenced claims trends in recent years, which has resulted in an upward pressure on costs.
These include: high levels of inflation, the increasing size of vessels, an upward trend in ship-owners’ liability limits, and technological advances allowing deep-water wreck removal.
Best also highlighted how inflation has became a major a concern worldwide in 2022, with many developed countries recording double-digit inflation during the year.
High inflation has also led to higher claims costs within the P&I industry. It is also impacting prior-year claims, increasing reserve values.
However, by contrast, a number of factors continue to have a positive impact on claims costs.
These include: the fall in the age profile of vessels, technological advances in navigation, investment in loss prevention, and increases in club deductibles.
Further, Best also explained that most clubs are expected to report significant investment returns in 2023/24, leading to a partial recovery in free reserves.
The agency noted that going forward, investment income is expected to contribute more to the clubs’ bottom lines as a result of a higher interest-rate environment, which allows clubs to obtain better yields on their fixed income portfolios.
