Circular No. 18/99 - Development of Closed and Open Policy Years and Treatment of Investment Income; Change in the Limit of Cover for Oil Pollution Claims for the 2000 Policy Year; Premium Rating for the 2000 Policy Year
DECEMBER 22, 1999
CIRCULAR NO. 18/99
TO MEMBERS OF THE ASSOCIATION
DEVELOPMENT OF CLOSED AND OPEN POLICY YEARS AND TREATMENT OF INVESTMENT INCOME
CHANGE IN THE LIMIT OF COVER FOR OIL POLLUTION CLAIMS FOR THE 2000 POLICY YEAR
PREMIUM RATING FOR THE 2000 POLICY YEAR
At its November meeting in London, and in subsequent discussions, your Board considered the development of closed and open policy years. It is also reviewed practice in regard to the allocation of investment income as between policy years, a practice which, as in the case of other Clubs, has a bearing on global rather than pure underwriting results for such years, particularly the most recent.
Your Board has also been considering prospective premium rating for the forthcoming policy year. The purpose of this Circular is to communicate to Members the various decisions which have been reached.
Development of closed and open policy years and treatment of investment income
As of December 31, 1998 the Club’s contingency fund, or the balance attributable to its closed policy years, stood at the record level of $36.1 million, or about one and a half times greater than its recent average per annum total premium income. As will be seen from the Club’s latest surplus statement as of September 30, 1999 – a document distributed to Members each quarter – this fund has now increased to $36.2 million.
Historically, and unlike practice elsewhere within the International Group of P&I Clubs, investment earnings, both realized and unrealized, have for the most part been allocated to closed policy years, creating substantial increases in contingency fund levels but at the same time, at least so far as recent policy years are concerned, limiting the contribution of such income to underwriting results.
As will be evident from the financial reports of all P&I Clubs at the present time, underwriting deficits are being suffered in virtually every quarter. It has only been the support of investment income and the drawing down of reserves which have protected many insurers from the levying of additional calls in excess of original estimates. Members of the American Club should nevertheless be pleased that its pure underwriting performance is among the best in the industry at large . An analysis produced by a competing Club recently placed the American Club in the top quartile of performers in this respect.
However, given practice elsewhere in the Group, your Board resolved at its last meeting to allow for a more flexible allocation of investment income for the future, effectively entitling every open year, prior to closure, to a full financial year’s investment income, leaving any capital gains or losses to be allocated to closed years and the contingency fund. This should have the effect, over time, of substantially improving the global results of the three most recent policy years.
So far as the 1999 policy year is concerned, your Board has resolved to levy the 25% estimated supplementary call – as forecast – as of December 31, 1999 payable on May 20, 2000 in the usual way. Members should budget, and be prepared to receive invoices, accordingly. The release call margin for this year remains as originally ordered i.e. 25% of advance call over and above estimated total premium.
As to earlier policy years, it is expected that 1996 will be closed without further call in March 2000. At this time the 1997 and 1998 policy years will also be reviewed once again in light of the changes in the treatment of investment income as mentioned above and the level of surplus considered by the Board to be both sufficient and necessary to secure the Club’s competitiveness in a difficult market. The release call margin for each of these years also remains as originally ordered, i.e. 25% of advance call over and above estimated total premium.
Change in the limit of cover for oil pollution claims for the 2000 policy year
As Members will no doubt already be aware through reports in the maritime press, standard cover for oil pollution claims as offered by members of the International Group of P&I Clubs will increase from $500 million to $1 billion with effect from February 20, 2000.
It is pleasing to note that, notwithstanding this increase in the oil pollution cover, the Group has once again been successful in achieving an overall reduction in the cost of its market reinsurance program, as well as in the price of U.S. voyage surcharges.
Apart from this, and some minor adjustments to the design of the market contract, the elements of the Group’s reinsurance arrangements, as well as the overall limits available thereunder, remain unchanged for the forthcoming year.
Premium rating for the 2000 policy year
The past several years have been characterized by a rating softness unseen for at least a decade. This has been sustainable in underwriting terms only by reason of healthy investment returns and the subvention of policy year deficits through the support of Club reserves.
If the Club – and indeed the market at large – is to maintain its financial strength, it is imperative that premiums are kept at realistic levels. Accordingly, your Board has determined that for the forthcoming renewal a general increase of 5% be applied to expiring rates, for both P&I and F.D. & D. mutual and fixed (charterers’) entries, prior to further adjustment to take account of individual Members’ records.
The Club’s supplementary call requirement for all mutual entries is estimated once again to be 25% of the advance call for the 2000 policy year. Its release call margin will remain, as at present, at 25% of the advance call over and above estimated total premium.
Joseph E.M. Hughes, Chairman & CEO
Shipowners Claims Bureau, Inc., Managers for
THE AMERICAN CLUB