Circular No. 15/97 - Development of Open Policy Years
To: MEMBERS OF THE ASSOCIATION
December 9, 1997
Circular No. 15/97
DEVELOPMENT OF OPEN POLICY YEARS
PREMIUM RATING FOR THE 1998 POLICY YEAR
At its recent meeting in New York, your Board of Directors considered the development of open policy years and made the following decisions in relation to them. In subsequent consultations involving the Board's Finance Committee, further decisions were made in regard to premium rating for the 1998 policy year, particularly in light of the Club's recent success in achieving full pooling status within the International Group, the circumstances and implications of which are described in greater detail in the Circular (No. 14/97) issued as a companion to this document.
1994 Policy Year
This policy year continues to develop in modest surplus. Accordingly, no further call is expected in excess of the originally forecast 65% of advance premium prior to closure of the year in due course, scheduled for June 1998.
1995 Policy Year
This policy year has also developed into surplus over the past twelve months. Accordingly, it is not expected that any further call will be required in excess of those already levied. Depending upon circumstances, it may be possible to close the 1995 year without further call at the same time as the 1994 year is intended for closure as mentioned above.
1996 Policy Year
Twelve months ago there were very early indications that this policy year would ultimately develop in deficit. These indications were based upon an actuarial determination of the likely final claims outturn for the year which was at the time immature. Nevertheless, it was felt prudent to put Members on notice that a further supplementary call of up to 40% of advance premium might be required over and above the original forecast for the year of 25%. This was communicated to Members in Circular No. 8/96 of November 18, 1996.
During the last twelve months, the claims development of the 1996 year has proved to be more favorable than originally projected. Although it remains likely that a call in excess of the originally estimated supplementary call for the year will still ultimately be needed, current indications are that this should not be more than 15% of advance premium, substantially down from the 40% overshoot mentioned above. Expressed differently, it is now expected that the actual total cost for 1996 will exceed the original projection of total cost for the year by some 12% rather than the 32% estimated a year ago.
Members are therefore advised to budget for a further call of up to 15% of advance premium for the year. No action will be taken for the time being as to levying any such further call in excess of the originally estimated 25% already debited at the end of 1996. However, the position will continue to be monitored closely and Members will in due course be informed as to when any further contribution to this policy year might be required.
1997 Policy Year
The early development for this policy year indicates a pattern much in line with its predecessor years. Although immature, the year as yet exhibits no claims trends which suggest that the originally estimated 25% supplementary call will prove insufficient. Members are advised to budget accordingly.
In light of the foregoing, your Board of Directors has ordered the levy of a 25% supplementary call for the 1997 policy year, as originally estimated and receivable as of December 31, 1997. The call will be payable in two installments on May 20 and August 20, 1998.
As a general observation, however, Members should be aware that it may in future be decided to levy such calls in one installment only, particularly where the sums involved are relatively modest or where they do not involve an aggregation of calls payable simultaneously for different policy years.
The release call margin for the 1997 policy year remains at 25% of the advance call for the year over and above estimated total premium.
Premium Rating for the 1998 Policy Year
As described in greater detail in Circular No. 14/97, the Club's acquisition of full pooling status as of February 20, 1998 will have a significantly positive impact upon its overheads for the forthcoming policy year.
This, coupled with further projected savings elsewhere in its reinsurance program, but tempered by a conservative view of likely claims costs and investment returns for the year, makes it possible for the Club to forgo for the 1998 policy year any general increase to Members' expiring estimated total premium. From this preliminary "zero increase" position further adjustment will be made to take account of a particular Member's loss experience and any other relevant factors.
The Club's supplementary call requirement for 1998 is estimated to be 25% of the advance call for the year. Its release call margin will remain at 25% of advance call over and above estimated total premium.
The managers will in due course be in touch with individual Members with proposals for renewal of their cover with the Club effective February 20, 1998. In the meantime, all Members are asked to note the contents of this Circular and await further contact.
Joseph E.M. Hughes, Chairman & CEO
Shipowners Claims Bureau, Inc., Managers for
THE AMERICAN CLUB