Claims are the barometer of operational quality: Gard CUO

The gradual decrease in claims over the past 15 years is “one of the positives” in the protection and indemnity (P&I) business and is an indicator of quality among shipowners, according to Gard’s chief underwriting officer, Bjørnar Andresen.

In an interview with Insurance Day, Andresen says the trend reflects how the service P&I clubs provide goes above and beyond insurance.

“The fact we don’t see a huge increase in the frequency of claims is one of the positives in the P&I business because the frequency of claims has gone down step by step since around 2010 and we believe that has to do with shipowners taking operational quality more seriously and running their ships in a better manner, on average,” Andresen says.

“We can only speak for ourselves, but I believe this is something most clubs have seen and although it’s gone up a little bit again from the lowest point, it’s still good compared with 15 years ago,” he adds.

Information sharing and loss prevention efforts are two of the ways Gard supports shipowners, he continues. “More than being just a provider of insurance capacity, we are appreciated as a service provider,” he says.

Claims are clearly higher than they were last year, but 2023 produced lower costs than expected on large claims. Managing such volatility is one of the advantages of the mutual system.

Gard’s business model is to use the profits from its commercial lines, which include the world’s largest hull book as well as offshore, to subsidise mutuality and budget for a small loss on P&I activities.

Right balance

The club estimates a 4% increase in P&I premiums is necessary to maintain a rough balance.

“With a moderate premium adjustment, we are ensuring we can continue to offer mutual P&I at competitive prices, while at the same time ensuring the group’s long-term stability,” Andresen says. “The macro­economic outlook continues to be uncertain, and we need to take into account an expected increase in claims.”

Andresen says in all marine products, there is always a small margin. “We are here for our members and nothing else, which means we try and find the balance every year, where we can – with a small contribution from the commercial products and from the investments – run a small loss on the P&I mutual,” he says.

“What’s important in this sector is to manage volatility. This is something we take very seriously and it’s a very good fit with our mutual ownership that has an interest in the wellbeing of the portfolio and of the insurer. Moreover, we can think long term and not simply quarter by quarter or year by year”
_{Bjørnar Andresen
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Finding a balance means aiming for a combined ratio of around 102.5% to 105% on the mutual product alone, he adds, which is then supported by a very small profit at a company group level.

“The P&I mutual market today is fairly balanced. It’s not like some in the media have said that it’s more expensive than it’s been in the past. Actually, on an international group level, our estimate is the average premium, including reinsurance, is a low double-digit figure lower compared with 2014, so in the past 10 years, it’s actually cheaper, on average, in premium per gross tonne,” Andresen says.

“It has been lower before and it is an increase on the past few years, but not severely and not close to where it was 10 years ago,” he adds.

Looking across the portfolio and at all the factors, including inflation, affecting claims development, a modest increase in the estimated total premium – also known as the estimated total call – required for a P&I policy is justified, he continues, to keep Gard’s book in balance.

Enough capital

Gard also looks at its capital situation, which Andresen says presents an opportunity to provide an owner’s general discount (OGD) to its members. That discount is not seen as a part of the renewal as such, he points out, because it is a capital adjustment that is done to benefit the owners, which are the mutual’s members. “To give predictability before the renewal, we are announcing the OGD every November now. It used to be at the end of the policy year, but now it’s up front, so the members know what to expect for the next year,” he adds.

The club’s capital situation is “good” and Andresen expects it to continue to be so over the next year, which is why it can discount the premium with a 10% pro rata for next year for all vessels that renew with the club.

“It’s two separate topics. One is to get the underwriting right – always marginal, but right and sustainable. And the other is to make sure we don’t have too much capital but we are still a financially strong club,” Andresen says.

To Gard’s board, a strong club means not only having an A rating but maintaining that when there is a sudden change in the claims climate or investment market. Andresen says: “The span is between A- and A+ and we currently have an A+ rating with a stable outlook from S&P Global. In fact, we are the only club within the International Group of P&I Clubs to have an A+ rating and we have been so for a while now.”

What does “too much capital” mean? Andresen replies: “In our modelling, we are using the same principle as Solvency II to measure capital adequacy, which takes into account the insurance portfolio, but also other risks, like operational risk and financial risk. This is done on an internal model basis, which is approved by the Norwegian financial supervisory authority.”

Looking to the 2025 P&I renewal more broadly, he points to the backdrop of a beneficial financial year in 2023, with good income for all clubs, which has continued during this year. “But at the same time, we saw as a group a deterioration in the pool claims during the current year, but that is on the back of very good years in 2023 and 2022,” Andresen says.

“There will be a situation where clubs are fairly healthy, but with differences between them and in terms of capital, and some will be struggling to have balance in their underwriting result going forward. That’s why you see some increases to be predicted from clubs, but of course this plays out in an environment where there is also fierce competition, and I think most clubs would like to grow and how that plays out is going to be interesting,” he says.

“I think it will be necessary for clubs to raise premiums. If they are not able to do so then they will have consequences later, but it won’t be, for most clubs, a consequence that gives any supplementary calls, which is always the backdrop of P&I,” he adds.

There have been instances of this in the past three years, as a way of capitalising, where the club asks every member to pay a certain percentage of the premium of the open policy years. Andersen does not expect that situation at the 2025 renewal, but says to avoid it in the long run, a sound insurance result, balanced with results from the investment market, is necessary.

“Many people think hull insurance is more competitive than P&I and we do both, but I would say P&I is even more competitive because the consequences there and then for the clubs are smaller than the hull insurers, which are operating commercially on a quarter-to-quarter basis,” Andresen says.

“You have to be short-term on the hull side, although we see a lot of different conduct there as well on the portfolio basis. For example, in 2018/19, a lot of companies had to exit from marine hull while others were more stable through a difficult, soft market period.”

Different profiles

There is plenty of capacity in the P&I mutual market, Andresen stresses. In fact, there is never a lack of capacity and always an overcapacity, he adds, because the ability to write business among the clubs is good.

The differences between them instead lie in their respective profiles. He says: “The size and capitalisation of the clubs are examples where they differ, but in what used to be very much a conforming market, where everyone asked for the same and were performing very similarly, over the past 10 to 15 years differences between the clubs have emerged, partly because more and more of them are also looking at commercial products.”

For example, Gard covers all types of shipping, while some other clubs concentrate on tankers, bulkers or smaller vessels. “This does not mean they are specialised clubs, but rather their profiles differ slightly from each other,” Andresen says. “The differences between clubs are bigger today than they were in the past, but capacity is plentiful and all clubs do most business, it’s just the profiles and the ways clubs are being run, are performing and are capitalised are different.”

Where all clubs agree, however, is in their understanding the geopolitical situation is the most severe emerging risk, not least the emergence of complex sanctions. Insurance companies and service companies that fail to enforce sanctions see their vessels ousted from the International Group’s insurance programmes.

To mitigate such a risk, Gard strives to ensure it has the full picture of the situation through investment in both internal intelligence systems and people. Externally, in the broader business context, sanctions, predominantly against tankers, have had a great impact on the industry, Andresen says, and has required “a build-up of functions and competence we haven’t had before”.

The best approach to sanctions is collaboration between regulatory authorities, he stresses, to avoid differences between them that make a shipowner’s ability to comply more difficult.

He says: “We need a clear regime that is relevant and aligned across jurisdictions, not only a national scheme that only applies to the insurers in that given country. Complying with sanctions is much easier when it is an aligned regime between, let’s say, the EU and the US and Britain, because then you can actually act swiftly in accordance with intentions. But when you are in a situation where you have one regime that says one thing and another saying something else, and depending on where you are regulated, it can be a difficult situation to act promptly. So, the clearer the picture, the easier it would be.”

A reaction to the sanctions has been the arrival of a crop of systems providers that “have probably done well”, he says, in terms of selling their data programmes.

Strategic objectives

Gard’s aim is always to be a predictable and stable provider of a good service and financial backing for its members and clients, Andresen says, which is why it is important for the club to have balance between its business areas. Gard only operates in marine and energy and P&I and it wants to maintain that balance.

“We have built a robust system where we can provide better service than the average on different products where there is a crossover in expertise,” he stresses. “That means we can help our members understand the risks better and hence provide coverage at a more competitive premium than they could get elsewhere.”

For this, Gard needs to continue to be strongly capitalised, he adds, to enable flexibility as situations change and evolve. An important element of that, he continues, is “investing in the future”.

For example, Gard is in the process of acquiring Codan’s marine and energy portfolio in Denmark. The $163m transaction, which is expected to be completed in March 2025, will give Gard a leading position in the renewable energy segment. “This will make us even stronger on the renewable energy side as Codan’s portfolio is very complementary to ours,” Andresen says. “We will be not only a capital provider, but also have an ability to lead and to make a real difference in that area.”

The broader picture of marine and energy, including P&I, is a matter of “marginal products over time”, he stresses. “What’s important in this sector is to manage volatility. This is something we take very seriously and it’s a very good fit with our mutual ownership that has an interest in the wellbeing of the portfolio and of the insurer. Moreover, we can think long term and not simply quarter by quarter or year by year.”

He concludes: “Long-term relationships combined with an elevated service is what we are always striving to achieve.”