Ship insurance clubs bow to pressure

Date: 31/07/1997

By Chris Johnstone

THE world's shipping industry has moved a step closer towards solving a dispute with competition watchdogs over its unique liability insurance regime - but still faces a long haul to ease all officials' worries about the structure that underpins it.

The European Commission's Directorate-General for competition (DGIV) shocked the shipping industry in June when it issued a statement of objections against so-called Protection and Indemnity Clubs (P&I Clubs): groups of shipowners who join forces to share the costs and get the best rates for covering themselves against liability in circumstances as varied as a collision or crew and passengers falling overboard.

Liability insurance for around 90&percent; of the world's merchant and ferry fleet is covered by the interlinked system of clubs.

The P&I Clubs had expected the Commission to continue an exemption from competition rules granted ten years earlier with, at worst, demands for only small changes. But it has instead attacked the clubs' basic tenets.

Competition officials focused on two main issues in their objections: the high levels of exposure facing shipping companies for claims under the existing system and the framework for linking the dozen or so leading P&I Clubs.

On the first issue, club administrators have offered changes aimed at appeasing the Commission and a group of Greek shipowners who complained about their high exposure under the present system in the event of a major claim.

That system currently sets a limit of around 21.5 billion ecu on the call that can be made on the 14 major P&I Clubs in the event of a catastrophe. Under the rules, the clubs would effectively find that amount in a whip-round if the damages claimed in a particular case exceeded the 310,000 ecu the shipping company involved was liable to pay and the 2.5 billion ecu contribution made by the reinsurance pool organised by the P&I Clubs.

After consultations with nearly all members, the P&I Clubs have moved to cut their liability exposure per claim drastically to 2.8 billion ecu. Club managers say this lower figure should still be more than enough to cover the worst type of disaster.

Commission competition officials cautiously welcomed the change at a meeting with P&I Club managers last week.

However, they will wait for a full response from all the clubs before setting aside their objections. The only one still to respond, the Standard Steamship Owners' P&I Club, was due to vote on the change by the end of this week.

The second problem surrounding P&I Clubs looks a lot less easy to resolve.

The Commission eyes the International Group Agreement, which sets the framework for relations between clubs, as a formula for a cartel.

The agreement discourages shipping companies from switching between clubs. If a company does move, it is forced to continue paying the same premiums to the new one as it did to the old during the first year.

Most of the competition between clubs is on service and not on price, say the managers of the P&I Clubs. The margin to compete on price is limited since the individual shipping companies are contributing to a commonly agreed reinsurance package and payments are related to the company's tonnage, activities and accident record.

A club which has handled a company for some time is likely to have those facts at its fingertips and is best positioned to set rates, say managers, who argue that altering the general agreement would provoke the unravelling of the whole P&I system.

Managers feel that the Commission has still to grasp the basic fact that the clubs are non profit-making mutual associations whose aim is to get the best cover at the cheapest price for their members.

“It is our belief that if some of the restrictions were removed, clubs would very soon find it impossible to operate together and they would soon be standing on their own,” warned Terence Coghlin of Thomas Miller and Co, the firm that manages the British P&I Club.

The clubs will be making that point when they formally reply to the Directorate-General for competition in September.

An agreement on the overall structure, however, looks unlikely by the Commission's end of year target date.