London Club Takes Early Action to Combat Financial and Regulatory Pressures

THE London P&I Club has taken early and decisive action to strengthen its financial position in light of the parlous state of global investment markets, continuing high claims levels, and the more stringent regulatory capital requirements expected to apply under Solvency II in 2012.

The Club has been experiencing very high levels of claims since 2006 (most particularly claims on the International Group Pool, of which it has to bear its share) and, from the middle of 2007, the negative impact of the credit crunch on its investments. As a consequence, free reserves fell to just under $81m at February 20, 2008.

The Club says that, although capitalisation remains strong at that level, the reserves no longer represent a comfortable margin in excess of regulatory requirements. It explains, “As the current year has developed, it has become obvious that investment performance cannot be expected to lead to free reserves being brought back up to a comfortable level in the foreseeable future. Indeed, the investment environment has worsened recently, with no prospect of an early respite. Nor is there any persuasive indication that the high level of claims experienced over the last two years will moderate sufficiently to help improve the level of reserves. Furthermore, it is clear that the substantial subsidy of investment income, used to reduce premium levels for many years now, cannot be relied upon in the foreseeable future.

“Accordingly, the Club’s Committee has decided that firm and decisive action needs to be taken to restore free reserves to a comfortable level, particularly in the context of the extreme uncertainty in the investment markets and the expected strengthening of regulatory capital requirements. That has led the Committee to the conclusion that Additional Calls must now be levied and that an increase in Advance Calls going forward is required.

“This conclusion has not been reached lightly and the Committee recognises how unwelcome the decisions will be to Members. However, it feels that in the current environment, it would be wise to take early and substantial action so as to reduce as much as is reasonable the risk of having to take further action as events unfold.”

The Club reports that the 2005/2006 policy year has developed satisfactorily and will be closed without further call. For 2006/2007, an Additional Call will be payable at 35 per cent of the Estimated Total Cost (the ETC) for the year. For 2007/2008 an Additional Call is also to be paid at 35 per cent of the year’s ETC; and for 2008/09 the Additional Call is payable at 25 per cent of the ETC.

The Club has also set rates for Release Calls which are the equivalent, in respect of each open policy year, of Deferred and Additional Calls which have been set by the Committee, but not yet become due, plus the same 20 per cent release call uplift which has applied for many years.

The Club’s Committee also reached a decision on premium requirements for the forthcoming 2009/2010 policy year. Against the background of high claims and investment uncertainty, it determined a General Increase of 15 per cent in Advance Calls, before adjustment in respect of individual records. Any adjustment to the cost of the Club’s share of the International Group’s excess loss reinsurance programme, which has not yet been determined, will also be applied. The estimated Deferred Call for 2009/2010 has been set at 40 per cent of the Advance Call.

The Release Call rate is set at the Deferred Call rate plus 20 per cent of the Advance Call rate.