The Challenges Facing the P&I Clubs

Date: 18th September 2013

Host: Alistair Groom, Chief Executive, Charles Taylor & Co Ltd (managers of The Standard Club Ltd)

Speaker: Alistair Groom, Chief Executive,Charles Taylor & Co Ltd

Subject: “The Challenges facing P&I Clubs”

Report by James Brewer

18th-september-2013-the-challenges-facing-the-pi-clubsUnderlining the theme of the meeting, our chairman Jim Davis said that there were indeed considerable challenges at present.

Mr Groom began by listing some of these challenges: major casualties and their cost and causation, reinsurance costs and their allocation, the continuing shipping recession, pricing, and regulation.

An indication of the massive amount of money it was possible to spend on major casualties was that the engineering relating to the raising of the Costa Concordia cost some $700m.  Standard Club was the lead P&I insurer of the Costa Concordia, although its financial involvement was relatively modest because of reinsurance. Standard had been heavily involved in the whole contract process of engineering decisions.

The Costa Concordia was but one of the serious casualties of the last few years that had continuing repercussions. Mr Groom

cited instance of the 2,251 teu containership Rena which ran aground in October 2011 on rocks off New Zealand, spilling oil and in January 2012 breaking in two. This was occasioning $250m of wreck removal costs.

In this whole area of liability, Mr Groom quoted the American businessman Robert Half, known for his pithy maxims: “The search for someone to blame is always successful.”

As to causation: pollution, wreck removal and collision were nearly always caused by navigation errors, not by ship deficiencies. More than 70% of claims which have hit the reinsurance layer exceeding the pool of the International Group of P&I Clubs pool had navigational factors.

Shipowners would say there was a problem of recruiting and retaining officers. Bridge team management was a continuing issue. Mr Groom said of shipowners: “They operate in a very tough market; to survive they have to get their costs down and cannot afford to pay more than they have to for their crew and for their officers.”

Market pressures: were they making shipping riskier? Over the last 20 years, shipping had become a lot more professional.

Turning to the way that reinsurance costs are passed on as additions to P&I basic premium, Mr Groom gave a historical overview. After the Exxon Valdez casualty in 1990, reinsurance rates shot up, but there were not many pollution claims subsequently, so gradually reinsurance rates for tankers got much lower, to the stage where they are not much more than for dry cargoships.  Then the Athens Convention came in, bringing extra costs for in relation to passengerships, and last year there was an increase in the passengership rate to reflect the Costa Concordia casualty.

The fact remained that major casualties were few and far between, said Mr Groom, and there was not a big enough statistical base for reinsurance costs. How can we allocate the reinsurance costs fairly? “Demonstrating that we have approached it fairly is one of our challenges.  I think that we have done it reasonably well, but it is definitely a hot topic.”

Mr Groom reminded the audience that shipowners were still struggling in the worst market for a generation, with only the specialist areas doing not too badly. In terms of cover given by the sector, “we have seen a huge increase in our defence (legal) costs over the last five years, with many people trying to cancel or to enforce contracts.”

He noted that “clearly there was ‘irrational exuberance’ in 2005/2006  — now we are seeing some shipowners invest very heavily in newbuildings.”

Pricing in the P&I arena was another big challenge.  Shipowners’ budgets were tight. Even if you have been making $100,000 a day, things might not be easy. “We are operating in a very competitive market.”

Mr Groom, a former chairman of the International Group of P&I Clubs, said that some people had talked about the Group as a cartel.  “That is rubbish,”  he declared. “Of course we have a pricing agreement, but there is an incredible amount of competition. Tonnage moves for competitive reasons. We only price ourselves to break even as a non-profit making organisation.” He said that investment income had been very helpful “but in this current market is very difficult”.

Standard Club and some of its rivals had adopted a strategy “to grow ourselves beyond the core.” Standard was providing new covers, and some other clubs were widening their range, partly because they wanted to save money for members, and in the hope of making a little additional income that would contribute to the club’s ends.

On the subject of regulation, Mr Groom said it was clearly important to have a fair and orderly market. In establishing a Singapore base, the club had wanted to go somewhere where regulation was tough.

As to the future, “the P&I model has clearly stood the test of time. The basic model seems to have worked, but it is really important that we are not complacent.  We need to strive to provide best value, not just give the same old stuff.  The same old stuff may be good, but it may not be enough. [The system] does give shipowners a real choice – I think that there is a real choice between clubs.”

Jim Davis said that Mr Groom’s survey of the challenges was “brilliant,” and opened the way for questions.

A member of the audience referred to “a tremendous dichotomy between the very small and the ‘mega-big’ clubs.” Mr Groom replied: “The smaller clubs survive because their members want them to survive.  Every club has its very strong, loyal following, and they like the style they get from that club, so even the small club has a place in the industry. The International Group and the pooling agreement give smaller clubs a platform to survive. It means that shipowners have a choice of 13 clubs to go to.”

Asked about the cost of dealing with the wreck of the Costa Concordia, Mr Groom said: “We had bids from six contractors. Protecting the environment and avoiding environmental damage was high on the list of priorities. Cost was an element, but it was only one of the factors we had to take into account. There was a debate as to whether the ship should be cut up on site. It is more complicated than saying that ‘one was cheap and one was expensive.’ There was a strong view that removing her in one piece was going to be less damaging to the environment than chopping her up on site. It was a high priority, but you cannot put a number on it. We are pretty sure that in the same circumstances tomorrow, we would not do anything different.”

Returning to the subject of the human element at sea, another participant at the event said that despite the ISM Code, we still have accidents. Mr Groom said that getting the right people is still a serious challenge, “but we cannot solve shipowners’ employment issues. We can do a lot of education, but we do not teach them how to run their ships.”

Thanking Mr Groom for his presentation, the clear way he had answered questions and for his company’s hospitality, Mr Davis said: “We have all, I think without exception, learned a great deal.”

Mr Davis wished Mr Groom well in his future plans.  It was announced in May 2013 that Mr Groom, who has been with the Charles Taylor group since 1977, would retire from his current posts early in 2014. He will continue to have close involvement with both Charles Taylor and the club, said the formal statement, and it was anticipated that he would take the role of non-executive chairman of The Standard Club Europe.