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Insurance Industry And Country Risk Assessment: Global Marine Protection And Indemnity


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Insurance Industry And Country Risk Assessment: Global Marine Protection And Indemnity

Credit Highlights

Key strengths Key risks
P&I clubs are generally well-capitalized, although this has recently come under pressure as a result of underwriting and investment losses. Poor technical performance in recent years.
Clubs have the legal right to apply unbudgeted supplementary calls to raise additional funds. Potential exposure to material product risk, notably large pool claims.
High barriers to entry and member retention, limiting threats from new entrants.


S&P Global Ratings' insurance industry and country risk assessment (IICRA) for the global marine protection and indemnity (global P&I) sector is intermediate. The assessment is comparable with that of other sectors, notably the global property/casualty reinsurance (global P/C Reinsurance) and global trade credit sectors. We base our assessment on our analysis of the 13 P&I members of the International Group (IG), together representing over 90% of global owned tonnage (see chart 1 for market share).

Chart 1


Country Risk

All P&I clubs are based in developed jurisdictions and source a significant amount of their business from these markets. Despite an increase in business from China and other less developed nations, notably emerging Asia-Pacific markets, we believe that country risk for the sector is still geared toward Western Europe, the U.S., and Japan. Therefore, our country risk assessment for the global P&I sector is low.

The industry is exposed to economic risks that are generally specific to developed markets. In our view, the sector's diversification mitigates the effects of economic downturns. In addition, the low country risk reflects the sector's exposure to well-established and transparent institutions and developed banking systems, together with strong payment cultures and minimal rule-of-law risks.

Industry Risk

Our assessment of industry risk reflects the sector's weak profitability prospects, with potentially material product risks, notably the exposure to large claims. The P&I sector's product risk is similar to that of global P/C Reinsurance, where volatility in the latter typically comes from natural catastrophes. However, these risks are more limited for P&I clubs because vessels can navigate away from tsunamis and cyclones.

The P&I sector has suffered from technical losses resulting from large claims, bringing combined ratios to 116%-117% in the 2019-2020 financial years. The poor performance continued in 2021, but in the latter part of the year the frequency of these large, pooled claims moderated. In fact, we calculate a net combined ratio for the sector of 108% in 2021. Even for mutual companies that do not target profit maximization, we consider this performance to be poor, both absolutely and relative to clubs' own targets. The positive trend in operating performance has continued into 2022, with pool activity being low to date this year.

While we still view the sector's profitability as weak, it should show an improvement over last year. Prospectively, we believe the sector's operating performance will continue its improving trend over the next two years, with combined ratios expected to decrease to around 105%-107% over 2022-2023. A few factors support this expectation, including:

  • At the February 2022 renewals, most clubs announced general increases on P&I rates of 5%-15%, with an expectation that we will also see some rate increases in the February 2023 renewals, albeit at lower levels than in 2022. In our opinion, higher rates should also help clubs weather the current inflationary environment.
  • On top of the general increases, clubs continue to revise the terms and conditions of their covers, increasing the deductibles applied in the event of a claim and consequently limiting the losses they pay.
  • P&I clubs have not had any material exposure to the Russia-Ukraine conflict. Indeed, hull and war risks are not covered under P&I policies.
  • P&I clubs have been increasingly diversifying their premium base into the better performing fixed-premium and charterers lines, which help offset the P&I lines' poor performance.
  • Finally, we believe that tighter underwriting discipline, enhanced risk management frameworks, and increased investments in loss-prevention programs should help control the technical performance in the longer term.

In terms of return on members' funds, P&I clubs traditionally benefitted from investment returns to offset the underwriting losses and result in overall net profits. However, because of the volatility in investment results, notably toward the end of the 2021 financial year, we estimate returns to be around -3.9% in 2021. The volatility in investment results continued in 2022. We therefore assume a return on members' funds at around breakeven, though this could be negative should investment returns remain volatile.

Chart 2


Factors limiting profitability
  • The nature of the P&I business exposes the clubs' operating performance to volatility, notably because of the unpredictability of large claims frequency. This has been evident recently--for example the net combined ratio of 116% in 2021 compared with 88% in 2015. In addition, the sector is exposed to unpredictable claims settlements in less-developed jurisdictions. Nevertheless, the IG pooling arrangement is a key mitigating factor, where claims above a certain limit (currently $10 million) are ceded to a pool, allowing the P&I clubs to share the losses and reduce the volatility in combined ratios.
Factors supporting profitability
  • The IG dominates the global P&I sector, with the 13 clubs accounting for over 90% of the global fleet as measured by tonnage. Non-IG companies have not been successful in competing with the established players, suggesting appropriate barriers to entry do exist to mitigate the impact that potential competition could have on the sector's profitability. Indeed, Norwegian Hull Club is moving out of the P&I insurance business after 14 years. The mutual said it had been unable to establish a profitable P&I business since it expanded into the market in 2018.
  • Furthermore, there are close relationships between the IG clubs and their ship-owner members, with high retention rates year after year. Strong customer loyalty makes it difficult for new players to gain meaningful market share. That said, we view regulatory barriers as low, given that the process of setting up for new entities is not cumbersome.
  • In terms of M&A, the sector has been quiet for many years, notably after the 2015 talks between the UK Club and Britannia failed to result in a merger. However, one of the most significant developments earlier in 2022 is the announcement of the merger between the North of England and Standard Club, to be formed as NorthStandard. If the merger completes, the combined group would be the largest member of the IG in terms of tonnage (representing 20% of the IG) and the second largest in terms of GWP and free reserves. The clubs plan to complete the merger in February 2023, subject to regulatory approvals. In our opinion, further consolidation in the sector would be beneficial, notably as fewer and stronger clubs would likely result in improved profitability.
  • We forecast real premium growth rates to remain positive and in the low-to-mid single digits. Given expected inflation of 7.2% in 2022 for the advanced economies, we expect GPW growth of 8%-10% for the P&I sector in 2022. For 2023, our inflation forecast stands at 4.1%. As a result, we expect nominal premium growth of around 6%, supported by further general increases.
  • With the majority of P&I clubs incorporated in the U.K., the Nordic region, Bermuda, the U.S., and Japan, we believe the sector benefits from a supportive regulatory framework. Most P&I clubs are subject to the Solvency II regime, or a close equivalent. We have not identified any governance or transparency issues at the sector level.
Adjustment factor

Despite the weak performance in the sector overall, some P&I clubs have operated with a more stable performance. Along with our expectation of improving profitability over the current and next year, we apply a positive adjustment to maintain our overall IICRA at intermediate risk.

Global P&I Sector--Key Metrics
--Fiscal year end--
2024f 2023f 2022f 2021 2020 2019
Gross premium written (Mil. $) 5,279 4,980 4,698 4,350 3,939 3,783
Net combined ratio (%) 102-105 102-105 105-107 107.8 117.0 115.7
Return on members' funds (%) 4-6 3-5 0.0 (3.9) 1.6 5.6
f--S&P Global Ratings forecast. The sector's metrics are based on the 13 P&I members of the International Group.

Related Criteria

This report does not constitute a rating action.

Primary Credit Analyst:Mario Chakar, Dubai +971-4-372-7195;
Secondary Contact:Mark D Nicholson, London + 44 20 7176 7991;

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