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By JULIE LIEDMAN, a freelance writer who lives in Philadelphia.

The Prevention and Indemnity renewal that ended February 20 was one of the most challenging in recent years -- and the future does not look promising.

"With freight rates depressed, the cost of fuel rising and an anemic global economy, ship owners are under a great deal of pressure to keep costs down," said Joe Hughes, president and CEO of the American Club, which pools large risks under the auspices of the International Group of P&I Clubs.

Nine of the 13 International Group clubs, including the American Club, imposed a 5 percent general increase this year. The UK Club and the Japan Club went with 3 percent raises, while the Shipowners' Club decided against any raises at all.

P&I insurance covers ship operators for liability to crew members and other people on board, damage to fixed objects like docks, and other miscellaneous claims.

"The investment markets have been entirely volatile, so the investment income the clubs rely on to balance their operating costs was reduced last year," Hughes said. "Yet there was a need to get premiums up to match the level of claims, which were quite acute during the last renewal period. The clubs, which are wholly owned by their members, tried to be as reasonable as possible. They tried not to raise rates to the extent that they would be too onerous."

Driven by growth in China and the demand for raw materials, the shipping market boomed between the years 2003 and 2008.

"When things are going well, ship owners start building," Hughes said. "Now they're having all these new ship deliveries, but because of the economy, there isn't enough cargo to put into them."

Nevertheless, Hughes said, ship owners are hopeful that things will improve by 2014, although market conditions ultimately will determine that.

"Owners think things will improve," he said. "From an insurance perspective, what that means is there's a linkage between low freight rates, ships steaming slowly because of the cost of fuel and relatively low rates of P&I claims, although some degree of inflation will kick in; it's inevitable.

"Next year will be difficult to get the right premium for the risk because ship owners will find it difficult to pay whatever the rates are since there undoubtedly will be some degree of claims inflation.

"In the next 12 to 24 months, insurance rates will start to rise aggressively," Hughes said. "I suspect there will be no shocks, but rates will have to rise, unavoidably."

The good thing about mutual P&I clubs, he added, is that since they are wholly owned by their members, there is a vested interest in keeping the price of insurance down as much as possible.

"It's the one area," he said, "where ship owners feel they have some control."

February 27, 2012

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