Gallagher's Malcolm Godfrey is urging protection and indemnity insurers to put clear mechanisms in place to return excess financial reserves to members.

The comments by the insurance broker's executive director of P&I come at a time when clubs are asking for between 5% and 10% in additional premium from shipowners to correct underwriting losses, even though they are sitting on AAA-rated capital reserves.

The estimated free reserves of the 13 members of the International Group of P&I Clubs are around $5.5bn.

Gard and Britannia P&I are the only clubs so far that have opted to return cash to members this year.

But most clubs are reporting positive investment income, and free reserves remain stable despite underwriting losses.

Godfrey believes that if clubs are asking for higher premiums, they should also be prepared to make clear when they will return excess funds to members.

“If we remedy this shortfall with increased premiums, it has to be accepted that a mechanism be put in place to return surplus funds, which historically have largely accrued on investment return,” he said.

“Given the level of free reserves, surely it is now time for all International Group of P&I Clubs to put in place formal mechanisms to return surplus investment income to their stakeholders, the club’s mutual members.”

Gard chief executive Rolf Thore Roppestad is returning excess capital to the club's members. Photo: TradeWinds

Gard, which has more than $1bn in free reserves, is one club that says it has such a system. Others do not reveal the exact trigger point for returning cash to members or the level of free reserves they are comfortable with.

Some clubs have suggested that ratings agency Standard & Poor’s requires P&I clubs to hold on to high levels of free reserves. Others said clubs need to retain strong reserves to protect against exceptional circumstances, such as a collapse in the investment market or a catastrophic claims year.

But Godfrey thinks such a move would help increase transparency and shipowner members would feel that their mutual has their best interests at heart.

Each club, he said, has what he described as a “comfort level” for capital adequacy, which shipowner members should be aware of.

“Any such mechanism would have to incorporate the provision that a club can reasonably retain such earnings if, by distributing these, they would jeopardise the club's financial stability, which is, of course, not in any member’s interest,” he said.

“This leads on to a requirement that managers should be publicly disclosing their individual solvency comfort levels, which are currently agreed privately between themselves and the board.”

The Covid-19 crisis has also put many shipowners in a difficult financial position, which deserves some sympathy from the P&I clubs, he suggested.

Although the clubs are arguing strongly that more premium is needed to cope with a year of exceptionally expensive International Group pool claims, Godfrey said they can still afford to hold fire on increasing premiums to help members also get through a difficult period.

“If ever there was a chance to subsidise the members' predicament by the use of these reserves to abate or defer the needed premium increases, this would be it,” he said.