Standard & Poor’s (S&P) has adjusted the outlook for leading protection and indemnity insurers Gard and North P&I Club in response to a 25-year high in half-year pooled claims.
The influential ratings agency is currently reviewing P&I finances in the light of an exceptionally high number of International Group of P&I Club pool claims, which are hitting the already faltering underwriting performance of the insurance grouping's 13 members.
TradeWinds earlier reported that the A-rated UK P&I Club's outlook was downgraded from stable to negative as a result of the S&P review.
Although the outlook adjustment is unlikely to have any impact on how clubs operate, it demonstrates a structural problem in the industry with premiums at levels which cannot cope with an unusually high claims environment.
Gard, by far the largest and wealthiest of the International Group's members, has maintained its A+ operating performance rating but had its outlook downgraded to negative.
Below expectations
S&P said it wanted to see Gard’s underwriting performance return to “breakeven levels”. It said Gard has shown two consecutive years of underwriting losses and commented: “These results have been below our expectations and have also shown a level of volatility that Gard does not usually exhibit.”
In a statement Gard chief executive Rolf Thore Roppestad told TradeWinds: “S&P’s decision is not a reflection on the capital or competitive position of the group, but rather on recent underwriting conditions. Their decision was driven by Gard’s underwriting losses over the last two years which have been largely due to significant losses in the International Group pooling system.”
“We aim to run the mutual business at a small loss, balanced with the returns earned on our commercial insurance book and our pricing decisions in the coming year will continue to reflect this philosophy.”
The North has maintained its A rating but its outlook has also been downgraded to negative. S&P said it expects the North’s capital reserves to shrink after the fourth consecutive year it has recorded a technical loss. S&P still expects the North to maintain its AAA capital adequacy rating.
Presssure on capital adequacy
But it warned: “The negative outlook indicates that the club's recent run of poor operating performance places pressure on its competitive position and risk-based capital adequacy.”
North chief financial officer Ed Davies said pool claims premiums have failed to keep pace with claims.
“We have been saying for some time now that P&I Clubs need greater underwriting sustainability. We will continue to exercise discipline on mutual rates as well as carefully managing our diversified income to move back to balanced underwriting,” he said.
Chief executive Paul Jennings told TradeWinds that S&P’s action clearly demonstrated the need for higher rates. “Some brokers have been saying that there is enough capacity in the P&I industry not to increase rates. If ever there was evidence that is not the case, then it is S&P's comments.”
