Protection and indemnity insurers have been forced to recapitalise a key reinsurance captive after a series of costly claims pushed it below statutory requirements.
The shortfall has occurred in the Hydra captive reinsurance facility, run by the International Group of P&I Clubs’ members, under its pool claims scheme.
Hydra forms an integral part of the International Group's pool claims system, which covers claims in excess of $10m filed by its 13 members.
Hydra kicks in for claims over $30m and up to $100m. It also provides an annual aggregate deductible for claims in excess of $100m.
A series of costly claims in the first half of this year have pushed the facility below its statutory capital adequacy requirements under Solvency II regulations.
A recent note from the Swedish Club to its members said: “As claims outpaced premiums with a wide margin for the first six months of 2021, the contingency capital of Hydra went below statutory requirements. This triggered a mandatory replenishment/injection of capital from the clubs of $240 million.”
Issue resolved
It is expected that premiums paid by the P&I clubs into the Hydra facility in the next policy year will also have to increase between 30% and 40%.
The capital issue at Hydra was resolved by the P&I clubs earlier this summer but has only just come to light.
Industry experts suggest that damage to balance sheets may be limited, as P&I clubs are able to return surplus capital, which was taken from Hydra in better times, back to the facility.
Expensive claims
But the development is another example of the stresses that an exceptionally expensive series of claims over the last two years are placing on the International Group's pool and its reinsurance programme.
The International Group is shortly expected to announce the results of a renegotiation of its two-year reinsurance programme with its reinsurers.
The negotiations involve commercial reinsurance cover, provided mainly by the London market, for International Group claims in excess of $100m.
The International Group’s reinsurers are seeking to recover significant losses made on the programme over the last two years, caused by the increasing cost of casualties.
The costliest casualty has been the wreck removal of the 7,700-ceu car carrier Golden Ray (built 2007), which cost in excess of $800m.
Other claims that have broken the $100m level are likely to include costly incidents such as the 203,000-dwt Wakashio (built 2007) and 20,388-teu Ever Given (built 2008).
Reports suggest that the International Group’s reinsurance bill could be increased by as much as 30%.
Most P&I clubs will add the extra costs directly to the P&I premium paid by shipowners at next year's February renewal.
P&I clubs are already lining up general increases of between 5% and 15% for their members to try to bring underwriting activities back into break even.
The International Group claims, and an unexpected increase in Covid-19-related crew claims this year, have brought all of the mutuals into an underwriting loss.
