Tuesday, 18th December 2018

International Group reinsurance renewal update - December 2018

"The continuing support of the market has enabled another successful renewal of the Group General Excess of Loss and Collective Overspill insurance programme. Changes to the structure of the reinsurance programme for 2019/20 should deliver enhanced value to shipowners, balancing a cost-effective commercial market placement with a robust and well-funded risk retention strategy that strengthens the financial position of the Group’s captive, Hydra. This will all come as welcome news for the Group’s shipowners."

Mike Hall, Chairman, International Group Reinsurance subcommittee

The arrangements for the renewal of the International Group General Excess of Loss (GXL) reinsurance contract for 2019/20 have now been confirmed.

Renewal overview

The loss experience of the reinsurance programme on the 2012/13 to 2018/19 (year to date) policy years remains acceptable to reinsurers, notwithstanding the claims development during the 2018/19 policy year. This factor, combined with continuing surplus market capacity, the consistently positive financial development of the Group captive, Hydra, and the effective use of multi-year private placements, has enabled the Group to achieve another satisfactory reinsurance renewal terms which results in a further year of reinsurance rate reductions across all vessel categories.

Club retention and GXL attachment

The individual club retention, which was increased with effect from 20 February 2016 to US$10 million, will remain unchanged for the 2019/20 policy year. The attachment point on the Group GXL reinsurance programme will remain at US$100 million for the 2019/20 policy year.

Pool structure

Following the changes introduced in the pool structure (US$30 million to US$100 million) for 2018/19, no further changes to the structure will be introduced for the 2019/20 policy year.

Reinsurance structure changes

Following the Group reinsurance broker tender process undertaken during the spring of 2018, and the appointment of Miller and Aon as co-brokers on the Group General Excess of Loss (GXL) and Collective Overspill reinsurance programme, a review was undertaken with the brokers of the current reinsurance programme structure, and a number of recommendations for changes to the current structure were made aimed at ensuring sustainability whilst improving the cost-efficiency of the collective reinsurance arrangements. These changes were reviewed and approved by the Reinsurance subcommittee.

The main changes to the programme structure for 2019/20 involve adjustment of the current programme second and third layer attachment points, the introduction of a new multi-year private placement, and the introduction of a US$100 million AAD within the 80% market share in first layer of the programme.

The first layer of the revised programme will provide cover from US$100 million to an increased upper limit of US$750 million, the second layer will cover from US$750 million to US$1.5 billion, and the third layer from US$1.5 billion to US$2.1 billion. There will be no change to the Collective Overspill layer which will provide US$1 billion of cover in excess of US$2.1 billion.

One of the three 5% multi-year private placements (US$1 bn. excess US$ 100 million) expires on 20 February 2019, and this will be replaced by a new multi-year 10% private placement within the new first layer (US$ 650 million excess US$ 100 million), increasing the private placement participation in the first layer from 15% to 20%.

Within the market share (80%) of the first layer, there will be a US$ 100 million AAD which will be retained by the Group’s captive, Hydra

Hydra participation

From 20 February 2019, following the changes to the reinsurance structure outlined above, Hydra will continue to retain 100% of the pool layer US$ 30 million-US$ 50 million, 92.5% of the pool layer US$ 50 million-US$ 100 million. In addition, Hydra will retain a US$ 100 million AAD in the market share (80%) of new first layer of the General Excess Loss programme.

MLC cover

The market reinsurance cover will be renewed for a further 12 months from 20 February 2019 with the expiring cover limit of US$ 200 million (excess of US$ 10 million) at a competitive cost which is included within the overall reinsurance cost.

War cover

The excess War P & I cover will be renewed for 2019 at a reduced premium which will be included in the total rates charged to owners.

2019/20 Group GXL structure

The diagram below illustrates the revised layer and participation structure of the Group GXL programme for 2019/20.

2019/20 Group GXL structure

Reinsurance cost allocation 2019/20

In accordance with the Group’s general reinsurance cost allocation objectives, principally that of moving towards a “claims versus premium” balance for each vessel type over the medium to longer term, the Group’s Reinsurance Strategy Working Group and Reinsurance Subcommittee have again reviewed the updated historical loss versus premium records of the current four vessel-type categories. This detailed review included a focus on claims by vessel type, and consideration of whether the available claims data merited extending the current vessel-type categories for the purposes of the reinsurance cost allocation exercise.

Tankers

In the tanker category, both the premium for clean tankers and persistent oil tankers (formerly called dirty tankers) and claims records continue to develop favourably, and the tanker tonnage share (as a percentage of total tonnage) remains flat (persistent oil tankers 20% clean tankers 13%).

Dries

In the dry cargo category (excluding passengers), the tonnage share (61% of total tonnage) remains flat and during 2018/19 the claims and premium record has continued to develop favourably. The subcommittee once again reviewed the desirability of, or necessity for, separating container vessels from dry cargo vessels for reinsurance cost rating purposes, and concluded that there remains insufficient historical claims data to support separate treatment for the 2019/20 policy year.

Passengers

In the passenger category, tonnage share (3% of total tonnage) remains flat and the claims and premium record has continued to develop favourably.

2019/20 rates

Based on its review of comparative performance by vessel type category, the Reinsurance subcommittee considered that there was no compelling case to prefer any of the sectors over the others and, accordingly, felt that the appropriate approach for 2019/20 is an even spread of reinsurance savings across all categories.

The 2019/20 rates are set out below:

2019/20 rates summary

Tonnage Category 2019 rate per g.t. % change from 2018
PERSISTENT OIL TANKERS $0.5747 % -1.68
CLEAN TANKERS $0.2582 % -1.69
DRY CARGO VESSELS $0.3971 % -1.67
PASSENGER VESSELS $3.2161 % -1.67
CHART TANKERS $0.2158 % -1.72
CHART DRIES $0.1054 % -1.74

This is another positive reinsurance renewal for the International Group and its Members.

Mike Hall, Chairman, International Group Reinsurance subcommittee

17 December 2018

M Hall

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