CEO's operational review
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CEO's operational review

The Gard group results for the financial year ending 20 February 2018, show a surplus after tax of USD 193 million on an Estimated Total Call (ETC) basis. 

The group’s income declined by 11 per cent because of ongoing reductions in insurance rates and values. At the same time, the technical result benefited from a continuing benign claims environment. All business areas delivered an underwriting profit, with a combined ratio net of 91 per cent overall. This is 8 percentage points higher than last year, mostly due to a more modest surplus on mutual business.

The non-technical result totalled USD 144 million and the return on investments was 6.3 per cent compared to last year’s 4.7 per cent due to unusually strong financial markets.

The consolidated equity, which provides security and stability for the membership, stands at USD 1,249 million, compared to USD 1,135 million on 20 February 2017. This is after a reduction in the premium cost to mutual Members of USD 79 million. Not calling the deferred call on mutual Members reduces the gross written premium in the accounts to USD 681 million and the accounting result to USD 114 million.

Preparing for the future
In 1907, Gard was founded to underwrite only the P&I risks of sailing ships – a single solution for one type of vessel. As the world and technology changed, so did the Club and today the group is still adapting to meet the needs of shipowners and our responsibilities to society. Our core business has developed to include:

  • helping our Members’ businesses grow by developing our products and services in response to their needs and the evolution of the maritime industries,
  • making the oceans cleaner and safer through prevention, casualty preparedness – including improved coordination with emergency response authorities and stakeholders – as well as through proactive and effective casualty handling,
  • helping protect the lives and livelihoods of thousands of seafarers and passengers every day, and 
  • developing risk solutions to support ocean economies around the world.

We integrate social and environmental concerns into our day-to-day activities. We are committed to making a positive contribution to the industries we serve – and society at large, by offering dedicated resources to share knowledge and expertise.

Our history is one of responding to change and our future will be the same. Our robust financial performance over time gives us the rock-solid foundation on which to do this.

Fair and predictable pricing
There are many things we need to keep getting right to meet the needs of our Members and customers for high quality service and products. We must excel at fundamental capabilities – assessing and pricing maritime risk as well as handling maritime casualties and claims. We must develop stronger analytical capabilities to take better business decisions. We must remain financially strong through insurance and financial cycles to deliver the stability and consistency that is needed to protect the assets, incomes, and reputations of our Members and customers.

Gard aims to maintain a premium level for mutual Members which is fair, predictable and sustainable long term. There are two key enablers to achieve this. The first is underwriting discipline. Our premium policy of advance calls and an estimated – but deferred – call, allows us to account for changes in claims trends.

Last year there was no general increase in the estimated premium for owners’ mutual P&I or for mutual FD&D. In fact, the premiums that our mutual Members pay have reduced over time on a per GT basis, and we believe that our business model allows us to operate at lower mutual premium levels. Still, the renewal result for each Member is determined by the expected risk as well as the individual performance, in combination with existing premium level. For the mutual Members, keeping overall premiums down is a good thing – if the scope of cover is not reduced, and premiums remain sufficient to cater for expected claims. Currently this is justified due to the positive claims environment. However, should that trend reverse, pricing will have to respond.

Better than expected claims development, investment income and/or results on for-profit operations will allow us to reduce (or in special years, waive) the deferred call to the benefit of mutual Members.

Our well-established capital management framework ensures that when capital targets have been met, surplus can be returned to the mutual membership by way of reductions in the premium paid. The financial result for 2017 reflects that it allowed the Board of Directors to decide not to call any of the deferred call for the 2017 policy year, which represents a 20 per cent reduction compared to the ETC for mutual Members – equal to USD 79 million. Over the last decade, the actual cost of insurance to mutual Members has been reduced by USD 392 million. We will continue to look to reduce the insurance cost for the mutual Members to below the estimated total call whenever our results and capital position allow us to do so.

Business review
Protection & Indemnity
For P&I, gross written premium for the financial year ending 20 February 2018 amounted to USD 546 million, which is a reduction of 12 per cent compared to the previous year. The 2018 renewal season saw a net tonnage gain. An increase of 8.2 million GT over the last 12 months brought the total owners’ mutual to more than 207 million GT. 99 per cent of the existing tonnage stayed with Gard and the overall market share has been stable. The market has experienced a period of decreasing premium volume driven by falling insurance rates and moderate growth in the world fleet.

The combined ratio for P&I was 92 per cent, up from 75 per cent for the previous year. Over the last few years, the insurance performance has been better than forecast due to a benign claims environment. Another critical factor for the strong insurance result has been the quality of our membership, with quality Members driving improvements in operations and reducing accidents and, as result, attracting new owners of a similar quality with whom to share risk. This has allowed for a reduction in premium rates for mutual Members.

Entered tonnage by domicile

P&I claims incurred totalled USD 357 million, an increase of USD 32 million compared to the previous year. There were fewer large own claims than expected in 2017 across all lines of business and only one claim by Gard on the Pool, but our contributions this year to pool claims from other clubs increased. There were fewer energy-related claims and the non-mutual P&I result was also strong.

The table below shows the development of net claims incurred for own account in the last five years.

Claims incurred net USD million

The strategy of delivering local support where Members and customers are located, and casualties occur, has proved its value. We have seen strong business growth in Greece and in Asia over the last few years and important Members and customers have made significant commitments of entries for the coming year.

Marine & Energy
In Marine & Energy gross written premium totalled USD 229 million, an increase of USD 26 million compared to the previous year. The combined ratio net was 88 per cent, down from 103 per cent in the previous year. For Marine, we are pleased to note that this is the tenth consecutive year that the marine portfolio has made a profit and we have also gained market share in some marine products.

While prices have been falling due to an abundance of capacity in the insurance market, more recently there has been signs that the marine market has been firming, with most renewals at as before and increased rates for clients with poor claims records.

At the same time, there has been a hardening of rates in the energy market. Activity in the offshore segment is increasing with more vessels and rigs being employed. At the current time, insurance premiums in the energy market are probably too low to cater for large claims that are inherent over time in this volatile line of business.

Net claims totalled USD 122 million, a decrease of USD 45 million compared to the previous year. The frequency of claims within both marine and energy is low, with only one major marine claim.

Over the twelve months to the 20 February 2018, the Gard group achieved an investment return of 6.3 per cent against a benchmark of 5.8 per cent. In the previous year, the investment return was 4.7 per cent. The group’s investment portfolio increased from USD 2,078 million as at 20 February 2017 to USD 2,156 million as at 20 February 2018.

Investment allocation
The equity investments returned 21.7 per cent, real estate investments 2.5 per cent and fixed-income investments 3.7 per cent.

The year to 20 February 2018 was an unusually strong year in the financial markets. Global growth accelerated in 2017 while inflation and interest rates remained low. Equity markets, particularly in Asia and other emerging markets, were strong.

We fully support the UN Principles of Responsible Investment and encourage fund managers to sign up to them. These principles recognise that long-term sustainable returns are dependent on stable, well-functioning and well-governed social, environmental and economic systems.

Investment allocation, per cent


Capital and Risk Management
Over the twelve months to 20 February 2018, the Gard group continued to be very strongly capitalised. The risk profile has been steady with somewhat lower expectation to claims frequency.

Risk management
Gard has an effective system of risk governance, which provides for sound and prudent risk management. Risk governance is based on the three lines of defence model, with clearly defined roles and responsibilities. Risk taking is carried out in the business functions (1st line), risk oversight is carried out by the Risk Management function, Compliance function and the Actuarial function (2nd line). Independent assurance is provided by Internal Audit (3rd line).

Gard’s Risk Management function is mandated to ensure that the group and the legal entities have the necessary expertise, frameworks and infrastructure to support good risk-taking. In addition, it performs reporting activities. The independence of the Risk Management function is maintained by a direct reporting line to the Chief Executive Officer when necessary, and regular reporting to the Risk Committee.

Gard’s internal risk capital model provides a quantification of the risks to which Gard group and its legal entities are exposed and represents an important tool for managing Gard. The model is used to determine the risk and capital requirements for internal purposes. The internal model and its parameters are reviewed regularly to reflect Gard’s experiences and changes in the risk environment and current best practice. The Standard Formula is used for regulatory reporting under Solvency II.

Risk appetite and strategy
Gard’s risk appetite is to hold sufficient capital and liquidity as well as constrain its risk taking to ensure that the group can continue to operate following an extreme loss event with the same risk tolerance for insurance risk. The risk-taking must be aligned to Gard’s risk-carrying capacity.

Gard aims to fulfil the following key objectives:

  • Have a high probability of meeting its insurance liabilities and providing its services;
  • Preserve the continuity of its offering after an extreme loss event; and
  • Have the flexibility and competence to help Members and clients manage new risks and pursue attractive business opportunities as and when they arise.

The probability that Gard would have to raise additional capital from its mutual Members by way of unbudgeted supplementary calls should be low.

Capital management
Gard has a simple capital structure consisting of Tier 1 capital through equity, which is earned and available, high quality Tier 2 capital in the form of unbudgeted supplementary calls, and tax assets included as Tier 3 capital.

Eligible own funds 2018 2017
Tier 1 Basic own funds 1,192 996
Tier 2 Ancillary own funds 328 338
Tier 3 Other own funds  
Eligible own funds 1,520 1,334

Gard group aims to manage its capital such that all its regulated entities meet local regulatory capital requirements at all times.

Risk profile
In context of its business operations Gard enters into a broad variety of risks, where the main risks are insurance risk and market risk. Gard is also exposed to counterparty default risk, operational risk, liquidity risk, business risk, compliance risk and reputational risk.

Gard has an extensive reinsurance programme. The mutual business is pooled between International Group (IG) clubs. For the 2018 policy year the IG clubs pool claims above the club retention of USD 10 million and up to USD 100 million. Above USD 100 million, the group purchases a reinsurance programme with USD 2 billion cover per vessel per event and an overspill protection cover of a further USD 1 billion. For P&I Fixed and the Marine and Energy businesses there are high capacity reinsurance programs in place. The structure of the reinsurance programmes has been stable during the last years.

Liquidity risk is the risk that Gard group, a legal entity and/or branch either does not have available sufficient financial resources to meet its obligations as they fall due, or can secure such resources only at an excessive cost. The sources of inflows are stable in Gard, where liquidity is generated primarily through premium income. Although payments are fairly stable over time, the nature of the insurance business means that Gard must be prepared to make sudden and large payments.

The amount of liquidity held is largely determined by internal liquidity stress tests. Based on these stress tests, we estimate short-term and long-term liquidity needs. To mitigate liquidity risk, Gard has established several mechanisms including cash pool arrangements within the group and access to credit, in addition to holding deposits and highly liquid assets.

S&P rating
In December 2017 Standard & Poor’s affirmed the A+ financial strength of Gard Group and its direct writing subsidiaries (Gard P. & I. (Bermuda) Ltd, Assuranceforeningen Gard – gjensidig -, Gard Marine & Energy Limited and Gard Marine & Energy Insurance (Europe) AS). The rating reflects Gard’s strong capital adequacy, strong operating performance and business profile as a leading insurer. The outlook is stable.

To help our Members and clients to make the most of opportunities at sea, we continue to invest in both our capabilities as an organisation, including improved processes and systems. Improved technology needs to be complemented both by structural and behavioural change. We believe that customer satisfaction will be improved by stronger collaboration and more effective sharing of knowledge across the teams that support them. We deliberately and systematically look for more effective and efficient ways of performing tasks and processes that may generate more customer value.

At the end of November, Gard began trading marine business on the London insurance market’s electronic placing platform, PPL (Placing Platform Ltd). This enables brokers and underwriters to quote, negotiate, bind and endorse business digitally on a single market-wide system. By joining the platform, we are taking a natural step in supporting our customers and brokers trading through London – as well as increasing the efficiency of our operations.

Gard is one of the co-founders of Digital Norway – an industry initiative to cross-fertilise digitalisation ideas and projects across industries.

Industry issues
The world is changing faster than ever, increased globalisation and digitalisation are changing our environment. The future will see Gard more integrated into the entire maritime industry and society at large, and that will mean identifying new trends, implementing new ideas and finding new ways to add value for our customers.

Outreach to emergency response stakeholders
The increasing size of vessels, for example, raises concerns around the resources required in the event of a major casualty. The largest container vessels may now carry more than 21,000 TEU; goods worth more than USD 1 billion and with the ship value exceeding USD 100 million. In addition, size is a driver of complexity and thereby costs of salvage or wreck removal.

To that end, we invest time and effort on our outreach programme – building relationships with casualty response authorities in various countries before any incident occurs. In our experience, getting to know the national and regional governments and responders helps to streamline communication and foster cooperation which are vital to reducing the environmental and societal impact of major casualties when they occur.

We believe in the results that industry collaboration may yield. We also work closely with the International Group of P&I Clubs, Cefor – the Nordic Association of Marine Insurers, and several other industry organisations to look at what can be done better in terms of prevention, preparedness and response. Examples include improved contractual terms for pollution response, salvage and wreck removal services and improved knowledge-sharing from past casualties.

Dangerous cargoes
Intercargo has reported that 11 bulk carriers were lost due to cargo liquefaction incidents between 2007 and 2016, with the loss of more than 100 lives at sea. The culprit cargoes included nickel ore, iron ore and bauxite. For the container shipping segment, the risk of loading inherently dangerous and inaccurately described cargoes is still very real. Dangerous cargoes take lives, injure innocent seafarers, endanger the environment and destroy property despite mandatory codes to manage the risks. In 2017, Gard increased its emphasis on sharing information and insights through a series of presentations, including two IUMI webinars with global audiences. Gard has also supported the International Group’s workshops to promote understanding in problematic shipping areas of the International Marine Solid Bulk Code, with a special focus on cargoes that may liquify.

Autonomous vessels
Truly autonomous vessels are coming closer to reality: off the drawing board and into the water, and their usage will lead to changes in the risk landscape. The leading cause of maritime accidents has been human error, so autonomous vessels should reduce accidents assuming their systems are properly designed, integrated, implemented and maintained. However, the cornerstone of P&I insurance – liabilities arising in direct connection with the operation of the entered ship – may move along the process or supply chain to the place(s) where such operations are carried out.

It is necessary to review existing insurance terms across different products to ensure they are “fit for purpose”, as well as to intensify industry collaboration and support efforts of international rule-making bodies, class and flag states to create a viable legal platform. Gard takes part in a designated International Group working group for autonomous vessels and is represented in a special Norwegian forum which includes both public and private sector interests.

The health of our oceans
The world’s oceans are our greatest common resource to create growth and jobs in areas including food, energy, minerals and transport. Their long-term health is a key component in the well-being of society at large. The United Nations has recently invited us to join its Action Platform for the Ocean, a working group to take a comprehensive review of the role of the ocean industries in achieving the United Nations’ 17 Sustainable Development Goals. Officially, launching in June 2018 Gard employees will be asked to contribute as experts on various issues, delivering concrete improvement initiatives that may enable positive maritime development.

At a day to day level, Gard is playing its part to tackle marine pollution with our global beach clean-up campaign, with employees from across Gard taking to shorelines in their communities to collect plastics and other litter. Gard supports “The Ocean Cleanup” organisation, which develops and deploys new technologies to help rid the world’s oceans of plastic.

Partnering with others
We look to build long-term relationships with external stakeholders and maintain a network of partners to enhance knowledge sharing on corporate responsibility issues. Since 2016, Gard has been a Green Award Incentive Provider. We are involved with key educational establishments such as the World Maritime University and Institute of Maritime Law at the University of Southampton, England. We are also an official partner of the Norwegian Red Cross and we have supported the organisation and its international societies in its work handling the aftermath of natural disasters for many years. We go beyond financial support and work to connect the Red Cross with our correspondents to contribute to building resilience in societies that are sporadically struck by natural disasters, civil unrest or similar. Again, the mutual exchange of knowledge and expertise is a foundation stone of this partnership.

The next 100 years
We want our business to keep delivering value for the next century – demonstrating sustainability and resilience, creating long term financial value and contributing to healthy ecosystems and strong communities. We will keep the best of today while adopting and adapting to the new. Whether it is products, technology, skills or people, we look beyond the here and now and invest for the future. This is a strategy that has served our Members and clients well for over a century and we believe will continue to do so for the next 100 years.