Although this Directors’ Report covers Gard’s performance in the year to February 2020, it is incumbent upon us to reflect on the unprecedented global environment in which we find ourselves today, a mere three months later.
The coronavirus outbreak is taking a toll in human life across the globe and it will cause the biggest economic shock since the Great Depression of the 1930s. Its scale means the ramifications on people’s lives and on the global economy will be profound and long lasting. For everyone, everywhere, ‘normal’ will be very different for a long time to come.
Specifically, for the industry we serve, it has brought parts of the world’s shipping industry to the brink of paralysis, with disruption that began in China now extending to shipping lanes everywhere. And this is following a year of sluggish global growth, growing business and political disillusion with globalisation and rising East-West trade tensions.
The commercial effects of the pandemic will be different depending on the segment: containers or cruise lines, tankers or bulk carriers. But there are shared concerns for all as ships encounter difficulties in loading, unloading and performing repairs and maintenance. The international travel bans cause particular problems for crew rotations, with a detrimental impact on the well-being, both mental and physical, of seafarers. The blockages to the global logistics supply chain from these restrictions on shipping pose further danger to the world economy.
There can be little doubt that 2020 will be a challenging year for the shipping industry and its insurers, whatever the impact of global economic stimulus measures. It is a measure of the times that pre-existing geo-political risks, such as the upcoming US election and Brexit, seem but a side show in the new world order that now dominates our outlook.
We are prepared for uncertainty
In times of turmoil, robust foundations are a comfort, and Gard’s capital strength and high-quality membership give us the confidence that we have the right fundamentals to resist shocks over time. Critical to this resilience is our focus on scale and strength – both operationally and financially. Our global reach, financial resources and access to capital mean we can continue to invest, protect and deliver value to our Members.
This year, Gard returned to profit and, as of 20 February 2020, the consolidated equity which provides security and stability for the membership stood at USD 1,179 million, compared to USD 1,159 million 12 months prior. Due to the high volatility and uncertainty in the global financial markets as a consequence of the Covid-19 pandemic, the Board has decided to defer a decision on whether to call or waive in part or fully the last instalment of the annual premium.
For over a decade claims trends declined, with accident frequency and claims costs falling and, as result, the cost of insurance also dropped for shipowners – a definite benefit in times of economic difficulties. 2019 saw pricing reach a tipping point, and marine insurers started to look for opportunities to increase rates. It is probably too early to predict where pricing will go from here, as different segments of the market might suffer differently in terms of direct and indirect effects of the pandemic.
Gard’s diversification strategy enables us to balance a small loss on our mutual business with a profit from our for-profit insurance businesses. We can be grateful that our unique diversification strategy gives us predictability and flexibility.
We are preparing for the future
One of Gard’s great strengths is the close alignment between Members and management in driving a strategic agenda to build a business that can adapt to whatever comes next. The voice of Members and clients is always heard and incorporated, and this is reflected in our agreement around the mission for the group – ‘Together, we enable sustainable maritime development‘ – as well as our goals for 2025, which focus on financial strength, an agile and competent global organisation and sustainable growth.
The effects of climate change are being felt across the world, and there is near universal consensus around the need for the decarbonisation of the global economy through energy transition to cleaner fuels. Shipping is a significant contributor to global CO2 emissions. Although there is an expectation of significant reductions by 2030, with even more ambitious goals by 2025, new propulsion systems are not yet available and new fuels only being explored and developed. While there may be carbon-neutral solutions that theoretically could be available to shipping, they have not reached the point of being commercially viable. However, that does not mean there are not actions we can all take now to improve our environmental footprint and contribute to a more sustainable maritime world. Gard is actively participating in and promoting sustainability initiatives both within the marine insurance industry and through cross-industry collaboration.
One key focus for the Board of Directors last year was helping the group to establish a common approach to sustainable ship recycling. This is an important topic in the industry, as shipbreaking can come with a high human cost – as well as significant reputational damage. Green ship recycling is both necessary and desirable and is considered the most sustainable way to end a ship’s life. There are, however, many considerations to be made to ensure that the dismantling of a ship does not endanger either people or the environment. Our policy clearly outlines how we believe businesses should be handling this important issue, and is aligned with our policy on sustainable business, our code of ethics and business conduct.
We are ready to face new threats and opportunities
Cyber threats remain high on the list of everyone’s potential concerns, with vessels increasingly adopting Internet of Things (IOT) technologies. Events are already demonstrating how operational technology is at risk of being exploited, with cyber criminals exploiting malware, ransomware and GPS spoofing to attack industrial control systems. While the IMO has given shipowners and operators until January 2021 to incorporate cyber risk mitigation into ships’ safety management systems, cyber criminals are taking advantage of the COVID-19 pandemic and the associated sharp increase in remote working to launch more attacks. Gard’s Loss Prevention activities have focused often and in detail on this topic to help Members and clients to mitigate and manage these new risks.
The IOT, and the wealth of data it generates, offers opportunities as well as threats. Gathering and learning from data is of growing importance and, as we accumulate a wealth of real time and historic data across the group, we can analyse it more effectively to gain knowledge and insight. This will help Gard to help its Members and clients by understanding risk profiles, building tools to prevent casualties and developing new risk transfer tools.
Co-operation with the International Group (IG) to share data and intelligence adds a further dimension – especially on large claims that are pooled. By looking at a wider data set from all claims across the industry, everyone can learn from past experiences to prevent future casualties and reduce the cost to shipping and society at large.
Last year, the IG appointed Nick Shaw as its CEO, and Gard welcomes the work that he and his team are doing to modernise the Group. However, our shipowners, whose needs all P&I clubs serve, require and expect greater support and faster change in how their insurers deliver risk transfer solutions. We would encourage more open direct industry dialogue between the IG and shipowners. As the leading IG club, we are here to support such efforts and to ensure that the mutual P&I system keeps evolving with the shipping industry and does not end up resting on its laurels.
Being agile in times of trouble
At the end of our financial year in February, the world looked a very different place than it does now. While a pandemic was on the world’s risk radar, the speed of its spread in a highly inter-connected world and the draconian measures taken to contain it were unanticipated. The world will face the consequences of those decisions for years, if not decades, and we will all face considerable challenges in our personal and professional lives.
In 2020 we must be ready to step up again as the shipping and marine insurance industries are tested as never before. Gard has a long track record of trying to anticipate and respond to change – we led the way in tankers in the 1920s and in the offshore energy field in the 70s. I am confident that the quality of our membership and organisation, the breadth of our offering, continued focus on loss prevention and strong claims handling capabilities are key foundations for dealing with the challenges we will face in the future.
I would like to thank everyone who is serving on our Boards and Committees for their time and commitment, and for the energy and enthusiasm of everyone working at Gard who contributes to the group’s strong performance every single day. We are in an age of real uncertainty but, with the right team and the right focus, together we can maintain and build on the promises we make every day to Members and clients.
Morten W. Høegh