Table of contents
1 Each Ship’s Estimated Total Call shall be set taking into account all matters, including the Member’s loss record, which the Association may consider relevant in assessing the degree of risk involved. All Ships under the same management may at the discretion of the Association be deemed, for the purpose of determining the loss record or otherwise for the determination of Estimated Total Call, to be owned by one Member.
2 A Ship may be entered on the basis of a fixed premium in an amount agreed between the Association and the Member. The provisions of Rules 12, 13, 15, 16, 17, 18 and 19 shall not apply to fixed premium entries.
3 The Association may, in its discretion, levy an additional fixed premium for cover made available pursuant to Rule 2.2. The provisions of Rule 12 shall not apply to any such fixed premium.
The principal aim of the Association is to offer insurance to Members predominantly on a mutual basis. The Association does not have any shareholders and is not therefore aiming to make a profit but aims merely to ensure that the premium that is payable by Members should be sufficient to cover claims that are retained by the Association, the Association’s reinsurance costs and administration expenses. In other words, the Association provides ‘insurance at cost.’ However, this means that apart from the additional premium that can be levied on the membership, the Association has no other ready source of additional capital that can be raised if required in order to fund unexpectedly high claims costs, reinsurance costs and/or administration costs. Nevertheless, this does not restrict the Association from offering, as an adjunct to its core business, ancillary insurance on a non-mutual, fixed premium basis to certain categories of assureds. The premium for such insurances is determined by individual risk assessment and the prevailing market forces and the aim of the Association is to make a profit in that regard for the benefit of the whole of the membership. Accordingly, whilst all Members enter into a contract of insurance with the Association, the premium arrangements for Members will differ depending on whether the entry is on mutual or fixed premium terms.
(A) …Estimated Total Call… (Rule 10.1)
In the case of mutual Members the Association will at the inception of cover for a Ship determine an Estimated Total Call for the Ship.1 The Estimated Total Call will be equivalent to the estimated total cost of insuring the Ship for a Policy Year,2 taking into account not only general considerations affecting the Association, such as reserves, inflation, reinsurance costs and other outgoings, but also considerations which are particular to the Ship.3
Thereafter, premiums are collected from mutual Members as follows:
a the Association will not usually collect the full Estimated Total Call in advance but will usually decide that the payment of a proportion of that Call (i.e. the Last Instalment) is deferred to after the end of the Policy Year.4 This allows the Association the flexibility to require payment of less than the originally Estimated Total Call should the results of the Policy Year be more favourable than originally expected.
b the Association has the right to call for additional premium by way of Supplementary Calls if the total claims and expenses exceed initial expectations and/or other revenue such as investment income is less than expected;5
c the Association has the right to return premium to Members in whole or in part if the claims and expenses are less than initially expected or the reserves are considered to be higher than what is considered to be desireable.6
On renewal of cover for a further Policy Year, a comprehensive review will be carried out by the underwriter responsible for an entry before renewal terms are submitted to the Member. This review will encompass changes in the risk exposure, such as the composition of the fleet, types of ships covered and their trade and crewing arrangements. The Estimated Total Call for a Ship may be adjusted to take account of the Member’s loss record, alteration of risks or any other factors that the Association may deem relevant.7 Well in advance of the renewal date, usually in October, the Association will send each Member a complete loss record covering all Ships for the loss record period,8 which shows claims paid and estimated; apportioned abatement costs,9 pool costs10 and market reinsurance costs, premiums etc., and concluding with a loss ratio expressed as a percentage. The loss ratio will be discussed with the Member before a renewal offer is made.
(B) …all matters…the Association may consider relevant… (Rule 10.1)
The Estimated Total Call fixed for each Ship is dependent on ‘all matters’ which the Association considers relevant to the risk. Those matters normally include the following:
a The Ship’s particulars, including type, flag, age, tonnage11 and trade;
b Intended trading area(s);
c Intended cargoes;
d The terms of the charter parties, contracts of carriage or other contracts used in the Ship’s trade;
e Crewing arrangements, including the number and qualification of officers and the number of other Crew members. The nationality of the Crew may also be relevant, as this may affect the Member’s liability for matters such as personal injury, death and repatriation expenses;12
f The terms of other insurances that apply to the Ship, as such terms may fully or partly duplicate the P&I cover. For example, the Ship’s Hull Policies may cover liabilities in respect of collision and/or damage to fixed and floating objects;
g The deductible13 which the Member agrees to bear. Increased or lowered deductibles can be negotiated and the Estimated Total Call will be adjusted accordingly;
h The extent of the cover required by the Member, including any variations of the standard cover under Part II of the Rules.14 A Member may wish to exclude certain liabilities included under the standard P&I cover, either because he has other cover available, or because he agrees to bear these liabilities as a self-insured;
i The management of the Ship. The Association will require sufficient information to assess the quality and experience of the managers of the Ship;
j The Member’s loss record,15 which will usually be a guide used in the assessment of future risk and, therefore, of Estimated Total Call. Information relating to measures taken by the Member to reduce risks, control claims exposure and generally ensure quality operations, may also be relevant.16
(C) …loss record… (Rule 10.1)
The loss record of a Member is essentially a comparison made for all Ships that are or have been entered by that Member in the relevant loss record period, of, on the one hand, the premium charged in respect of such Ships and, on the other hand, claims, paid and estimated, plus apportioned abatement, pool and market reinsurance costs applicable to those Ships. When calculating the loss record of individual Members, no account is taken of the Association’s administration costs or its investment income17 except in the case of a Defence entry in which case an administration expense is shown on the Member’s loss record. The administration expense is estimated based on the number and characteristics of defence claims registered, and is included due to the fact that, in comparison with P&I entries, a significantly greater proportion of the total cost of defence claims can be attributed to internal costs in view of the substantial service element.
It is normal for the Association to assess the Estimated Total Call on the basis of a loss record period of six years preceding the current Policy Year. A period of six years is considered necessary because P&I claims are sometimes not reported to the Association until several years after the incident which gave rise to them, and furthermore, they may not be finalised until a long time thereafter. What is not shown on the loss record are the claims incurred but not reported, which can be a substantial factor where a Member is known to have a ‘long tail’ in relation to claims.18 The Association may apply a lower acceptable loss ratio level for Members who are historically prone to such claims.19
The loss record for the current Policy Year will usually not be significant in this regard as it may not represent a sufficiently accurate claims picture. Claims may still be reported and claims that have been reported may develop significantly. However, where, in the current Policy Year, there has been one or more significant claims affecting the overall record substantially, and it is clear at the time of the renewal discussions what the claims cost will be, e.g. because the claim has been compensated, this is likely to be taken into account.
When the Association is asked to consider accepting the transfer of a ship or fleet from another club which is a party to the International Group of P&I Clubs, the loss record of the former club must be made available to the Association to assist it in its risk and Estimated Total Call assessment.20
(D) …All Ships under the same management… (Rule 10.1)
The Association has the discretion to treat all Ships deemed to be under common ownership or management21 as one entity, and to treat the entry of all such Ships as a ‘fleet entry’. The Association will assess a composite loss record for all Ships on a fleet entry and entry on a fleet basis may affect the Estimated Total Call of any given Ship in that fleet.
(E) …fixed premium… (Rule 10.2)
The premium arrangements for fixed premium entries differ from those described in (A) above for mutual Members. In the case of a fixed premium entry a single premium for the Policy Year is agreed at inception, and is payable in one instalment at that time.22 The principal categories of fixed premium entries are charterers and mobile offshore units.23
A fixed premium rating can be varied for the next Policy Year under Rule 11, but the provisions which apply to mutual Members under Rules 12, 13, and 15-19 do not apply to fixed premium entries. In other words, the Association cannot levy additional premium or return any surplus in the case of such entries. The fixed premium is therefore assessed in a manner which includes a margin to cover uncertainty in the development of the Policy Year. The objective is to ensure that the total premium income from fixed premium entries will be higher than the claims produced by such entries, so that in the aggregate and over time, a surplus will be generated which will contribute to the Association’s funds.
(F) …additional fixed premium… (Rule 10.3)
A fixed premium may also be levied for additional insurances made available under Rule 2.2. Such fixed premium will be payable in one instalment on inception of cover24 and the provisions of Rule 12 relating to Estimated Total Calls and last Instalments will not apply to such additional insurances.
1 A separate Estimated Total Call will be determined for P&I cover and Defence cover for each Ship.
2 The Estimated Total Call is sometimes referred to as the ETC.
3 Where a Ship transfers to the Association from another club in the International Group of P&I Clubs, the provisions of the International Group Agreement will be relevant.
4 See the Guidance to Rule 12.
5 See Rule 13.
6 See Rule 17.
7 Such an adjustment will be applied after any general variation under Rule 11 – see (A) and (B) of the Guidance to that Rule.
8 See (C) below.
9 The total claims costs incurred for the Association within the ‘abatement layer’ as apportioned to the Ship(s) concerned. The purpose of applying an ‘abatement layer’ is to distribute the costs of large claims over the membership as a whole on the basis that such claims occur randomly within the membership and should be treated as a mutual risk.
10 The entered Ship’s proportion of the total estimated costs incurred by the Association under the Pooling Agreement for all Policy Years pertaining to the loss record period.
11 A number of factors, in addition to the assessment of risk, are dependent on the Ship’s tonnage including voting rights at General Meetings, the Association’s liability under the Pooling Agreement and its liability to contribute to the costs of the Group Excess Loss Policies. For these purposes each Ship has an ‘entered tonnage’ based on its gross tonnage or, where the Ship has not been measured, on such other basis as the Association shall determine.
12 The Association’s exposure may be affected by any social security scheme in the country of domicile of the Crew member and by any personal injury and life insurance provided by the Member, and the Association will also require details of the terms of the contracts of employment, which may impose particular liabilities on the Member.
13 See the Guidance to Rule 76 and Appendix V.
14 See (A) of the Guidance to Rule 2.
15 See (C) below.
16 It is sometimes the case that a Member will argue that his Estimated Total Call should be reduced on the basis of measures taken to reduce operational risk. The Association will usually not accept any particular adjustment of the Estimated Total Call until such measures actually show an effect in the form of reduced claims and improved loss record.
17 About 10 per cent of any premium is generally held to be necessary to cover incurred but not reported (IBNR) claims, which means that an acceptable net loss ratio will be in the range of 90 per cent rather than 100 per cent.
18 A Member is stated to have a ’long tail‘ when the claims to which he is subject take a substantial time to resolve. The usual reason for a ‘long tail’ is the nature of the claims incurred by the Member. For fleets where personal injury claims represent the majority of claims incurred, e.g. cruise and passenger ships, there is usually a longer tail than average, because the claimant generally has a longer time available to file suit in respect of a claim than is the case for e.g. cargo claims. The most notable example is occupational disease claims, which may materialise many years after the (alleged) event that caused the disease.
19 The Association may for example use a 10 or 15 year record to assess the IBNR claims factor of the loss record.
20 The procedures concerning transfer of ships from one club in the International Group of P&I Clubs to another is regulated by the International Group Agreement. See www.igpandi.org.
21 See the Guidance to Rule 1.5 as to whether persons are deemed to be managers of a Ship.
22 See Rule 20.4.
23 See Rule 64. Separate Rules apply to mobile offshore units, but they are outside the scope of this Guidance.
24 See Rule 20.4.