Twelve months ago, it was becoming clear that the Covid-19 pandemic would have a wide-ranging and catastrophic impact on everyone. Few of us could have foreseen exactly how devastating and far-reaching the consequences of the virus would be – not only for businesses and the world economy, but for people and their everyday lives. Nobody was prepared but, as I write, there are certainly hopeful signs that the successful development and roll out of vaccines will bring more optimism in the coming months. But we must be more prepared for further disruption because vaccination programmes are moving at very different speeds, bringing continued uncertainty about how quickly we can start returning to ‘normal’. No one is safe till everyone is safe.
One immediate effect of governments protecting their borders was that shipowners were unable to effect crew changes – and seafarers became innocent prisoners of circumstance. The issue was raised by the UN Global Compact in May 2020 and flagged with the governments of the G7 and G20 nations, and it was advocated that seafarers are designated as key workers. But progress has been painfully slow on this vital issue and there is considerable dismay that governments have lacked the willingness and ability to address this issue with action making a real difference.
More can and must be done. In January 2021, the Neptune Declaration on Seafarer Wellbeing and Crew Changes, signed by over 750 businesses, put accountability on the industry to use their leverage to end the ongoing crew change crisis. As well as reaffirming that seafarers should be key workers, it also wants to ensure that, irrespective of their nationality, they get priority access to Covid-19 vaccines in recognition of their critical role in global supply chains and trade. This is particularly important since many come from countries where the vaccination roll out is moving more slowly. Gard has worked hard to keep this topic firmly in the spotlight using all available platforms – conferences, webinars, articles, press outreach, to ensure that the plight of crews around the world is not forgotten. We need to keep up the pressure on national governments to find solutions to the crew change crisis. The sustainability of our industry – and the sustainability of the ocean economy, depend on it.
Performance through the pandemic
In spite of all the challenges, I am delighted to say that 2020 saw Gard continue to offer first class service through difficult operating conditions as well as delivering a profit for its Members. As of 20 February 2021, the consolidated equity which provides security and stability for the membership stood at USD 1,263 million, compared to USD 1,179 million 12 months prior. These results are a clear demonstration that Gard can maintain its course through unexpectedly rough weather.
The Board took several decisions in the last year around the capitalisation of the group that were designed to help Members’ cashflow and make the system of returning capital more transparent and easier to understand. The first was to delay the decision on the final premium instalment for 2019 policy year until November 2020. At that point, the Board decided to reduce the Estimated Total Call (ETC) by five per cent, a total saving of USD 18 million for the Members. This year, the Board has decided to reduce the last instalment for the 2020 policy year by 10% of the ETC, saving an additional USD 38 million for the Members as well as easing their cashflow burden.
The second was the approval of a new Owners’ General Discount which came into effect on 20 February 2021. The group’s strong results in recent years have delivered positive benefits for our Members as Gard has been able to reduce the last instalment of the ETC, making the cost of insurance with Gard cheaper. However, the practice of deferring any reduction in the ETC premium until several months after the end of the policy year in question made budgeting harder for shipowners and made it difficult for Members to appreciate the fact that the group’s superior performance had delivered lower insurance costs.
By simplifying the premium policy and bringing the discount forward to the beginning of the policy year, we give our Members greater transparency and predictability as to the real cost of buying mutual P&I products with Gard and reward them for being part of a strongly performing Club. For the 2021 policy year, the Owners’ General Discount on the ETC was set at five per cent.
Gard’s results were nevertheless affected by some key trends in shipping and financial markets in the last 12 months. Our underwriting results were impacted by a negative trend in pool claims in the International Group (IG) which totalled around USD 450 million for 2020, as well as suffering from adverse development on claims from prior years. It is in extraordinary years such as this one that the mutual system proves its worth to the sector it supports.
The volatility experienced in the stock market over the last year inevitably impacts investment results, as does the ongoing low interest rate environment, both requiring a tight focus on underwriting discipline. More positively, our Marine & Energy portfolio provided a welcome contribution to the group’s overall result. This strategy of diversification, that Gard first pursued nearly two decades ago, helps us to smooth market turbulence, using the positive contribution from the commercial business to support the mutual Members. We can be grateful that this structure gives us predictability and flexibility through good times and bad.
Operating in the wider world
P&I Clubs and marine insurers straddle two worlds. They sit firmly within the broader maritime industry, providing a “ticket to trade” for vessels across the globe. They are also financial institutions, albeit relatively small ones, which are subject to the regulatory pressures of that sector. In some cases, both worlds feel the same pressure points – around climate change for example or tackling sanctioned behaviours, while others may be specific to only one – for example tensions around international trade.
The importance of shipping in maintaining the supply of essential goods has never been more evident than in recent months and, inevitably, increased activity generates greater carbon emissions. The International Maritime Organization’s (IMO) strategy to cut emissions from vessels by at least 50 per cent by 2050 (compared to 2008) means that we are now at a point where there is an encouraging common recognition of what needs to be done and where the industry needs to go. Nevertheless, differences remain as to how we will get there given the significant number of unknowns, not least around technological change and innovation.
Climate change and the energy transition affect everyone – shipping is just one part of the picture. Gard has taken a proactive approach to understand the risks and opportunities associated with lower emission shipping, believing that it should understand the risks early and ensure that Members and clients are supported when new technologies are utilised. This includes being involved in pilot projects for new fuel technologies and zero emission shipping, in addition to bringing new technologies into the portfolio. One example is the multi-stakeholder collaboration Gard has entered with the Centre for Research-based Innovation (SFI) AutoShip. This project is taking a leading role in the development of autonomous ships for safe and sustainable operations, driving the decarbonisation of the maritime industries. In order to incentivise the shift to sustainable business models in our industry, it is imperative that positive social and environmental impact is illustrated, while preserving and even enhancing value creation.
There are increasing calls for insurers’ actions on sustainability to be reflected in their day-to-day business as well as the investments they make. Since last year, Gard has been a signatory to the ship recycling transparency initiative, a cross sectoral coalition calling for more transparency around ship recycling. We recommend to our Members that they follow the standards laid out in the Hong Kong Convention when recycling ships. In the past year, Gard has supervised the removal and recycling of five wrecks, all in line with the standards of the Hong Kong Convention or the EU Ship Recycling Regulation.
It has been a challenging year for P&I insurers, with the system hit by large losses and adverse developments in prior year claims. Years such as these require reflection on the strengths and weaknesses that have been revealed by events – and consideration of where change could reinforce the good or ameliorate the bad. This is a debate that Clubs individually and collectively need to undertake to prepare for the next crisis.
Mutuality is a significant asset for the shipping industry, but there is no room for complacency. Collectively Clubs can be looking at where improvements can be made. How can we as mutuals always aspire to improve our capital efficiency? Can we balance the need for complete P&I cover with the potential exclusion of coverages such as cyber? Can more be done with digitalisation to make claims handling more effective – delivering greater societal good?
These are complex questions without simple answers, but they are ones with which Gard is actively engaging. Last year, I talked about the shipping and marine insurance industries being tested as never before, and I believe that trend will continue. In these circumstances, I would like to offer a special thank you to everyone at Gard for responding with great professionalism and speed to rapidly changing circumstances, delivering strong results and high levels of service. My thanks also go to those serving on our Boards and Committees for their time and commitment. It is the quality of our membership and organisation, our financial strength and our ability to keep eye view on the future – despite immediate challenges, that mean Gard will continue to deliver the promises it makes every day to Members and clients.