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IG faces challenging renewal on loss-hit $3.1bn reinsurance contract

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The International Group of P&I Clubs (IG) is gearing up for a highly challenging renewal of its $3.1bn reinsurance tower, following a disastrous spell of losses after the placement switched to a two-year deal in 2020.

The two-year period has been marred by a string of sky-high claims, which have driven the (re)insurers on the contract to a significant loss.

Multiple market participants suggested to Insurance Insider that a re-rating of the contract – even a rise of around 20% – would not be a sufficient remediation measure, and they would be prepared to walk away from the deal unless more drastic measures, such as a substantial increase in retentions, was implemented. Another possibility would be the introduction of an aggregate deductible.

“The risk and exposure is growing the whole time,” one source said. “The value proposition has been really poor.”

The IG reinsurance contract is one of the most unique in the market, providing up to $3.1bn of liability cover per ship for around 90% of the world’s ocean-going tonnage. It is heavily written in Lloyd’s and the London market, with the participation of around 80 markets, and plays a central role in underpinning global trade.

Renewal meetings have started much earlier than usual, with negotiations on the February-incepting placement usually concluded by December to aid 1 January marine treaty renewals.

Sources expressed frustration about what they viewed as the consistent low-balling of claims notifications coming from the IG, with losses repeatedly spiralling far above initial estimates.

A standout example in the last contract period is that of the Golden Ray, a car carrier that capsized off the coast of the US. It was initially notified at $115mn, but the figure has spiralled, with the latest notification coming in at $788mn earlier this year.

Losses in the past such as Rena and Costa Concordia have had similar issues. Rena was initially notified for $175mn in 2012, but losses spiralled to in excess of $425mn, while the eventual cost of Costa Concordia came in above $1.4bn.

Numerous markets said that they no longer reserve based on the IG estimates, instead coming to their own in-house decisions on where claims would end up.

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After several years of repeated losses, and no signs of a slowdown in claims activity, sources said that many participants were looking to reduce their involvement on the programme, which could make securing the necessary capacity more challenging.

However, new markets have entered marine liability since the last IG renewal – including Inigo and ERS – which sources said could influence dynamics.

It was mooted by sources that a change in leader was likely given the outflux of staff from Axa XL, with a number of market participants unhappy that it had not been able to hold the IG to account for “step reserving”.

Convex was named by many as a potential successor, given the past relationship Convex’s leadership has with the IG from their days at Catlin. The possibility of a co-lead structure was also suggested.

Sources said that the market dynamics were likely to be driven by the attitudes of the largest reinsurers, such as Swiss Re and Munich Re, both of which will likely bear a significant share of the Golden Ray deterioration.

The IG is made up of 13 individual P&I clubs, non-profit mutual insurance associations which provide liability coverage for their members.

The first $10mn of any claim is paid by individual clubs, with losses up to $100mn pooled amongst the 13 IG members, after which the reinsurance contract is triggered.

At its last renewal in February 2020, the contract switched to a two-year deal – another factor which has aggravated the marketplace. It is co-brokered by Miller and Aon, and the current leader is Axa XL.

A group of up to 80 markets participate in the deal, with insurers and Lloyd’s markets writing lower layers, and exposure on the upper layers falling more heavily on the treaty and retro markets and major global reinsurers.

IG CEO Nick Shaw said that the group had “longstanding relationships” with its reinsurers, who played a “vital role” in supporting shipowners.

“Whenever challenges have arisen we have met them together in partnership to ensure a fair and equitable outcome for all parties,” he added. 

“We remain fully committed to this long-term, partnership approach and, together, to continue providing the stability and strength that is vital in underpinning the safe and efficient functioning of world shipping and global trade.”

Mounting loss activity

The Golden Ray has proved the standout claim of the last contract cycle, but it was only one of a number of losses that have been notified to reinsurers, with concern that several recent incidents could also trigger the cover.

The MV Wakashio, which ran aground off the coast of Mauritius last summer, is expected to be a sizable claim, although its eventual scale will depend on whether pollution liability can be capped by an international convention.

Last summer, reinsurers were also notified of a loss of around $130mn relating to the MSC Gayane, which has been heavily fined after 20 tonnes of cocaine were discovered on board. It is understood that the issue is yet to be settled and the figure could increase.

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In addition, the market fears that the Ever Given incident in the Suez Canal could lead to a claim, as could the recent sinking of the X-Press Pearl and the oil leak from tanker Symphony off the port of Qingdao, China earlier this year.

The Golden Ray loss has been particularly painful because it has been a sideways claim, with elements of both pollution and wreck removal, meaning that it looks likely to impact the insurers on the first layer twice. The clear-up of the ship has been hampered by coronavirus and the US storm season, and a recent fire on board has also caused delays, leading many in the market to believe the loss could eventually exceed $1bn.

Meanwhile, 2020 was the most expensive year ever for pool claims retained by the clubs, with 19 claims at the end of the policy year, totalling a cost of $463mn in the band up to $100mn.

Market sources are united in believing that loss severity is rising in marine liability due to increasing environmental liabilities and swelling wreck removal costs. But there is still debate around whether the frequency of loss over the last year is an aberration or the start of a trend.

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Head of marine at Liberty Specialty Markets Mike Burle said that the scale of claims was being driven in part by the increasing size of ships.

“I think what we may have seen is significant claims to larger vessels because the main vessels are getting larger,” he said.

Containership catastrophe

While the Ever Given incident in the Suez Canal grabbed global headlines earlier this year, it is perceived largely as a near miss in the market.

Sources said that the potential for a super-loss from a containership looked increasingly likely, and that such a possibility was not priced into the reinsurance protection. Insurance Insider has previously explored the issue here.

“That is the one that keeps me awake at night,” one underwriting source said.

The largest containerships in the world can now carry over 20,000 containers, and sources said that the logistics involved to deal with a major incident striking such a vessel would be highly complicated and astronomically expensive.

“I think unmodelled losses like this are a concern,” said Burle. “The Ever Given was a wake-up call for the industry.”

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