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Nov 23, 2021
Lockton P.L. Ferrari

General Increase Bulletin No. 13/21

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1st January 2024.

The EU ETS is limited by a 'cap' on the number of emission allowances. Within the cap, companies receive or buy emission allowances, which they can trade as needed. The cap decreases every year, ensuring that total emissions fall.

Each allowance gives the holder the right to emit:

  • One tonne of carbon dioxide (CO2), or;
  • The equivalent amount of other powerful greenhouse gases, nitrous oxide (N2O) and perfluorocarbons (PFCs).
  • The price of one ton of CO2 allowance under the EU ETS has fluctuated between EUR 60 and almost EUR 100 in the past two years. The total cost of emissions will vary based on the cost of the allowance at the time of purchase, the vessel’s emissions profile and the total volume of voyages performed within the EU ETS area. The below is for illustration purposes:
  • ~A 30.000 GT passenger ship has total emissions of 20.000 tonnes in a reporting year, of which 9.000 are within the EU, 7.000 at berth within the EU and 4.000 are between the EU and an outside port. The average price of the allowance is EUR 75 per tonne. The total cost would be as follows:
  • ~~9.000 * EUR 75 = EUR 675.000
  • ~~7.000 * EUR 75 = EUR 525.000
  • ~~4.000 * EUR 75 * 50% = EUR 150.000
  • ~~Total = EUR 1.350.000 (of which 40% is payable in 2024)
  • For 2024, a 60% rebate is admitted to the vessels involved. However, this is reduced to 30% in 2025, before payment is due for 100% with effect from 2026.
  • Emissions reporting is done for each individual ship, where the ship submits their data to a verifier (such as a class society) which in turns allows the shipowner to issue a verified company emissions report. This report is then submitted to the administering authority, and it is this data that informs what emission allowances need to be surrendered to the authority.
  • The sanctions for non- compliance are severe, and in the case of a ship that has failed to comply with the monitoring and reporting obligations for two or more consecutive reporting periods, and where other enforcement measures have failed to ensure compliance, the competent authority of an EEA port of entry may issue an expulsion order. Where such a ship flies the flag of an EEA country and enters or is found in one of its ports, the country concerned will, after giving the opportunity to the company concerned to submit its observations, detain the ship until the company fulfils its monitoring and reporting obligations.
  • Per the EU’s Implementing Regulation, it is the Shipowner who remains ultimately responsible for complying with the EU ETS system.

There are a number of great resources on the regulatory and practical aspects of the system – none better than the EU’s own:

23rd November 2021

P&I Mutual entries

  • A +12.5% minimum increase.

FDD Mutual Entries

  • A +12.5% minimum increase.

The recent Board meeting has concluded by setting a +12.5% minimum increase to be applied onexpiring P&I and FDD mutual premiums at 20th February 2022. In addition, rates will be adjustedto reflect any changes in the cost of the International Group reinsurance programme, together withany uplift in the cost of the club’s own whole account reinsurances for 2022. Members withadverse records will in addition have rates and terms increased to reflect as appropriate recordand/or risk exposure.

Commenting upon the Board decision the following driving factors have been noted in forming thebackground to the 2022 renewal for the club,

- the trajectory of marine losses has continued to move relentlessly upward over the recent past. This has been most visible in the escalating cost of larger claims, particularly those falling within the International Group’s Pool. Although the frequency of losses has remained broadly constant, their individual severity has risen substantially over the past few years. The American Club contribution to the International Group pooling mechanism has itself almost doubled since 2018, and now accounts for about a third of the Club’s net claims overhead.

- the impact of “social inflation” has become evident across a broad spectrum of exposure, particularly in regard to personal injury and environmental claims. Their cost has grown appreciably over the past few years, in a manner much less predictable than has traditionally been the case.

The renewal circular continues in noting,

“The negative developments described above have emerged against a background of chronically weak premium pricing......The American Club has been no stranger to these realities. In common with its peers within the International Group, the Club has seen pressure on reserves as mounting claims and other costs prove increasingly irreconcilable with inadequate premium income.......This has caused your Board to make some difficult decisions, intended to fortify the results of certain years as described below, and thereby secure the Club’s financial strength for the future.”

The general requirements set by the Board are reflected above in the opening bullet points.

In addition, the club circular introduces new actions required on the 2018, 2019 and ‘in prospect’ for 2020, policy years.

Before introducing the deliberations we take a step back to put this new development into context.

The club circular November 14 2019, circular N0. 36/19 introduced the Background to 2020 American Club Renewal. In this circular the club announced the levying of supplementary calls for the 2016 and 2017 policy years.
For the 2016 policy year a supplementary call of 22.5% of original estimated total premium was announced payable in two equal instalments on May 20th and October 20th 2020. The 2016 policy year was subsequently closed.
For the 2017 policy year a supplementary of 17.5% of original estimated total premium was announced payable in two equal instalments on May 20th and October 20th 2020. The 2017 policy year was subsequently closed.

The club circular of 25th June 2020, circular 14/21 introduced the Annual Report & Accounts for 2020. Within this circular the club advised of the note contained in the Accounts referring to premium earned but unbilled (EBUB), an accepted use of the accounting mechanism expanded to account also for the deficits attributable to the development of open policy years. An accepted mechanism in account reporting which reflects the Associations ability as an assessable Mutual Insurance Company to cure all policy year deficits. The Annual accounts so presented restated this position.

Turning to the club renewal circular issued November 19 2021, circular 24/21 the title includes reference to “Levying Supplementary Calls for the 2018, 2019 and 2020 (in prospect)”.

In summary,

2018 policy year

“Owing to the unanticipated deterioration of certain claims for the Club’s own account, together with an escalation in the cost of Pool claims, the deficit for this year has increased to $6.9 million as of September 30, 2021.”

“This deficit is covered by an allowance for premium earned but unbilled (EBUB), the rationale for which was described in the Club’s Annual Report and Accounts for the 2020 financial year issued in June, 2021. Accordingly, your Board has determined that the EBUB as of September 30, 2021 should now be billed in the form of a supplementary call of 15% of currently estimated total premium for the 2018 policy year.”

Applicable to the P&I entries “will be due for payment in a single instalment on March 20, 2022. Concomitantly, the 2018 policy year will be formally closed as of September 30, 2021.”

2019 policy year

“Twelve months ago, this policy year exhibited a deficit of nearly $19 million, a function of the inexorably rising cost of claims within the International Group Pool and an increase in projected losses for the American Club’s own account. As of September 30, 2021, the deficit covered by EBUB stood at $19.5 million, a figure which would have been larger but for the Club’s own reinsurance protections. In any event, your Board has determined that this EBUB figure should now be billed in the form of a supplementary call of 35% of currently estimated total premium for the 2019 policy year. This supplementary call, will be debited in two equal instalments due for payment on May 20 and October 20, 2022.”

As in the case of 2018 noted above, the call for 2019 will apply only to the Club’s P&I (Class I) business”.

2020 policy year

The club comments as follows,

“the 2020 policy year has developed significantly to the downside, with both an escalating Pool and rising retained claims being the chief causes of this deterioration.”

“Although the year might be expected to improve over time as further investment income accrues to it, your Board is of the view that the EBUB allowance should be maintained at its current level, but without realizing it as a supplementary call for the time being........However, it is expected that a supplementary call for 2020 will be required in due course at a similar level to that of 2019, and a decision formally to take such action will be made during the first half of 2022”.

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P.L. FERRARI & CO S.r.l.

General Increase Bulletin No. 13/21
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