The 2022/23 P&I Club renewals are afoot and the current dynamicof the industry has raised questions amongst our clients regardingthe types of premium calls that are (or can be) raised by theirrespective International Group P&I Clubs
Those entered on a mutual basis into the International Group
of P&I Clubs are members of those P&I Clubs with associatedpremium obligations as set out in the respective Club’s Rules. Asmembers, the assureds benefit from the good performance of theirClub and the consequent financial stability generated, whilst at
the same time collectively share the burden with other membersof the Club in the event remedial action is required to re-establishstability if losses persist and as determined by the Club Board ofDirectors. Obligations of members entered on this basis in P&IClubs are very unlike other insurance products which are purchasedon a fixed-premium basis (i.e., the agreed premium represents theexact amount that each policy holder will pay regardless of theinsurers’ financial performance).
The following explanation is intended to provide an overview of thetypes of premium calls that a P&I Club is entitled to make againstall mutual members in accordance with their Rules, as well as thefrequency with which they occur thus detailing the overall potentialexposure and impact.
Estimated Total Premium:
Also referred to as Estimated Total Premium, this is today thewidest terminology used by most Clubs and has replaced theprevious Advance Call plus Supplementary Call terminology(see below).
Estimated Total Call is the estimated total amount originallyagreed upon inception and due over a policy year. It represents therisks and associated costs and operation of entered vessels to theClub and is calculated to cover anticipated claims, re-insurancepremiums, Club pooling contributions under the shared PoolingAgreement and associated Club costs for that policy year for eachindividual member.
Typically, it is debited by Clubs in either four or five instalments as determined by the individual Club Board. Depending on theinstalment pattern of each Club, the instalments can either bemade in full during the course of the policy year, or include a finaladditional instalment in the successive policy year. Regardless ofhow many instalments, the total amount payable remains subjectto Unbudgeted Supplementary Calls, as per the below.
Advance Call plus Supplementary Call / Deferred Call:
For many years the International Group Clubs debited memberspremiums using this method and terminology – now only two remain.
Under this method of allocating premium, there are two stages ofcollecting premium. The Advanced Call is typically the premiumthat will fall due from the member to the Club during the policyyear. Within the total amount payable (in excess of the AdvancedCall), however, there will be a Budgeted Supplementary Call, alsoknown as the Deferred Call, which is scheduled for payment shortlyafter the policy year has come to an end.
A budgeted Supplementary Call or Deferred Call is intended toprovide the Club with a buffer in case the forecast of claims andcosts during the year has been underestimated. In fact, this callcan be reduced or even waived entirely for the whole membership.
Unbudgeted Supplementary Call:
Being mutual associations, the P&I Clubs are owned by theirrespective members. As stakeholders in the Club, the membershave a direct exposure to both the financial successes and / orweakness of their P&I Club. Therefore, the amount of premiumoriginally agreed at renewal between the Club and the member isnot the only financial commitment to consider.
An Unbudgeted Supplementary Call is the method by which theP&I Clubs can call additional funds from its members for up tothree policy years where the premium agreed between the Cluband its members has been insufficient to meet the cost of claimsand operational expenses of the Club.
The amount of the Unbudgeted Supplementary Call is typicallylevied as a percentage of the premium already agreed for that policyyear – for example, 35% of the original estimated 100% premium iscalled for the given policy year(s). There is no set limit on how mucha P&I Club could call from its members and is entirely subject to thesolvency and regulatory controls of the financial performance of theP&I Club, in addition to the individual Board considerations for thegood governance of the Club’s financial stability.
Annexed to this document is a history of the International Group’srecord of making Unbudgeted Supplementary Calls – note thatthe figures are given in excess of any budgeted SupplementaryCall or Deferred Call.
Because the P&I Clubs have the option to call UnbudgetedSupplementary Calls for up to three years after that policy yearhas come to an end, when a member leaves a Club, their liability topay premium to the Club does not cease at the time of departure.Rather a Member’s liability to Pay premium extends to the threeprior policy years in which they had vessels entered into the Club.
In order for the Club to protect the wider membership from adeparting member’s ongoing premium obligations, and to giveleaving members definitive closure of their premium obligationsto the Club, the Club Rules (or policy of insurance) allow for theimplementation of Release Calls.
The Release Call is the amount which the Club believes will reflectthe potential likely exposure to Unbudgeted Supplementary Callsfor the three open policy years. A Release Call is calculated as apercentage applicable individually to each of the remaining threeopen policy years, and generally reduces as each year closes. Thecurrent Release Calls are established by each Club’s Board ofDirectors and advertised by regular circulars.
When a member decides to leave their entered Club, they have afew options on how to manage the mandated Release Call: i) theycan provide the Club with a bank guarantee or cash in the amountrequired by way of security for any Unbudgeted SupplementaryCalls; or, ii) pay the Release Call in full and final settlement of anyfuture Unbudgeted Supplementary Calls.
Should a departing member elect the second option, opting to paythe Release Call in full and final settlement, they are thereafterreleased from any and all future premium obligations, save foreventual Overspill Calls. If during the closure of the three openyears no Unbudgeted Supplementary Calls are made by the Club,the member does not have the right to request reimbursement
of the Release Call paid.
Whilst the intention of a Release Call is to genuinely reflect theexposure to future Unbudgeted Supplementary Calls, some Clubshave unusually high Release Calls in comparison to their financialstanding and solvency ratios, leaving some to speculate that theseare being used as a method to deter members from leaving a Club.
The International Group of P&I Clubs share (or ‘Pool’) claims inexcess of USD 10m up to USD 100m with an individual Club’sparticipation to the claim amount calculated as a percentage in accordance with the risk that each Club poses to the widerInternational Group – this is done through the InternationalGroup’s captive named ‘Hydra’. For claims in excess of USD 100m,the International Group purchases re-insurance for each and everyvessel, for each and every claim up to USD 2.1bn (with a separatelimit of USD 1.0bn for oil pollution).
For claims in excess of USD 2.1bn the Club Rules invoke thepossibility of making an Overspill Call. In recent years the Clubshave collectively purchased an Overspill Call reinsurance of USD1bn to provide additional protection to the membership – seebelow graph for the full structure. (Download the complete pdf to see below graph)
In the unlikely event that a claim exceeds both the InternationalGroup reinsurance and the Overspill Call reinsurance limits ofUSD 3.1bn, the excess amount is levied proportionately across allClubs, not just the Club that has produced the claim. An individualmember’s exposure to an Overspill Call is limited as per the Ruleswhich are largely similar to one another; as an example from oneClub’s Rules reads:
“The board shall not levy on anymember in respect of the entry ofany one ship an overspill call or callsin respect of any one overspill claimexceeding in the aggregate 2.5% ofthe Convention Limit of that ship.”
P.L. Ferrari reports the financial position of each of the Clubs basedon publicly available information, both in our Annual Review and viaregular Newsletters. The Clubs are also monitored by Standard andPoor’s each year, more critically the regulator (relevant to all Clubsother than the Japan and American Clubs) sets Solvency 2 thresholdswhich are reviewed in real time and will demand any Club thatbreaches the minimum threshold to take the appropriate remedialaction (the levying of an Unbudgeted Supplementary Call(s)).
We are always available to give more detail on this subject. It isimportant as all members of Clubs are jointly and severally liablefor the financial liabilities of their Club.
(Download the complete pdf to see P&I Unbudgeted Supplementary Call Historical Data)
P.L. FERRARI & CO. S.r.l.