From our correspondenteurope

P&I club probe grinds to a halt

A European Commission investigation into P&I club competition has failed to reach any firm conclusions. So why was the investigation launched, and will its abandonment leave the clubs with an untroubled route ahead?
ery early in August, the glad news issued forth from the competition authorities in Brussels. They had formed a view on the arrangements of the International Group of P&I Clubs, following an investigation, and they had concluded that the investigation was not sufficiently conclusive to confirm the Commissions initial concerns that the agreements between clubs might be lessening competition between P&I clubs and/or restricting, to a certain extent, the access of commercial insurers, and/or other mutual P&I insurers to the relevant markets. The announcement brought to an end a process that began in August 2010. Like many things European these days the conclusion was invested with a certain lameness. The narrative of why the investigation began, how it was conducted, and how the club interacted with the officials of the Competition Directorate seems in retrospect altogether underwhelming. The parties certainly had a history. Brussels has never had much of a soft spot for shipping. It was very down on shipping conferences in the 1980s and it has no warm heart for the clubbiness of shipping. Europe is the home of a lot of powerful shippers who as a whole do not have much time in their industrial calculus for the desires of shipowners to earn freight in ways which

our regional correspondent in

Sam Ignarski,

EUROPE
The European Commission has failed to confirm its suspicions of anti-competitive practices in P&I insurance.

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September/october 2012

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From our correspondenteurope

have an effect of smoothing out the peaks and troughs of the shipping cycle. Moreover, early in the 1990s, as a result of pressure from Greek shipowners, the competition directorate had forced upon the clubs a number of rules that made changing clubs, at least in theory, a little easier for the members. On the face of it, there is plenty in P&I to attract the attentions of antitrust officials. The clubs share claims between themselves and, over a certain level, by way of a reinsurance pool bought from the insurance market. They agree they will not underbid each other for shipowner business already held, and they will not give inducements to owners to switch to them from the holding club. The penalties for doing so are severe the offending club loses the protection of the reinsurance bought by the International Group of Clubs in respect of the ships concerned. The clubs cooperate on a whole range of specialist issues and there are sub-committees on all manner of cargoes and risk issues. Since they pool their claims, there is a deal of scrutiny over large claims to ensure they are settled in accordance with the club rules, the wordings of which are also harmonised between the 12 clubs in the group. As an industry, the P&I world is heavily eurocentric, highly established, and very durable. It is from time to time described in the shipping press as a cartel and were it not so peculiar, were it a mere branch of commercial, industrial fixed price insurance, the way it goes about its business would have long been altered by modern competitive realities.

Hamburgs multipurpose terminal.

Origins
It is a peculiar industry as a result of its origins. The capital which the ocean shipping industry puts aside for third-party liability exposures is under the stewardship of mutual associations, which some say are the last living link with the 19th century. Non-profit associations, set up under the self-help doctrines of largely British Victorian shipowners, the clubs cannot easily be acquired by others or merged with large corporate joint stock companies. They are managed by specialist companies set up with limited aims and they make a little capital go a long way. This is important not only for the financial futures of the club. The club executive managers handle the claims, many of which drag on for years or even decades. They aim to break even over the long term, setting their prices and planning their calls to ensure that the process is as smooth as it can

be made over say five or six years. They prefer this ponderous progress to the wilder gyrations of the insurance cycle. Why did the antitrust authorities again fix their eyes on P&I? The theories for this are various. Some think it is the fringe fixed premium P&I insurance industry that had a word with the regulators. Insurance companies who have a toe in the P&I water tend to specialise in small ships or hard-to-insure ships. They are loath to mix it with the clubs, if only because the prices charged by the clubs are low and the margins of underwriting surplus are not wide. Mutual clubs that are not part of the International Group cannot offer the high limits offered by the group and cannot enforce any price discipline when in competition with them. The largest and most estimable of the fixed premium P&I providers, British Marine, is nowadays, following its demutalisation and sale, a part of the QBE insurance company. A large proportion of its staff in recent times decamped to start up an operation called Lodestar, a development that ended in court actions and injunctions to delay its start date. There are much easier ways of earning a handsome premium surplus than fixed P&I insurance. Another reason mooted for the

investigation is the difficulty outsiders have in joining the International Group of Clubs. The outsiders tend to be just that. The last to join was the New York-based American Club. The latest applicant is the China P&I Club. Others like the Korean P&I Club might like to join one day. But the group is slow to open ranks.

Outcome
The closing down of the investigation was of course welcomed by the clubs and people like the International Chamber of Shipping. The clubs and the P&I trade were on the whole underwhelmed by the process of the investigation. They complained they were put to a lot of work and expense to educate officials who understood little and knew less of this arcane branch of marine insurance. The investigating team was changed, international civil service fashion, midway through the investigation. The new people needed to be educated all over again to get them up to speed. In the end it rather looks as if the whole thing ran out of puff. So the status quo prevails. But is plain sailing to be expected? Maybe not. The sanctions against Iran have ushered in an era where a key form of insurance to shipowners is not available to all comers. In an oil thirsty world this may end in tears. The needs of the shipowners of the Pacific Century many not over time be well or adequately met from operations largely based in Arendal, London, Newcastle, Gothenburg or New York. There are a dozen clubs in the International Group, some of which are struggling to justify their places in the modern shipping world. These me-too operations may be the ones to HLPFI watch in our changing times.

The needs of the shipowners of the Pacific Century many not over time be well or adequately met from operations largely based in Arendal, London, Newcastle, Gothenburg or New York.

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