Claims under control

As chairman Knud Pontoppidan said in the latest financial statement: “We are assuming that premium rates will remain soft, although it is expected that as trade volumes continue to increase, premium income will increase correspondingly.” At the same time, more trade usually means more claims.

In fact, insurance premiums negotiated by the club were on average 4% lower during 2010, and to date, the slide has continued, reflecting the state of the insurance market at large.

The club’s directors and managers are keen that rates should harden modestly, to help underpin the finances – even though the institution has a strong balance sheet. Since moving up from chief operating officer to his current post, Mr Fenton as head of the management team has navigated the club through the exceptionally choppy waters of the global financial crisis. The measure of success in doing so is that the specialist insurance rating agency AM Best has annually bestowed on the club its A- (Excellent) rating without a break since 2006, a seal of approval of the recovery which had to be fought for after the worrying deficit incurred in the 2001 policy year.

That rating is an endorsement, said Mr Fenton, of the club’s maintenance of a capital position strong enough to deal with any shocks that might come along, and its confidence that reserves more than meet potential liabilities.

Keeping this rating has been a priority for the club, which is harried by competitors who offer what is said to be below-cost pricing and who assert that they can match the mutual on claims service.

Mr Fenton puts the current challenges into the context of developments over the last four years. As we went through 2008, we were already in the soft part of the insurance cycle, he told Port Strategy. Just when there was an expectation that premium rates would start to rise, towards the end of 2008, the credit crunch struck. Following that has come a couple of years of very soft rating.

The saving grace was that as trade levels tumbled, claims slowed in a clear correlation, to the extent in 2009 of a sharp 20% drop in claims below $1m. As many businesses struggled, the combined ratio (claims and operating expenses as a percentage of premium income) at the TT Club stayed well below 100%, a performance equal to any competitor.

The investment environment was tough, but the club had got out of equities in 2007, protecting it from the impact of the stock market slump through that period. Early in 2011, the club again took a very small position, currently 5%, in equities, but its portfolio remains based around cash and government bonds.

With the rebound of trade volume, claims levels have returned to the long term trend line, but within underwriters’ expectations, keeping the combined ratio comfortably below 100%. The earthquakes in Haiti, Chile and New Zealand have brought more claims, mainly in the first two countries for losses of containers on the ground, but the club has paid out less in respect of claims of $1m and more than in any recent year.

The modest bill for catastrophe claims reflects the decision by the club some time ago to concentrate on providing liability-led insurance. It is still gathering information about its exposures to the March 2011 earthquake and tsunami in Japan, and here again it looks as though its main problems will arise from the land-stacked boxes that were smashed.

This respite from big claims for the past three years has been welcome, although the spectre of crane accidents hovers. The costly nature of these had been underlined in January 2008, when operations at Southampton Container Terminal were disrupted by the collapse of a gantry crane into the hold of the 8,749 teu Kyoto Express. Soon afterwards Hurricane Emma hit infrastructure on its way through northern Europe, and in high winds a ship delivering new cranes to Felixstowe broke loose from its moorings and crashed into two ship-to-shore gantry cranes.

The past year was categorised by Mr Pontoppidan as reasonably quiet in terms of major losses, although the club was on risk in the collision between MSC Chitra and the Khailijia off Mumbai, resulting in 300 cargo containers sliding overboard, and the grounding of the Kota Kado in the Pearl River delta.

Another major worry is bodily injury claims, particularly in the US and Australia. Mr Fenton says that even with the best expertise, from an insurance standpoint they are very difficult to handle and to estimate in cost, because they have such a “long tail” (it takes time for the implications of an injury to become clear). They can develop in unexpected ways, both good and bad. Of all the heads of claims, this can be the most complex, and features heavily in the club’s loss prevention drive.

Mr Fenton is proud that the club has played a big part in industry efforts to promote minimum safety features on container quay cranes and sought to help managers introduce port systems and procedures that might be summed up as “keeping machinery and people separate.”

For ports and terminals, “we continue to provide liability only, or liability and property,” says Mr Fenton. “We are liability-led: that is where we think we add the value. We have good market shares around the world. We are growing in China, but we are also growing in the US.” The limit to growth resides in ensuring that the risk profile has a balance between the risky and catastrophe zones, and more benign risks.

In addition to competition from Lloyd’s and the London company market, there has always been local insurance available for port businesses. Mr Fenton says that the club has become more competitive, particularly after “taking out a big chunk of cost at the end of 2008". The product is better than that of others, he asserts, because of the added value of loss prevention. As ports and terminals tend to have frequent claims, “they are interacting with us on a regular basis".

Is that persistent subdued phase of the insurance cycle about to end? Pressure from the reinsurance sector will tend to drive up rating, “and that will benefit us because it will improve our cash performance", Mr Fenton says.

The club is hoping for continuing gentle treatment from its own reinsurers, who are largely syndicates at Lloyd’s, and according to Mr Fenton, very much seized of its good performance in claims levels. He emphasises that reinsurers look at a client’s long term record, and prefer to enjoy long term relationships.

In "rebalancing" its total portfolio, the club is setting out to attract more members from the transport operator and logistics category (currently 18% of its insured members), although the plan is for the ports sector to remain at around one-third of the book. The transport operator tack follows the expansion into the field of logistics by many businesses in the transport chain.