While the U.S. merchant marine has dramatically shrunk since World War II, mutual insurer American Club has adapted by expanding overseas.
Joe Hughes
The American Steamship Owners Mutual Protection and Indemnity Association, better known as The American Club, is thriving 100 years since its 1917 founding.
While the U.S. merchant marine has dramatically shrunk since World War II, the mutual insurer has adapted by expanding overseas.
The story of the insurer is told in a new book, The American Club: A Centennial History, by Richard Blodgett.
While hull and machinery insurance, which protects damage to a shipowner’s property, has an older history, Blodgett writes P&I insurance originated in the mid-1800s when English “legislators and the courts not only created new forms of liability, they also broadened the liabilities that already existed and increased the amounts of money awarded to victims – trends that continue today.”
To protect themselves from liabilities such as injuries to seafarers, damage to cargo, damage to docks or other ships in the event of a collision, pollution, fines and penalties, and wreck removal, shipowners formed mutual insurance clubs. The American Club also provides freight, demurrage and defense (FD&D) insurance that covers a variety of other risks.
It wasn’t until 1980 that the club admitted its first foreign-flag member, and in 1995 it implemented a “major strategy for growth and diversification.”
U.S.-flag carriers remain important to The American Club, including “green water” coastal operators, but as of December 2016, 86 percent of its membership by tonnage and 65 percent by premium comes from outside North America. Most of its members operate bulkers or tankers, not containerships.
The premiums paid by U.S. members are larger than their tonnage because most U.S.-flag vessels, tug and barges, in particular, are smaller than oceangoing ships. And the risk related to U.S.-flag tonnage in terms of personal injury awards is higher.
Most inland or “brown water” tug-and-barge operators buy their liability insurance from fixed premium insurers, not mutual P&I clubs, and the American Club offers this through a sister company called Eagle Ocean Marine.
Joe Hughes, secretary of The American Club and chairman and chief executive officer of the company that runs it for its members – the Shipowners Claims Bureau – said most claims result from cargo loss and damage, or the death, injury and illness of seafarers.
Hughes noted the club is one of 13 large P&I clubs that collectively have formed what is called the International Group of Protection & Indemnity Clubs (IGP&I).
In 1989, The American Club reached an agreement to become a member of the IGP&I, which can trace its roots to a much earlier “London Group” formed in 1899 that had six members. In addition to The American Club, today’s IGP&I has eight members from the United Kingdom, three from Scandinavia, and the Japan P&I Club. There are some other P&I clubs that are not members of the group, but IGP&I says it insures 90 percent of the world’s oceangoing tonnage.
For P&I insurers with cruise ships, passengers are a major area of liability, and Hughes said in any given year a club may have a spate of dock damages, collisions, and pollution.
Liabilities for a single incident can be huge. When the Costa Concordia went aground off the coast of Italy in 2012, resulting in the death of 32 people, P&I claims ended up costing $1.7 billion, in addition to hull and machinery claims of about $500 million. One of the biggest expenses in the disaster was related to removing the wreck of the gigantic cruise ship. The ship was not insured by The American Club.
Hughes explained that IGP&I has created a system of layered reinsurance to prevent P&I clubs from being swamped by any single claim. Basically, each club retains the first $10 million of any one claim, and claims between $10 million and $100 million are reinsured by a pool of the international group, with some of the risk reinsured by a captive reinsurer called Hydra. For claims in excess of $100 million, there are several layers of market reinsurance up to a further billion dollars for oil pollution and $3 billion for passenger and crew claims, and reinsurance for what’s known as “overspill” claims.
Over the past five years, Hughes said “P&I costs have been remarkably stable. In fact, they’ve been in a sort of a gentle decline over the past few years.” He attributed that to both low reinsurance costs and the fact that P&I claims – the largest driver of insurance costs – have been modest, both large claims and smaller “attritional” claims of $250,000 or less.
As a result, there will not be any general rate increase when policies are renewed on Feb. 20, and Hughes does not expect many carriers to switch clubs.
(Blodgett explained P&I insurance is renewed each year on Feb. 20 “because historically that was the date when British ships, having been laid up for the winter, could leave port on the River Tyne with reasonable assurance that the Baltic Sea would be ice-free when they arrived.”)
The so-called “Rotterdam Rules,” an international treaty created by the U.N. Commission on International Trade Law (UNCITRAL) in 2008, could result in higher cargo claims for P&I clubs, Hughes said.
For example, the Rotterdam Rules would eliminate the “defense of error in navigation or management, and weaken the fire defense,” he said.
But Hughes noted there has been little progress in getting the Rotterdam Rules enacted. The United States is one of only 25 countries that has signed the treaty, but neither it nor any signatories, other than Congo, Togo, and Spain, have ratified it.
Chris Dupin is Maritime and Intermodal Editor of American Shipper. He can be reached by email at cdupin@shippers.com.