Revisions of the Insurance Loss Record Index for Ocean-going Vessels
We are notifying you of the revisions to the insurance loss record index for ocean-going vessels that will take effect from the policy year 2022. The purpose of these revisions is to provide more clarity and transparency for our Members, to assist them in achieving a more comparative Loss Record.
The index has been used for the loss records mentioned below (in No 3) in the Club’s basic policy for underwriting ocean-going vessels insurance.
- The Club must underwrite fair, disciplined, and consistent insurance in order to provide Members with sustainable insurance services.
- Based on the spirit of mutual insurance, Members must share appropriately the insurance claims payments for the entered ships, reinsurance premiums, and expenses required for the management of the Club.
- The insurance premium for an individual Member must be calculated according to the Member’s loss record, which is based on accidents the Member has had in the past, and other factors including deductible amount, reinsurance premium and ship type, to be commensurate with the underwriting risk of the entered ship.
- Prior to signing a new contract, the Club must make certain that the Member meets the appropriate safety and risk standards for ship operation.
Please take note of the following revisions that will take effect from the beginning of policy year 2022.
- New Loss Record Index
The Club will no longer use the gross loss ratio as an index for calculating the insurance risk of each Member. Although this index shows the claims trend of individual Members, it does not indicate the direct and indirect costs of underwriting and therefore does not indicate the net loss record including the costs.
Instead of the gross loss ratio, the Club will use the net loss ratio as a loss record index. Net loss ratio is used by many of the Clubs in the International Group of P&I Clubs (IG) as it is a more comprehensive risk index. Net loss ratio provides a clearer picture not only of the claims trend of individual Members but of the contribution they should make towards the expenses needed for the management of the Club.
The net loss ratio for a policy year is calculated by the formula below.
Net premium: Premium paid to the Club during the policy year. Brokerage fee is not included. The figure reflects lay-up refunds, cancellation refunds and changes in the insurance premium amount.
Claims payment: Any claims payment covered by Abatement (see "2. Introduction of Abatement" below) and exceeding the Club retention (US$10 million in the policy year 2021) will be deducted from the total claims payments (paid and payable.)
IG reinsurance premium: The IG pool/reinsurance system to prepare for large and unpredictable accidents. All IG Clubs contribute to and share in the payment of claims in the Pool, which is structured in three layers for losses from US$10 million to US$100 million. The IG also arranges the reinsurance in the commercial market for claims between US$100 million and a certain upper limit (US$3.1 billion in the policy year 2021). See the diagram on our corporate website (https://www.piclub.or.jp/en/about/ig).
Current IG reinsurance premium rates allocated according to ship type are shown on the IG’s website (https://www.igpandi.org/article/international-group-pooling-and-gxl-reinsurance-contract-structure-2021-have-now-been-finalised). All Members contribute to the premium.
IG pool contributions: All IG Clubs contribute to the Pool. In order to level the fluctuations in the IG pool contributions paid annually by Members, the Club calculates the contributions due for the year by a 5-year moving average method, using the payments record in the past year. 50% of each calculated amount is allocated to all ocean-going entered ships based on their premiums and entered tonnage. For the ongoing year, the figure of the most recent policy year completed will provisionally be used, and it will be replaced by the actual figure in the subsequent years.
Abatement Contribution: See "2. Introduction of Abatement" below.
As for the new loss record based on net loss ratio, see [Attachment 1. New Loss Record Format, and Terms, Definition and Formulas].
- Introduction of Abatement
The Club will introduce a risk sharing system called Abatement as a formal operational rule. In this Abatement system, all Members of the Club will share and contribute towards the insurance claims payments in the Abatement Layer, which is an amount set within the Club for large and unpredictable losses. This system is based on a principle of mutual insurance. While Members have already been contributing towards the payment of large and unpredictable accidents, the Club is making these contributions more transparent.
The advantage of sharing a risk by Abatement is the mitigation of a sudden deterioration in the loss record of an individual Member who sustains a larger than normal loss, as well as avoiding sudden fluctuations in premiums.
All claims payments in excess of US$3 million per incident (net of the individual Member’s deductible) up to the Club retention (currently US$10 million) for the policy year when the incident occurred will be covered by the Abatement Layer and allocated to all Members of the Club. (The amount allocated is called the Abatement Cost.)
The Club will calculate the Abatement Cost to be contributed by individual Members based on the paid and payable claims for the completed policy year. 50% of the Abatement Cost will be allocated to all fleets using an apportionment calculation based on insurance premium and tonnage. For the ongoing year, the average figure of the previous 5 years will be provisionally used, and will be replaced by the actual figure in subsequent years.
See [Attachment 2. Abatement FAQ] for details of the Abatement system.
- Period covered by Loss Record
A loss record was previously covering the total of 5.5 years including the 5 policy years most recently completed and a half year of the year. A loss record will now cover the 6 years most recently completed, and the record of the year is indicated separately. If there is a major change in the loss record in the year, it will be taken into consideration.
For further information, please click here.
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