International Group P

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International Group PI Clubs Market Update

• March 27, 2008

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Topics

• The International Group of Clubs
• Mutuality and Reinsurance
• Club Cover
• Non-poolable and Extended Cover
• Underwriting Considerations
• Challenges and Opportunities

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The International Group of PI ClubsOverview

• The Clubs are Associations of Shipowners and
  Charterers, owned and controlled by the insured
  shipowner or charterer "Members".
• The members of the Club are both the Insurer and
  the Assured
• 13 clubs collectively covering 90 of the
  worlds merchant fleet
• Each club has its own style, focus geographical /
  type of insured operation
• Each club has its own strengths and weaknesses
• specific expertise
• financial stability,
• commercial,
• flexibility,
• service
• All 13 focus on blue water tonnage although
  some will consider brown water and offshore
  (energy) business.

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The International Group

• Full Titles
• The American Steamship Owners Mutual PI
  Association Inc. U.S.A.
• Assuranceforeningen Gard, Norway
• Assuranceforeningen Skuld, Norway.
• The Britannia Steamship Insurance Association
  Ltd., London.
• The Japan Ship Owners' Mutual PI Association,
  Tokyo.
• The London Steamship Owners' Mutual Insurance
  Association, London.
• The North of England PI Association Ltd., United
  Kingdom.
• The West of England Ship Owners Mutual Insurance
  Association Ltd., London.
• Ship Owners Mutual PI Association, Ltd, London.
• The Standard Steamship Owner's PI Association
  Ltd., London.
• The Steamship Mutual Underwriting Association
  Ltd., London.
• Sveriges Angfartygs Assurance Forening,
  Gothenburg.
• The United Kingdom Mutual Steamship Assurance
  Association Ltd., London.

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Mutuality

• The Clubs operate on a non-profit making mutual
  basis. Shipowners created non-profit mutuals
  to combat the large profits made by underwriters
  150 years ago.
• Members pool their premium together in order to
  meet losses suffered by each individual Member.

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Structure of an International PI Club

• Shipowners within a Club elect a Board of
  Directors that meet during the course of the year
  to make decisions with respect to
• Claims
• Finances
• Policy (Rules)
• The Board of directors appoint a manager to
  operate daily activity of Club. The mangers
  primary tasks are to
• Handle Claims
• Underwrite
• Handle Investments
• Charles Taylor (Standard Club), Thomas Miller (UK
  Club) Shipowners Claims Bureau (American Club).
  Unlike the PI Clubs, the managers are profit
  making companies.

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Types of Calls (Premium) a Club can levy
against its membership

• Estimated Total Call (ETC) Advance
  Supplementary
• Advance Call - Premium paid during the insurance
  year. Usually four installments. Typically 80
  of ETC but more clubs are collecting 100 ETC.
• Supplementary Call - Paid shortly after policy
  year. Is based as a of Advance Call In
  example above it would be25 of Advance (20 of
  ETC).
• Unforcasted Supplementary Call - If there is a
  shortfall because claims exceed the premium, the
  Members may pay a pro rata "additional call.
  Estimated Supplementary Call is then increased.
  In example above the 25 Supp call would be
  increased to say 30. Applied across membership.
• Likewise, if there is surplus, a return may be
  made to the Membership, or the surplus
  transferred to reserve to meet losses on other
  years. Board of Directors decision.
• Release Call - Paid for all open policy years
  when leaving club (Typically 25 of Advance).

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Supplementary Calls(as at December 2007)
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Premium Breakdown
Reinsurance
CLAIMS
Management
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International Group ResultsCombined Underwriting
Result 5 year average
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Free Reserves
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Consequences of sharing risk

• Sharing risk
• Club members share risk therefore risks must be
  equitable and similar in nature.
• Single set of insuring conditions (Rules). The
  Clubs must offer the same poolable cover. All
  renewal dates are February 20.
• Competition
• Due to shared reinsurance capacity, the Clubs can
  not compete directly on price within the IGA.
• Clubs can not attract a new Member by offering
  terms more favorable than the holding Club.
• Release calls for movement between Clubs.

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PI Club CoverMajor Risks covered by IG Clubs

• Diversion Expenses
• Fines
• Legal costs
• Sue and Labor
• Risks incidental to shipowning
• (Omnibus Rule)

• Cargo Claims
• Loss of Life / Personal Injury
• Crew, Passengers, Third Parties
• Collision and Fixed and Floating Objects
• Pollution
• Wreck Removal
• Repatriation Seaman effects
• Fines
• Stowaways
• Unrecoverable GA

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Club CoverOther Risks

• Freight, Demurrage and Defense (FDD)
• Legal costs and other expenses which may be
  incurred in resolving disputes usually under
  charterparties
• Does not cover the amounts in dispute
• When ordering a new building remember to attach
  FDD at the signing of the new build contract and
  not at delivery (i.e. when the main PI incepts)
• FDD would provide cover legal costs and expenses
  in relation to disputes with the yard.
• Charterers Risks
• Liability
• Damage to Hull
• Bunkers

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Club CoverExtended cover (Buybacks)

• Most Clubs will purchase specific reinsurance
  programs to cover those risks not covered on a
  poolable basis through the IGA.
• Limits will vary by Club
• Coverage will vary by Club depending on the
  appetite of the Club for a particular class or
  targeted business.
• Common extensions include
• Specialist Operations cover Drilling/Pipe
  laying/dredging etc
• Salvage operations cover
• Contractual Liability and Towage
• Shipowners Liability to Cargo (deviation risks)
  SOL cover
• Additional Assureds (commercial market terms)
• Coverage can also be purchased directly with the
  commercial market either on a primary or excess
  basis.

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Level of cover provided

• The International Group provides significant
  limits of cover.
• In 1998 a new limit of liability was defined.
• Overall limit 5.5 billion (this limit
  fluctuates)
• 1976 Limitation of Liability for Maritime Claims
  Convention
• 167,000 SDR (270,540) for ships not exceeding
  500 tons
• For each ton from 501 to 30,000 tons, 167 SDR
  (270)
• For each ton from 30,001 to 70,000 tons, 125 SDR
  (203)
• For each ton in excess of 70,000 tons, 83 SDR
  (134)
• IGA Club Limits are set at 2.5 of the estimated
  combined world shipping fleet

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Level of cover provided

• Sub Limits
• Oil pollution 1 billion
• Crew and Passenger claims 3 billion combined
• Passenger claims limited to 2 billion
• Athens Convention on Passenger Liability 1976 as
  amended by the 2002 Protocol.
• 250,000 SDR for death or injury in respect of
  each passenger
• Increasing to to 400,000 SDR unless the carrier
  can prove that the incident which caused the
  death or injury occurred without the fault or
  neglect of the carrier
• Single Cruise Ship at 3,000 passengers
• 400,000 SDR x 3,000 1.200 Billion SDR (1.944
  Billion)

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How do the clubs achieve these limits?

• Through mutually, sharing risk between the
  Members of each club.
• Primary 7 million
• Some Clubs purchase their individual reinsurance
  programs within this layer (abatement)
• Excess of the above claims are pooled and
  mutualised between all Clubs.
• Lower Pool up to 30 million
• Upper Pool up to 50 million (within the IGA
  Captive Hydra)
• International Group Reinsurance program
• Varying layers up to 2,050 billion
• Oil Pollution 1 billion
• Overspill (do not confuse with pollution)
  excess layer for a further 1 billion.

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Pool Structure
Overspill Approx 5,500m
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How is the system monitored?

• The International Group Agreement (IGA)
• Gentleman's agreement until 1985 when first IGA
  written down.
• Sets out procedures for movement between Clubs
  (all 13 Clubs are signatories).
• Restricts free movement on a competitive basis.
• Has been accused of being a cartel.
• Constantly under threat from EU non competition
  rules. Most obtain approval from EU and
  Department of Justice in United States.
• The system is robust and has been in place for
  150 years.

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Financial Review2007 Pool Contributions
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Pool incurred (paid) claims development
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Major Claims 2006/07
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Underwriting considerations

• Factors driving premium
• Operators reputation
• A Club may ask current Members for their input on
  a prospective Member
• Quality of the operation
• Clubs will often undertake an audit of the
  operation
• Nature of business
• Clubs specialize in certain types of business and
  geography
• Loss record,
• Vessel details,
• Fleet size
• Crewing,
• Trade

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Club Service

• Advice and information
• Contract advice
• Claims handling and advocacy
• Clubs are working for the Members
• Clubs will look for a way to pay claims rather
  than look for an exclusion
• CLUB LETTERS OF UNDERTAKING is a powerful
  security tool when vessels are under arrest in
  countries around the world. Club letter is well
  recognized world-wide and can be used in lieu of
  a Bank Guarantee/LOC/CASH deposit. LOUs can be
  quickly arranged in order to keep the vessels
  schedule.

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Summary
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Summary
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NET PREMIUM MUTUAL INCOME

• 1. UK Club 316,000,000 8. American
  134,000,000
• 2. Gard 211,000,000 9. Japan
  Club 110,000,000
• 3. West of England 186,000,000 10. Shipowners
  90,000,000
• 4. Britannia 170,000,000 11. Steamship
  Mutual 86,000,000
• 5. North of England 138,000,000 12. Swedish
  Club 86,000,000
• 6. Skuld 138,000,000 13. London 67,000,000
• 7. Standard 135,000,000

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The International Group - Premium Market Share

• Common Usage
• Britannnia
• London Club.
• North of England
• West of England
• Shipowners
• Standard Club
• Steamship Mutual
• UK Club
• Gard
• Skuld
• Swedish Club
• American Club
• JPIA

65
25
5
5
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Owned Mutual Tonnage

• 1. UK Club 95,000,000 8. North of England
  40,000,000
• 2. Gard 76,400,000 9. London 29,000,000
• 3. Britannia 74,000,000 10. Skuld 26,800,000
  
• 4. Standard 64,000,000 11. American 15,500,000
• 5. West of England 56,500,000 12. Swedish
  Club 14,800,000
• 6. Japan Club 56,400,000 13. Shipowners
  9,400,000
• 7. Steamship Mutual 43,000,000

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International Group General Increase History
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Future Outlook Challenges

• Most Clubs rely too heavily on investment returns
  to break even more general increases may lie
  ahead.
• Devaluation of the dollar has increased the claim
  expenses. Switch to multi national currency SDRs
  may be the answer.
• Increase in labor costs / repair costs effecting
  third party property claims ie. Collision, Fixed
  and Floating Objects type claims.
• Diminishing supply of competent seafarers.
• Increase of entitlements under global
  compensatory regimes needs to be addressed in
  current pricing.
• Deep pocket syndrome still exists globally with
  poor judicial standards for shipping cases.
  Governments often overreact to major casualties
  in order to o further a political agenda.

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Opportunities for the Fixed Premium Market

• Given the rise in premium over the last 8 years
  commercial markets may wish to revisit
  profitability of Blue Water PI Insurance
  market timing could be ripe. 160 general
  increase since 2000.
• Vessel owners with medium to small size fleets
  and with good records likely to have paid the
  General Increases.
• The Shipowners Protection Mutual and British
  Marine Mutual (BMM)(demutualized in 1999) that
  have focused on small coastal trading vessels ex.
  tanker, cruise ships have been profitable in
  recent years. One of the few niches that have
  made a good return over last 6 years.
• Many drybulk/multi purpose vessels are forced to
  buy the Clubs high limits of coverage as the
  Club system does not allow members to buy
  different levels of coverage.
• US market should target niche International Group
  business that seek lower limits of coverage and
  predictable insurance costs. This formula may
  appeal to the new class of shipowners stock
  listed companies.