International Group P&I Club - Call Types
The 2022/23 P&I Club renewals are afoot and the current dynamic of the industry has raised questions amongst our clients regarding the types of premium calls that are (or can be) raised by their respective International Group P&I Clubs
Those entered on a mutual basis into the International Group
of P&I Clubs are members of those P&I Clubs with associated premium obligations as set out in the respective Club’s Rules. As members, the assureds benefit from the good performance of their Club and the consequent financial stability generated, whilst at
the same time collectively share the burden with other members of the Club in the event remedial action is required to re-establish stability if losses persist and as determined by the Club Board of Directors. Obligations of members entered on this basis in P&I Clubs are very unlike other insurance products which are purchased on a fixed-premium basis (i.e., the agreed premium represents the exact amount that each policy holder will pay regardless of the insurers’ financial performance).
The following explanation is intended to provide an overview of the types of premium calls that a P&I Club is entitled to make against all mutual members in accordance with their Rules, as well as the frequency with which they occur thus detailing the overall potential exposure and impact.
Estimated Total Premium:
Also referred to as Estimated Total Premium, this is today the widest terminology used by most Clubs and has replaced the previous Advance Call plus Supplementary Call terminology (see below).
Estimated Total Call is the estimated total amount originally agreed upon inception and due over a policy year. It represents the risks and associated costs and operation of entered vessels to the Club and is calculated to cover anticipated claims, re-insurance premiums, Club pooling contributions under the shared Pooling Agreement and associated Club costs for that policy year for each individual member.
Typically, it is debited by Clubs in either four or five instalments as determined by the individual Club Board. Depending on the instalment pattern of each Club, the instalments can either be made in full during the course of the policy year, or include a final additional instalment in the successive policy year. Regardless of how many instalments, the total amount payable remains subject to Unbudgeted Supplementary Calls, as per the below.
Advance Call plus Supplementary Call / Deferred Call:
For many years the International Group Clubs debited members premiums using this method and terminology – now only two remain.
Under this method of allocating premium, there are two stages of collecting premium. The Advanced Call is typically the premium that will fall due from the member to the Club during the policy year. Within the total amount payable (in excess of the Advanced Call), however, there will be a Budgeted Supplementary Call, also known as the Deferred Call, which is scheduled for payment shortly after the policy year has come to an end.
A budgeted Supplementary Call or Deferred Call is intended to provide the Club with a buffer in case the forecast of claims and costs during the year has been underestimated. In fact, this call can be reduced or even waived entirely for the whole membership.
Unbudgeted Supplementary Call:
Being mutual associations, the P&I Clubs are owned by their respective members. As stakeholders in the Club, the members have a direct exposure to both the financial successes and / or weakness of their P&I Club. Therefore, the amount of premium originally agreed at renewal between the Club and the member is not the only financial commitment to consider.
An Unbudgeted Supplementary Call is the method by which the P&I Clubs can call additional funds from its members for up to three policy years where the premium agreed between the Club and its members has been insufficient to meet the cost of claims and operational expenses of the Club.
The amount of the Unbudgeted Supplementary Call is typically levied as a percentage of the premium already agreed for that policy year – for example, 35% of the original estimated 100% premium is called for the given policy year(s). There is no set limit on how much a P&I Club could call from its members and is entirely subject to the solvency and regulatory controls of the financial performance of the P&I Club, in addition to the individual Board considerations for the good governance of the Club’s financial stability.
Annexed to this document is a history of the International Group’s record of making Unbudgeted Supplementary Calls – note that the figures are given in excess of any budgeted Supplementary Call or Deferred Call.
Because the P&I Clubs have the option to call Unbudgeted Supplementary Calls for up to three years after that policy year has come to an end, when a member leaves a Club, their liability to pay premium to the Club does not cease at the time of departure. Rather a Member’s liability to Pay premium extends to the three prior policy years in which they had vessels entered into the Club.
In order for the Club to protect the wider membership from a departing member’s ongoing premium obligations, and to give leaving members definitive closure of their premium obligations to the Club, the Club Rules (or policy of insurance) allow for the implementation of Release Calls.
The Release Call is the amount which the Club believes will reflect the potential likely exposure to Unbudgeted Supplementary Calls for the three open policy years. A Release Call is calculated as a percentage applicable individually to each of the remaining three open policy years, and generally reduces as each year closes. The current Release Calls are established by each Club’s Board of Directors and advertised by regular circulars.
When a member decides to leave their entered Club, they have a few options on how to manage the mandated Release Call: i) they can provide the Club with a bank guarantee or cash in the amount required by way of security for any Unbudgeted Supplementary Calls; or, ii) pay the Release Call in full and final settlement of any future Unbudgeted Supplementary Calls.
Should a departing member elect the second option, opting to pay the Release Call in full and final settlement, they are thereafter released from any and all future premium obligations, save for eventual Overspill Calls. If during the closure of the three open years no Unbudgeted Supplementary Calls are made by the Club, the member does not have the right to request reimbursement
of the Release Call paid.
Whilst the intention of a Release Call is to genuinely reflect the exposure to future Unbudgeted Supplementary Calls, some Clubs have unusually high Release Calls in comparison to their financial standing and solvency ratios, leaving some to speculate that these are being used as a method to deter members from leaving a Club.
The International Group of P&I Clubs share (or ‘Pool’) claims in excess of USD 10m up to USD 100m with an individual Club’s participation to the claim amount calculated as a percentage in accordance with the risk that each Club poses to the wider International Group – this is done through the International Group’s captive named ‘Hydra’. For claims in excess of USD 100m, the International Group purchases re-insurance for each and every vessel, for each and every claim up to USD 2.1bn (with a separate limit of USD 1.0bn for oil pollution).
For claims in excess of USD 2.1bn the Club Rules invoke the possibility of making an Overspill Call. In recent years the Clubs have collectively purchased an Overspill Call reinsurance of USD 1bn to provide additional protection to the membership – see below graph for the full structure. (Download the complete pdf to see below graph)
In the unlikely event that a claim exceeds both the International Group reinsurance and the Overspill Call reinsurance limits of USD 3.1bn, the excess amount is levied proportionately across all Clubs, not just the Club that has produced the claim. An individual member’s exposure to an Overspill Call is limited as per the Rules which are largely similar to one another; as an example from one Club’s Rules reads:
“The board shall not levy on any member in respect of the entry of any one ship an overspill call or calls in respect of any one overspill claim exceeding in the aggregate 2.5% of the Convention Limit of that ship.”
P.L. Ferrari reports the financial position of each of the Clubs based on publicly available information, both in our Annual Review and via regular Newsletters. The Clubs are also monitored by Standard and Poor’s each year, more critically the regulator (relevant to all Clubs other than the Japan and American Clubs) sets Solvency 2 thresholds which are reviewed in real time and will demand any Club that breaches the minimum threshold to take the appropriate remedial action (the levying of an Unbudgeted Supplementary Call(s)).
We are always available to give more detail on this subject. It is
important as all members of Clubs are jointly and severally liable
for the financial liabilities of their Club.
(Download the complete pdf to see P&I Unbudgeted Supplementary Call Historical Data)
P.L. FERRARI & CO. S.r.l.