09 September 2024
2025 P&I Renewal Outlook
In preparation for the 2025 P&I renewal, we have produced a high-level version of our annual pre-renewal P&I review. We have compiled this market summary version looking at some of the main key takeaways from the recent Club financials, as well as what we expect to see at the coming renewal.
By P&I standards the market environment has seen a gradual decline in the average general increase since 2022, there is still some time lag between claims and the premium changes that have taken place over the recent (firm market) years, which is why we expect the Clubs will take a softer approach to renewals and a lower level of premium increases in 2025.
We expect the range of premium increases to sit between 2.5% to 7.5%
We have seen consecutive financial underwriting years (2022 and 2023) produce positive technical results, in the region of USD160 million per annum. These surpluses were achieved in somewhat fortuitous claims years. Despite this, there is still generally an over-reliance, for most Clubs, on investment return. A few weeks ago, we saw how fragile the US equity markets are in today’s geopolitical climate. US equities diminished overnight on the back of US recession fears, which impacted the rest of the equity market, only to recover a few weeks later. This kind of instability highlights the need for a stronger focus on technical performance.
We have passed the hardest market cycle now, which we recap below:
A new market cycle
The likes of Gard, Shipowners, Skuld, and Steamship all have 3-year average combined ratios of under 100%, which is below the 105% target combined ratio normally approved by most Club boards across the industry. We would expect to see these particular Clubs come in at the lower end of premium increases for 2025, if seeking any at all. It’s worth also mentioning that these 4 Clubs have a combined 7-year trailing combined ratio (CR) average under 107%, although 3 of the 4 are considerably better. Therefore, by contrast to the rest of the market, they will be under less pressure technically. We also expect to see all of these Clubs (save Shipowners) produce returns to the membership in 2025.
The rest of the market (8 Clubs) is running at an average CR of 113% over 7 years and 108% over the last 3 years. This is where we expect to see the market average premium increase in 2025 come in at least 5%. The five S&P BBB/BB- rated Clubs are collectively running at an average of sub 120% in the last three years.
What could general or target increases look like in 2025?
We feel the following is a reasonable outlook at this time:
If our early assessment is correct, the average market premium increase should be in the region of 4.8% for 2025.
However, as we all know well, a general increase is usually the starting point of any renewal negotiation. Each member will be reviewed on their own merits. Our forecast view here is a general one, as we are looking at the market average sentiment holistically for 2025.
That being said, the early signs of the 2024 pool experience may have spooked the market and therefore potentially the 2024 results, so we expect premiums increases could continue into 2026. We will review this in greater detail when we publish the 2024 Gallagher pre-renewal review in the coming weeks.
2023 results & performance
The 2023 P&I Club financial year reporting saw free reserves (FR) increase by 823.9 million, as the market free reserves returned to historically high levels at USD5,701.8 million. Collectively, the market saw investment returns producing almost 85% of this result, to the tune of USD731.7m million. The Clubs saw their own claims within retention, as well as their share of the pool come in at well below average levels with back-to-back low levels of pool activity in both 2022 (USD200m after 24 months) and 2023 (USD200m+ at 12 months). The 2018-2021 average pool claims year is now running at 15-20 claims per annum, within the region of USD450-500m. This excludes Club retentions. As anticipated, the average market combined ratio*, which measures the market technical underwriting performance, was below the breakeven of 100%, standing at 95.4% for 2023–24 , compared to 97.6% in the previous year 2022/23. As such, the room for error on a purely technical basis across the market remains marginal.
*combined ratio formula: (claims + expenses) / premium
Combined ratios are calculated prior to considering investment returns/losses. This is something that we monitor closely, and a market average below 100% is indeed welcome news. However, it is important to recognise that the trailing 7-year market average is still running at 108% (2017-2023), which is something that needs to be averaged down over the coming policy years. To achieve a 7-year breakeven by 2027, the market would need to consistently perform at the 2023 combined ratio level. While investment income can support overall financial stability by increasing free reserves, it does not directly improve the combined ratio itself. Therefore, during this period, the focus should remain on improving the technical result.
Is cash king? Is there too much cash in the system?
A historical free reserve high suggests that once again, there is too much cash in the system. This is often a point of contention in the market, for those saying, “the Clubs have too much cash, why is there a need to raise premiums”. The viewpoint isn’t entirely wrong from a commercial perspective if you are “living for today”, but the P&I market underwriting hasn’t produced a consistent surplus in the last 10 years. Again, this isn’t new either. In the last 20 years technical underwriting has produced a USD1.4billion loss and investment returns have subsidised this by USD6b.
We expect to see, for those Clubs that can, further capital returns to the membership in 2024 and 2025. This is not problematic for members’ 2025 budgets but, in our view, it means rates are likely to hold in 2025 before the market is able to start addressing rating levels consistently downward.
Who do we think will return funds in 2025?
*These four clubs returned funds to members in 2023 & 2024 [sub-USD100m aggregate]
**NorthStandard was established in 2024
Reinsurance
The market sentiment suggests that the group reinsurance contract will see significant increases in 2025. The market is factoring in the Baltimore bridge incident to be a significant loss. We might suggest that it would be prudent to say that owners should ‘budget’ for a double digit increase of the group reinsurance rates.
The allocation of the increased cost of group reinsurance premium will need to be allocated fairly across the tonnage classes.
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