We have discussed in previous reviews the pros and cons of various suggestions regarding possible changes to the reinsurance allocation process and methodology.
One possible alternative in the evolution of the IG's allocation methodology was originally proposed in our P&I review three years ago and is a variation of the abatement principle which is already familiar across the P&I industry.
This idea in our view remains a coherent and viable approach to address the allocation challenge in a volatile claims environment. Most clubs abate claims within their retention above a certain level, usually around USD 2 million. The cost of all claims above this abatement level, up to the limit of the individual club retention (currently USD 10 million) is then shared across the membership equitably in some way.
It seems a logical extension that the IG could adopt a similar principle in the allocation of reinsurance cost across various ship types. If it is generally agreed that extremely large claims are reasonably random and that frequently the size of the claim is broadly proportionate to ship size, then a virtual abatement layer within the IG reinsurance set at a catastrophic level (say USD 200 million per event) above which claims costs are allocated evenly, proportionate to ship size, may be an elegant solution to this challenge.
A virtual abatement layer within the IG reinsurance could solve the challenges of allowing greater differentiation of rating across a larger number of ship types, and addressing the volatility of individual catastrophic claims falling on a single ship type. This suggestion is slightly more complicated than the current system but has the advantage of allowing potentially greater fairness and transparency in the allocation of reinsurance rates across a diverse range of ships that the IG has to administer.
While there has been no radical changes to the cost allocation process in the lead up to the 2017 policy year, the decisions regarding allocation have been made much earlier in this renewal season than ever before. This is a welcome development and will allow ship operators to firmly budget earlier than in previous years.
Most clubs abate claims within their retention above a certain level, usually around USD 2 million.