Korea P&I Club plans to link up with Korea Shipping Association
August 2nd, 2018 17:00 GMT
by Adam Corbett
Published in Insurance
Two South Korean insurers aim to combine forces to create a significant Asian third-party liability insurer
Korea P&I Club is planning a collaboration with the Korean Shipping Association (KSA) that could put their combined insurance premium income on a par with some members of the International Group of Protection & Indemnity Clubs within the next two years.
Under the project, which is at the review stage, the collaboration will fall short of a merger. But the two South Korean insurers will link up under a single newly formed independent management company.
The idea is to use the single management to slash administrative costs and improve services. The combined premium will be about $100m, putting the duo in a position to make significant savings on their reinsurance bill with the Lloyd’s market.
Korea P&I provides third-party liability cover on a fixed premium basis to oceangoing vessels, while the KSA offers both hull and P&I cover to South Korean coastal vessels.
Bay Moon, Korea P&I chief operating officer, said he is confident the project will get off the ground.
“We are looking now at whether it will be good or not to have an independent management company," he said. "It is related to how we will combine with the KSA. There is already a wide consensus that we [South Korea] don’t need to have two P&I providers and the combination will save costs and provide a bigger fund for coastal carriers.”
He added that the tie-up will become a reality “sooner or later” and that it could happen within the next two years.
Moon said that combination could help Korea P&I's long-term ambition to join the ranks of the International Group. Moon has been lobbying the International Group to join its technical committees as a starting point to eventually being added to the elite group.
However, rather than total premium earnings, the key criteria for joining is charging premiums for a minimum of five years on a genuine mutual basis.
Korea P&I models its structure on that of a mutual insurer but is providing insurance on a fixed premium basis only.
But, apart from that, it does have all the characteristics of a mutual. It has members made up of the leading 24 South Korean shipping companies, including Hyundai Merchant Marine, Pan Ocean and Polaris Shipping.
Modelled on mutual
Rather than pay shareholders, it returns profit into its free reserves that increased from $43m in previous years to $49m in 2017.
Korea P&I figures show it is performing well and making an underwriting profit, with a combined ratio of 76% last year, and it has not charged its members a general increase for the past seven years.
However, the churn effect, where low-premium newbuildings replace higher-premium older ships, saw total premiums slip to $30m in 2018 compared with $31m in 2017.
About $3.1m of Korea P&I’s total premium is earned from its fixed premium business outside South Korea, mostly in South East Asia.
But the general decline in South Korean shipping saw its insured fleet fall from 1,089 ships in 2017 to 1,010 this year, while entered tonnage fell from 22 million gt to 20 million gt.
Although fixed premium insurance is mostly limited to the small-ship market, Korea P&I is active in capesize bulkers, VLCCs and even LNG carriers through a tie-up with the Standard Club.
Korea P&I provides the first layer of insurance for such vessels, which is topped up by Standard Club cover, thereby satisfying charterers and banks' requirements to have third-party liability cover provided by a member of the International Group.
However, Moon said some International Group members are targeting its South Korean clients and that the fair trading authority in the country is now monitoring the P&I business for unfair pricing.
“Because of very severe competition in January, the Korean fair trading agency investigated certain transactions," Moon said. "Their point of view is that there were not so many breaches of fair trading regulation, so they decided against penalties. But they decided to watch the situation, so one or two must be cautious.
“When they give price inducement, they must be careful because if [the] price is less than cost then that is not sustainable.”