Amid the ongoing economic downturn and the constant threat of piracy, Thomas Miller chairman Hugo Wynn-Williams explains how the protection & indemnity sector is navigating the choppy waters.
By Mark Sands
At the junction of Aldgate, Fenchurch Street and Leadenhall Street in the City of London stands the Aldgate Pump. The Grade II-listed pump has been there since 1876, making it just one year younger than its fairly new neighbour, specialist insurer Thomas Miller.
Although it was founded in 1875, Thomas Miller only arrived on the site in 2008, having spent much of its history opposite Lloyd‚Äôs of London at St Mary Axe.
The business has been managing the UK Protection & Indemnity Club since 1894. Today, chairman Hugo Wynn-Williams estimates the club occupies half of Thomas Miller‚Äôs staff, and generates the same proportion of its revenue. However, transport ‚Äì and specifically marine ‚Äì remains its dominant business.
The firm describes itself as ‚Äúa provider of business services to mutuals, specialist insurance sectors, asset management and wealth-creation vehicles‚Äù, but Wynn-Williams sees things more simply, saying: ‚ÄúIn some ways you could look at Thomas Miller as a big managing general agent with mutual capital.‚Äù
Wynn-Williams should know what he‚Äôs talking about ‚Äì he‚Äôs been at Thomas Miller for 35 years and two and a half months [at the time of publication]. He is precise with the date for a reason: ‚ÄúI remember [my first] day because I was told by my old boss, who retired some time ago, that I actually arrived a day late. I think I was meant to start on 13 August, and my mother rang up and said, ‚Äòsorry, Hugo isn‚Äôt going to be in today!‚Äô,‚Äù he chuckles.
Now one of the P&I market‚Äôs elder statesmen, Wynn-Williams admits he started out in law, having passed his bar exams ‚Äì but was told by his pupil master that he would be unlikely to reach the upper echelons of commercial practice.
So, in his search for employment, the young Wynn-Williams attended an interview with Tindall Riley, a rival of Thomas Miller both then and now. ‚ÄúThey saw nothing there, or perhaps they didn‚Äôt have any gaps at the time, but they said, ‚Äòhave you thought of Thomas Miller?‚Äô‚Äù he laughs. ‚ÄúIn those days, finding out about Thomas Miller was very difficult indeed. We‚Äôve been accused in the past of being somewhat invisible, but back then ‚Äì well, you could imagine! But I got an introduction, and they were obviously pretty desperate, so I came in.‚Äù
Wynn-Williams rapidly climbed the ladder in the firm, being elected to its partnership 12 years after arriving a day late. He says he was captivated by the business from an early stage: ‚ÄúThe bit that grabbed me then, and still grabs me today, is the shipowners themselves. They‚Äôre a great, colourful community.
‚ÄúThey are serious entrepreneurial businessmen in an extraordinary trade, and without it we wouldn‚Äôt have anything to eat or wear and wouldn‚Äôt be able to do anything. And it doesn‚Äôt get the credit that it should, generally. Getting to know the shipowners is a relationship business. That‚Äôs the bit that actually gave me the buzz.‚Äù
Wynn-Williams says his time at the firm has been one of marked change in almost every sphere, having gone through economic peaks and troughs, as well as a constantly changing political climate; the Soviet Union, he says, once represented 12% of UK P&I‚Äôs business.
Fast-forward to the present day and the world‚Äôs shipping trade, along with the rest of the economy, has been struggling under the weight of an unprecedented financial crisis for more than five years. ‚ÄúIt‚Äôs been an extraordinary time to be here,‚Äù Wynn-Williams says ‚Äì not least because shipping companies had been making solid profits for the five years leading up to the collapse.
‚ÄúHad you been there with your ships positioned at the right time, with deliveries coming on in that period, you would have made several generations‚Äô worth of profit,‚Äù he says. Such was the euphoria, he adds, that there was a frenzy of ship ordering, with the peak delivery occurring in 2012.
‚ÄúThat‚Äôs been the problem,‚Äù adds Wynn‚ÄëWilliams. This is because since then the average age of the world‚Äôs fleet has shortened dramatically, to roughly nine years, he explains, which means fewer claims relating to mechanical collapse. This, in turn, leads to lower premiums.
In the mid-1980s, when shipping was last hit by economic collapse and recovery, the opposite was true ‚Äì there were more maintenance-based claims. Wynn-Williams explains: ‚ÄúThere are all sorts of other factors that may be inflating claims today, but back then you had nothing like the oversight we have now, so the world‚Äôs fleet had a greater average age and maintenance problems were a real issue. You had a maintenance-led claims explosion. That is much less likely today because there are a lot of stakeholders making sure it doesn‚Äôt happen.‚Äù
Although no such prospect is facing today‚Äôs younger fleet, that doesn‚Äôt mean it‚Äôs plain sailing. The P&I clubs are seeing more casualty claims, which are becoming more costly for insurers. ‚ÄúThe people-related claims, when they happen, are considerably more expensive,‚Äù Wynn-Williams says. ‚ÄúWhether you spill oil, bang into another ship, or put your ship on an island off the coast of Italy, it is going to be expensive.‚Äù
He adds that while a recession is in place, those increasing casualty claims are concealed behind lower frequency created by more ships making fewer calls at a reduced pace. He says the jump in casualty claims is further magnified by the fundamental challenges of medical treatment for injured sailors costing more, as well as issues around recruiting staff for modern shipping.
‚ÄúIt‚Äôs not as attractive as it was. You don‚Äôt spend six to eight weeks loading in New Zealand. You spend half a day in a port that, frankly, doesn‚Äôt have the delights that the ports of old might have had.
‚ÄúSo it‚Äôs not easy to get people in there. That, in turn, means you have to pay them considerably more than you might have done previously, so the compensation goes up if there is a problem.‚Äù
This means an economic recovery ‚Äì which could see ships travelling faster and claims increasing at their current severity ‚Äì could prove challenging.
‚ÄúThe last very deep shipping recession was in the early to mid-1980s, and when shipping came out of that, claims went up. The year-on-year inflation that appeared was about 20% to 25%,‚Äù Wynn-Williams estimates. ‚ÄúThat is hairy stuff, particularly when the premiums are geared to that very low level of activity, and suddenly they have to snap back. You find that those premiums haven‚Äôt got any shock absorption in them.‚Äù
Such developments come alongside an increasingly complicated political environment, with shipowners watching this month‚Äôs talks between the US and Iran particularly closely to see if shipping line sanctions will be lifted. White House officials said on 25 October that the US is not looking to lift trade restrictions on the Islamic republic ‚Äúat the front end‚Äù of negotiations over its nuclear power programme.
The industry is watching developments eagerly, says Wynn-Williams: ‚ÄúNone of us here fancy putting on orange overalls at any point, nor do we want to put the P&I Club ‚Äì which is a dollar-based club ‚Äì in any danger at all.‚Äù
He adds that while previous sanctions, such as those imposed on Zimbabwe, have had limited effects on shipping, the risk is now more real. ‚ÄúHaving been here a very long time I can remember things like the Rhodesian sanctions, which, generally speaking, were ignored by everybody. Now the legislators have realised that if you target not the people who may be doing it, but the ones providing banking and insurance, you have an extremely effective sanctions regime. That‚Äôs the big change.‚Äù
Wynn-Williams is aware of one case where a ship travelled to Syria following the introduction of sanctions, but says the vessel was immediately scrapped.
In another example the Thomas Miller chairman¬† highlights, a Russian ship was revealed to be carrying attack helicopters to Syria in June last year, with a P&I club member insuring the vessel. The Standard Club withdrew its insurance while the ship was 50 miles off the Scottish coast and, as a result, the ship (the MV Alaed) was unable to continue until it could arrange new cover, and later returned to Russia.
Wynn-Williams adds: ‚ÄúWe‚Äôve had to explain to some of the government authorities that we don‚Äôt actually know at any one time what‚Äôs in every container or every ship that is sailing the oceans. But if we feel that there has been a clear breach then you don‚Äôt hang about and you pull the cover.‚Äù
The piracy issue continues to remain at the front of mind, too. Wynn-Williams says while piracy off the coast of Somalia appears to have passed its peak, the opposite is true for Africa‚Äôs west coast in the Gulf of Guinea.
Piracy in the Gulf of Aden appeared to be a rules-based game, with a clear business transaction and solution in mind, the Thomas Miller chair says, but the same is not necessarily true in the waters between Gabon and Liberia. ‚ÄúWith the Gulf of Guinea, there doesn‚Äôt appear to be a rule book ‚Äì at least not at the moment ‚Äì and it can be extremely unpleasant for everyone involved. That‚Äôs not to say that the Somalian risk is not extremely unpleasant, but it‚Äôs a very different beast.‚Äù
All this makes this year‚Äôs renewals season for the P&I clubs one of particular note, with Wynn-Williams estimating that 90% of the world‚Äôs fleet will renew their insurance with P&I clubs before noon on 20 February. ‚ÄúIt becomes very febrile and everyone gets very excited,‚Äù he says. ‚ÄúI wouldn‚Äôt call it enjoyable, but there‚Äôs a certain sense of satisfaction as noon passes on 20 February. Then if you really want to find out what‚Äôs going on, you could wander around the wine bars of EC3.‚Äù
Tentative signs of recovery in the economy point to potential danger from claims, but most clubs (UK P&I included) already asked members for increased fees last year because of shipowners‚Äô keenness to cut their costs.
The UK P&I Club was scheduled to have a board meeting to discuss members‚Äô rates and reinsurance strategies on Monday [28 October], so at the time of interview Wynn-Williams felt bound to silence: ‚ÄúIt will be a mixed bag. Some clubs put in the big increases last year and may feel comfortable. Others probably feel they‚Äôve got to fill that premium gap, so there will be pressure on rates. I don‚Äôt see any sort of alarm calls, but you will definitely see a variety of increases.‚Äù
At the same time, he forecasts retentions north of 95%, arguing that the clubs tend to see far greater movement of tonnage over the course of the year as ships are sold or scrapped and replaced.
Looking beyond February, Thomas Miller will look to continue a diversification drive that in recent years has seen the firm open its investment business to non-club members, launch its own claims management operation and unveil Codal, a new product to provide insurance for charitable organisations against a range of risks.
It‚Äôs a move that Wynn-Williams concedes is aimed at lessening the business‚Äôs reliance on the high seas. ‚ÄúWe have to keep developing new businesses, scaling smaller businesses where appropriate and, fundamentally, making it a nice place to work,‚Äù he says ‚Äì which may or may not require Wynn-Williams reminding newcomers to arrive on time for their first day in the office.