What impact has the Coronavirus had
on the P&I Clubs so far?
The obvious impact on the Clubs has been a financial one. Given the recent stock market crash, all Clubs have suffered sizeable investment losses.
Whilst many of the Clubs have extremely robust free reserves, they also have a lot to lose! Having now spoken to more than half of the IG P&I Clubs in this past week, their current paper loss seems to vary between 5% to 20% of their portfolio depending of course on how much they have gone into equities. The investment losses will all depend on how long this lockdown prevails and what damage it does in the long term to the global economy. In general, the Clubs are well prepared to outride the storm, but it will also depend on how claims will develop. In a scenario where investment is not recovering (due to a lockdown without end in sight) whilst at the same time claims explode things will naturally look much bleaker!
What do the Clubs see in
terms of Corona related claims today?
Some Clubs have reported Corona infection cases where imminent need for evacuation arose. In some cases, governments refuse to allow foreign seafarers to be admitted into local hospitals transforming these cases into very costly medical evacuations, sometimes by helicopter or airplane to a neighboring country!
As widely reported in the press, the cruise sector has been most affected due the obvious potential of mass infections and we have seen tragic examples where this has already happened as for example on the Diamond Princess in Yokohama (Japan) or the Holland America cruise ship Zaandam which is still trying to be allowed to enter a port despite incurring a number of passengers deaths from Corona onboard the vessel. Apart from a few exceptions, notably the GJERTRUD MAERSK containership, there have been very few or none massive Corona outbreaks on cargo ships. Most Clubs report high volume queries on hypothetical questions that owners have asked and seek clarification for. Shipowners seem to plan and anticipate well ahead!
Whilst there finally seems to be movement on the critical crew change issue (where governments need to categorize seafarers as “key personal” to enable freer movement and travel) this matter seems to be one of the greatest concerns for the industry, at the moment. The Clubs are applying pressure via the International Group of P&I Clubs in order to resolve the issue. Shipmanagers also seem to have finally gained a united voice.
Some of the other issues range from Bill of Lading (the lack of being able to present originals in at the port of discharge) to the risk of cargo damage (perishable goods or for instance becoming too moist) resulting from delayed delivery. Naturally there are also logistical constraints on surveys but most flag states and classification societies seem to find practical solutions or grant extensions by applying common sense, the Clubs tell us. As I suggested in our first Coronavirus “Highlighting the Issues” there is huge potential for disputes under charter parties, COAs and other commercial contracts in Shipping but the Clubs say they have not seen an abnormal built-up in defense claims yet.
Obviously the crisis is affecting the various shipping segments in different ways, from complete standstill in the cruise market, strain on Car Carriers, general cargo ships and Bulkers to the other side of the spectrum where tankers are celebrating a bonanza after the output surge by Saudi Arabia following Opec´s inability to take a united stance. Here fortunes will also be helped or affected by the degree of automatism through the loading and unloading process where people intensive port operations will naturally delay the vessel´s turn around if we are talking about a country and port where the virus has made a big entrance. Tankers and LPG carriers will probably suffer less as cargo operations require less shore labor.
Finally, how are the
Clubs assisting shipowners?
One of the “A” Clubs has allowed their shipowner members until 20 May 2020 to settle their first instalment of owned P&I premium. You might even ask yourself why some of the Clubs do not increase their capital returns to owners to support them in this crisis. This is unfortunately more complex than one might hope for. The Clubs, by delaying premium instalment collection by large will already have had to approach their regulators (e.g. the FCA) to obtain their blessing to do so. The reason being that postponing collection inevitably increases the risk of incurring a default on some of the owners and whilst the risk should be small to remote it can become an issue if at the same time the Clubs starts experiencing a strong surge in claims which is also caused by Corona. The situation could be aggravated further if the current paper losses on the Clubs’ investment portfolios are not recovered because the global lockdown continues for a period of months, as for instance announced this week by government officials in the United Kingdom. We want to remain positive and hope it does not come to a such a scenario, but one can understand why the Clubs would want to remain cautious now!
Other Clubs allow for a 3 month “payment holiday” or will evaluate more generous payment schedules depending on the degree of hardship that has fallen onto their member. The message is: “come and talk to us”.
One of the aspects that can give additional relief to owners is the way how the Clubs grant return premiums if an owner is forced to put his vessel into lay-up. Here one needs to distinguish between cold lay-up and warm lay-up. As you can imagine, many cruise vessels will probably go into cold lay-up or something very similar to that. But in cargo shipping very few vessels have had to do this for now meaning we are talking about temporary warm lay-ups where the Club will grant between 30% and up to 50% in premium returns. The “material change of risk” angle will be the decisive trigger. A reduction of crew and halting the vessel´s trade allows the Club to re-evaluate the risk. Again, this comes with the health warning that individual circumstances will need to be considered.