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Merger set to reduce COFR costs

Loyalty bonus proposed as Shoreline Mutual and Arvak chart a future together.

Jim Mulrenan, London   |   11 April 2014

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Simon Scupham, Chairman of Shoreline Mutual Managers

The cost of trading to the US is set to fall for several thousand shipowners as the result of a loyalty bonus being introduced to mark the merger of Shoreline Mutual and Arvak.

Details of the bonus have yet to be decided but the reduction will be substantial and significantly shrink one of the overheads facing both tankers and dry cargo vessels that voyage to the US.

Shoreline Mutual is an insurance club that is the second biggest of the financial guarantors that enable shipowners to get Certificates of Financial Responsibility (COFRs) for US trading

Arvak is a much smaller shipowner-controlled company that grew out of an initiative by the Skuld protection-and-indemnity (P&I) club to help members obtain COFRs.

Both facilities, run by Bermuda based Shoreline Mutual Managers, are to be combined into a new venture, Maritime Insurance Solutions Ltd (MISL), with a loyalty bonus that will be backdated to the start of 2014 part of the plan.

The new MISL structure is also seen as more appropriate for expanding the range of products, although the focus will continue to be difficult risks that the P&I clubs are reluctant to write.

The merger comes as a battle over a Standard Club proposal for the P&I mutuals to offer COFR guarantees is coming to a head, although Simon Scupham, the chairman of Shoreline Mutual Managers, says the two are unrelated.

Scupham says the plan to merge the two COFR schemes has been under development since the start of 2013, so months before TradeWinds broke news of the Standard Club’s plan to offer COFRs last October.

Funding loyalty bonus

The funds for the loyalty bonus will come from efficiencies achieved from MISL being a single company and also from finer pricing obtained from lead reinsurer, the Catlin syndicate 2003 at Lloyd’s, and others on the reinsurance panel.

While the principle of a loyalty bonus has been agreed, the MISL board has yet to determine its structure, the formula for allocating the benefit and exactly how it will work.

“Details of the loyalty bonus is for the board to decide but it will be a substantial amount,” said Scupham who indicates he would not regard 10% as substantial. “It will certainly be north of that figure. The combination of the magnitude and mechanism of the program we believe will be very attractive to our loyal members,” he added.

MISL will be constituted as a Bermuda segregated accounts insurance company owned in trust for the benefits of its insureds so will have quite a lot in common with a shipowner-controlled mutual.

The chairman of Shoreline Mutual, Vikrant Bhatia of KC Maritime, and Arvak chairman Per Nykjaer Jensen, a former Clipper group executive who now runs SeaMall, a Danish maritime pro-curement pool, said in a circular to members that there should be significant costs savings, with the new structure streamlined, fit for purpose and well placed to respond to any further needs that arise.

The board of MISL will be made up of the directors of Shoreline Mutual and Arvak who include executives from Zodiac Maritime Agencies, BW Maritime, Ultranav, Disney Cruise Lines, Petroleum Geo Services, Concordia Maritime, Interlake Steamship and Erik Ostbye, a Norwegian with connections to the Blystad shipping empire.

The boards of Shoreline Mutual and Arvak have a history of holding joint sessions, with Scupham seeing the formation of MISL as a logical development. “This is all about adding value rather than losing anything,” he added.

Although MISL will be the new COFR guarantor, the Shoreline name will live on as a brand and in the management-company name.

“We will maintain the Shoreline name for the foreseeable future. Whether at some point in the future we will rebrand is something we will think about in the long term,” said Scupham.

Shipowners Insurance and Guaranty (SIGCo), a Bermuda based, shipowner-controlled company, is the biggest of the COFR guarantors covering 11,000 vessels. Shoreline Mutual covers 3,750 vessels and Arvak about 550.

A continuity credit profit sharing scheme was introduced by SIGCo about six years ago but this company has a facultative reinsurance-based structure that enabled it to build a reserve fund.

Shoreline Mutual, by contrast, has operated on a fully reinsured basis and has been prioritising low margins so has not built a reserve.

New marine guarantor ready to write risks the P&I clubs reject

The price of Certificates of Financial Responsibility (COFR) guarantees has fallen since the early 1990s as fears about funds being drawn down following a major US oil spill have waned.

But Shoreline Mutual has never had a claim so reinsurers were persuaded to make a further pricing concession to mark the 20th anniversary of the club.

“We had a conversation with the reinsurers who have supported us over these 20 years. We have built quite a degree of credibility with them and they recognised this would be a fantastic thing to do. We are proud we have been able to accomplish this,” said Simon Scupham, chairman of Shoreline Insurance Managers.

“At the very beginning everyone was petrified at the risk and there were almost daily calls about what might happen and different scenarios. But we have not had a loss and the reality of the risk has become better understood, and as the number of insureds has gone up the pricing has come down,” he added.

The Standard Club believes that there could be savings of about $40m a year if the protection- and-indemnity (P&I) clubs began writing COFR guarantees but there is deep-rooted opposition among rival club managers to the P&I mutuals getting into this business.

The 13 International Group P&I clubs refused to provide COFR guarantees at the time of the US 1990 Oil Pollution Act (OPA 90), with specialist insurers such as Shipowners Insurance and Guaranty (SIGCo), Shoreline Mutual and Arvak springing up to fill the gap.

“The suggestion that guarantors are just taking money out of the pockets of shipowners is very unfair when you consider that most of the money goes on reinsurance, and the frictional costs are a small price to pay for the protection the International Group clubs get,” said Scupham.

He sees Maritime Insurance Solutions Ltd (MISL) focusing on COFR guarantees, war “blue cards” required by Europe introducing higher passenger compensation limits under the Athens protocol and international carrier bonds but a part of the thinking is that the company would be ready to take on further risks that the P&I clubs felt it was unwise to insure.

“We are not setting up shop in competition with the clubs but as an independent vehicle for the next 20 years, ultimately owned by the same people as P&I club members,” Scupham said.

He sees the most likely scenario as that MISL might write guarantees required under single state legislation if countries step outside the international convention approach and introduce domestic maritime compensation regimes.