What is protection and indemnity insurance?

What is protection and indemnity insurance? | Insurance Business

What is protection and indemnity insurance?

Protection and indemnity (P&I) liability insurance is specifically designed to address the unique needs of the marine industry. It covers practically all maritime liability risks associated with the ownership and operation of a vessel, including third-party risks for damage caused to cargo during transit, risks of environmental damage such as oil spills and pollution, war, and political risks. 

There’s no standard underwriting form when it comes to P&I insurance. Rather, underwriters will tailor bespoke P&I coverage for each insured, based on the nature and character of the risk, and the amount of insurance desired.  

P&I insurance is often provided by a P&I club, which is essentially a mutual insurance association that provides risk pooling, information, representation and risk mitigation for its members. Typical members of P&I clubs include ship owners, ship operators and charterers – and more recently, membership has been opened up to freight forwarders and warehouse operators. A P&I club reports only to its members, and not to shareholders like a traditional marine insurance company.

What does P&I insurance cover?  

The primary purpose of P&I insurance is to provide policyholders with protection against personal injury, illness and death claims from crew, passengers and so forth. P&I insurance also covers things like:

- Liability claims as a result of collision

- Removal of wreck

- Stowaways and repatriation

- Damages to or loss of cargo

- Damages to fixed or floating objects

- Civil liabilities imposed after pollution or oil spill

- Liability under approved towage contracts

It does not cover risks that would fall under a workers’ compensation policy or under the collision clause in a traditional hull policy.

A brief history of P&I insurance

It can trace its roots back to 19th century London, UK. At this point in time, ship owners and charterers would seek insurance for their ships, and cargo owners would get insurance for the cargo. However, the ship owners and charterers realized they could be found at fault should cargo get lost of damaged at sea, and so they sought third-party indemnity insurance for cargo liability. Underwriters in the first half of the 19th century were reluctant to take on third-party cargo liability risks, and so the ship owners responded by forming mutual P&I clubs.

As shipping volume increased in the second half of the 19th century, so did the number of insurance claims, specifically relating to collisions and third-party liability claims. During this period, it became more usual for crew members to seek compensation from their employers. Furthermore, the Lord Campbell Act of 1846 enabled claims to be made by dependants of crew members who were killed onboard, and introduced the possibility of claims by passengers – a great risk for ship owners considering the emigration boom towards North America and Australia.

In response to the growing risks, and inadequate insurance coverages, the first protection association was formed in 1885, called the Shipowners’ Mutual Protection Society (later to become the Britannia P&I club). The aim of the club was to cover liabilities for loss of life and personal injury, as well as the collision risks excluded from marine insurance policies at the time. The club was a success and other similar associations were formed. Approximately 20-years later, the clubs started providing indemnity coverage to provide extra coverage for ship owners, hence the name P&I clubs.

P&I clubs around the world

The P&I clubs originated in London, UK, but the concept soon spread to other major shipping jurisdictions around the world. Today, there are thriving clubs in: the UK, Bermuda, China, Japan, Norway, Singapore, Sweden, United Arab Emirates, the USA, and South Korea.

The International Group of P&I Clubs

Thirteen of the major P&I clubs have now joined the International Group of P&I Clubs, and together they provide P&I insurance for approximately 90% of the world’s ocean-going tonnage. As part of the group, each member club remains as an independent, not-for-profit mutual insurance association, but shares their large loss exposures, as well as their respective knowledge and expertise on marine liabilities.

The group explains its ‘core’ functions on its website as being: “Firstly, the operation of the claims sharing (‘pooling’) arrangements and the collective reinsurance of these arrangements, secondly, it operates as a forum for collecting and exchanging views between the clubs and their ship owner members on matters relating to ship owners’ liabilities, and insurance of such liabilities, and thirdly, it provides a collective industry voice for the purposes of engaging with external stakeholders including intergovernmental maritime organizations, national governments, marine authorities around the world and the shipping and marine insurance/reinsurance industries.”

How does the international group share losses?

The 13 clubs in the international group pool their resources together in order to provide very high insurance limits and reinsurance cover at good cost. Any claims up to US$10 million must be handled by the individual club, but any loss exceeding that limit (up to US$100 million) will be shared out among the 13 clubs.

The Shipowners’ Club explains further: “Every dollar over US$100 million is paid by International reinsurers under an arrangement known as the International Group General Excess Loss Reinsurance program. There are approximately 90 reinsurers supporting this program, which makes it the world’s largest marine reinsurance contract. It provides a further US$2.1 billion of insurance cover per vessel, per incident, in addition to the US$100 million which the clubs insure together.”

Major marine broker takes on the clubs

Global insurance broking and risk management firm Marsh has pushed in recent years for the International Group of P&I clubs to be more transparent and collaborative with their P&I data.  Marsh is challenging the status quo with its new P&I portal, a technology-driven tool that gives ship owners the ability to access “the whole black box” of P&I data, including financial and underwriting information from the 13 P&I clubs. Through the P&I portal, Marsh clients can compare up to four international group P&I clubs at any one time and can match their risk profile with the right club.

“The 13 P&I clubs around the world are in a unique position in that they provide liability cover for approximately 90% of the world’s ocean-going tonnage, which means they carry an enormous amount of data. But today, each club has their own data and they don’t really share it,” said Richard Adler, senior vice president, global marine practice, Marsh. “We think the clubs should start to collaborate at a different level and share that data. Why? Because the more data you have, the better your analysis and loss prevention will be.

“In the past, the clubs have said they can’t share their data, arguing that it’s privileged and that ship owners are very private individuals. That’s absolutely correct - but you can easily anonymize data, which in the end will be to the benefit of the ship owners. I can assure you there’s no ship owner in the world that doesn’t want to improve their loss prevention [and] be a more responsible ship owner because the less claims you have, the better your performance will be and the more points you win with your charterers and clients. It’s a win-win for everybody.”