ANNUAL

REVIEW
2017
HIGHLIGHTS
FIVE YEAR COMBINED SUMMARY
Income Statement (US$ millions)
5% AAA
PREMIUM RETURN CAPITAL STRENGTH

2016/17 2015/16 2014/15 2013/14 2012/13

Gross premium income 429.5 489.8 394.9 383.5 365.3

431m 2.8%
Underwriting result 11.0 87.4 (29.2) 13.2 (10.3)
Investment result,
FX and other income 21.0 (12.8) 25.9 13.1 8.5
Pension Scheme deficit (30.2) 18.2 (19.1) (26.3) –
Revaluation of land and buildings 0.6 (2.5) 6.9 – – US$
SMI free reserve at 20 February 2015 – – 41.4 – – FREE RESERVES INVESTMENT RETURN
Increase / (decrease) in free reserve 2.4 90.3 25.9 – (1.8)

Balance Sheet (US$ millions)

7% 96%
Feb-17 Feb-16 Feb-15 Feb-14 Feb-13
Net assets 1,043.7 1,050.9 1,041.3 935.9 917.6
Net outstanding claims (612.9) (622.5) (703.2) (623.7) (605.4)
Free reserves 430.8 428.4 338.1 312.2 312.2
CONTROLLED COMBINED RATIO
Combined ratio 96.0% 73.3% 108.6% 90.1% 104.2% MEMBERSHIP GROWTH

2 ANNUAL REVIEW / HIGHLIGHTS www.nepia.com

CHAIRMAN’S STATEMENT 2016 was another positive year for the Club
which concluded in a successful renewal
with overwhelming support from our Members
and a modest financial surplus.
During the year we took the positive decision to
return 5% of mutual premium to Members for the
2016 policy year in recognition of the continuing
difficult trading conditions facing many areas of
the shipping industry. Our pension scheme deficit
suffered a further impairment following a fall in
UK corporate bond yields triggered by post-Brexit
uncertainty in the UK. The cumulative impact
of this and the return of premium reduced the
financial year surplus by over US$44 million.
Notwithstanding this, the combined ratio for
the financial year was 96%, an excellent result,
particularly after returning 5% of 2016 premiums to
Members. This result should ensure that our long
term combined ratio remains in the upper quartile
of International Group (IG) clubs and is testament
to the Club’s rigorous underwriting approach and
proactive claims and risk management ethos.
3 ANNUAL REVIEW / CHAIRMAN’S STATEMENT www.nepia.com
140m GT OWNED
Renewal
The renewal at 20 February 2017 was extremely
429m
positive for North. Net growth at renewal was
approaching 5 million GT and year-on-year growth
overall was nearly 10 million GT, taking total owned
tonnage to 140 million GT (190 million GT including
chartered). It is particularly pleasing to see that the
overwhelming majority of this growth came from the US$
existing membership, demonstrating real confidence
in the financial strength and service delivery of the GROSS PREMIUM INCOME
Club. As a result of membership renewal negotiations
and further reductions in reinsurance costs over
the year, premiums have reduced slightly, a
credible result in the current market conditions.
99%
Claims
The 2016 claims experience remained at a relatively
stable level, although due to a number of larger claims
in the second half of the year, not as positive as the
previous policy year. At 20 February 2017 there were
34 claims recorded with incurred values in excess of
US$1 million compared with 19 the previous year. The
number and value of Pool claims in 2016 was at a low MEMBERSHIP RETENTION RATE
point. The recent period of relatively benign claims is of
course very welcome but we must not be complacent
as there may be early indications of claims increasing.
> Continued over
CHAIRMAN’S STATEMENT
Financial
Free reserves have remained stable over the course
of the year. The Club’s capital strength, as assessed
by Standard & Poor’s, increased from “AA” to “AAA”
and we maintained an ‘A’ (stable) rating for the 13th
consecutive year. Our available capital is now within a
tolerance range approved by the Directors, which is
reflective of the Club’s risk appetite and exposures.
Positive contributions to the financial year result
were an investment return of 2.8%, producing
US$25 million and an underwriting surplus resulting
in a combined ratio of 96%. Following the 5% mutual
premium return (approximately US$14 million), a small
surplus of US$2.4 million was achieved and free
reserves increased to approximately US$431 million.
A negative factor has been an increase in the defined
benefit pension scheme deficits. Members may recall
an improvement of US$18 million in 2015, but due to
the volatility in UK corporate bond yields, the position
has deteriorated by approximately US$30 million,
increasing the combined deficit to US$57 million for
the North Group. The deficit is closely monitored
and it is hoped it will unwind in the medium term if
the interest rate environment improves. Any benefit
from this will accrue to the Club’s membership in the
future. In the meantime, capital strength remains very
strong and there is no tactical benefit in crystallising
the deficit at this stage.
4 ANNUAL REVIEW / CHAIRMAN’S STATEMENT www.nepia.com
A
S&P RATING
Service
Service excellence has been the foundation of North’s
successful development into one of the largest and
leading IG Clubs. This remains the case and the Club
will be conducting another survey of Members and
13TH CONSECUTIVE YEAR
Brokers later in the year to further understand Members’
requirements and to refine and enhance the services
provided. The Club’s service offering last year was
supplemented by the opening of a subsidiary office
76%
in Shanghai in November, working in tandem with the
Hong Kong office to support not only the Asian based
membership but also the international membership
trading in the region. Throughout the course of the
year, the operational and service delivery teams based
at North’s headquarters in Newcastle and across
regional offices have been further strengthened.
INVESTMENTS RATED AA+
Diversification
North is committed to a strategy of continued
diversification, with the objective of delivering meaningful
benefits for the mutual membership. This strategy
25m
is achieved through the careful development of fixed
premium business within the group which currently
stands at approximately 30% of total group income.
As well as a growing fixed premium chartered portfolio,
the largest proportion of this diversification results
from the merger with Sunderland Marine (SMI) in US$
February 2014.
INVESTMENT RETURN
SMI has undergone a period of significant transformation
as we deliver against the strategy established by the
Board following the merger.
> Continued over
CHAIRMAN’S STATEMENT
Diversification (continued)
A financial loss during the year of US$9.9 million
resulted from a movement in the defined benefit
pension scheme of US$4.7 million and an operational
loss of US$5.2 million. Included within the operational
result are costs relating to the restructuring of the SMI
organisation and from the run-off of discontinued areas
of business. SMI is now focused on underwriting in
core areas which continue to produce a profitable
contribution for the group. This strategy is nearing
completion and more recently in the US and Canada
where business is now being underwritten by a
partner in Lloyd’s of London through SMI’s MGA
in Canada, Harlock Murray Underwriting (HMU).
Having delivered significant change during the
year, the Club is confident that SMI will make an
ongoing and positive contribution for Members.
Over the next two years, we will be working to
bring the SMI business directly into North through
a Part VII transfer process, which is the final
stage of full integration of the businesses.
The unique nature of the SMI transaction to acquire
the company and free assets means that we now
have a diversified fixed premium platform with an
annual income in excess of US$90 million, without
incurring the expensive set up costs sometimes
involved with transactions of this scale. I am confident
that the fixed premium diversification strategy is
well positioned to produce financial benefits for the
mutual membership, whilst delivering competitively
priced service to fixed premium policyholders.
5 ANNUAL REVIEW / CHAIRMAN’S STATEMENT www.nepia.com
Industry
North’s fundamental business aims include operation as
a mutual insurance organisation and key membership
and participation in the International Group, which I
strongly believe provides significant benefits for Members
and the global shipping industry. North plays a key
role in the affairs of the International Group with the
management team holding a number of leadership
roles, including on the topical Sanctions Committee,
Claims Cooperation Committee, and current Chairman
of the key Reinsurance Sub-Committee, (which has
successfully delivered reinsurance premium savings of
circa US$100 million over the last three years). I believe
it is important that the benefits of the International
Group are clearly explained to Members and
stakeholders and I encourage all International Group
clubs to engage in this process and to ensure that the
International Group finds increasingly innovative ways
to cooperate and assist Members’ requirements.
North has actively supported and promoted a specific
industry wide initiative of early intervention to resolve
disputes on a collaborative basis, which is showing
positive benefits in terms of both time and cost.
Governance
North has been at the forefront of best practice
corporate governance within the P&I arena. This
has enabled the Club to transition smoothly into
the Solvency II regime, largely within the existing
governance structure. I am particularly grateful
to my fellow Directors and the Club’s managers for
their diligent efforts in this area as they continue to
refine and enhance the governance arrangements,
which is an ongoing process within North.
A further significant challenge has arisen following
the UK’s referendum decision in June 2016 to leave
the European Union and the UK Government’s
triggering of the two year Article 50 process on
29 March 2017.
In the event that a satisfactory trading arrangement
which secures financial passporting rights is not
negotiated by March 2019, then it will be necessary
for the Club to make alternative arrangements,
probably by way of the establishment of a European
based and regulated company. The Club’s managers
are currently reviewing various options and will
ensure that suitable arrangements are in place over
the coming months to allow a smooth transition in
the event that Brexit negotiations do not preserve
free trading and access to Europe.
> Continued over
CHAIRMAN’S STATEMENT
Board Members Outlook
In November 2016, Atul Agarwal retired from his After a period of relative consolidation, North
STRATEGIC VISION AND AIMS
positions as Non-executive Member Director and has agreed modest growth targets for the next few
Members Board representative, and I would like years. Controlled growth is a healthy operating
to thank him for his valuable contribution. I am strategy for business, but for North this will always be
pleased to welcome James Tyrrell (Non-executive subject to meeting our financial and service targets.
Member Director) and Phil Moorhouse (Independent
Overall, this has been another productive and “A world leading
Non-executive Director) to the Board of Directors
following their appointments during the year.
positive year for the Club and we have again made marine insurance
significant progress towards our strategic aims and group, providing the
highest quality of
The Members Board continues to expand and I am objectives, along with further improvements against
pleased to welcome a number of new representatives: agreed key performance indicators. Delivery of
Atle Sebjornsen (NCC), Dimitris Marinos (Seastar), Coco financial stability and the highest level of service cost-effective
Vroon (Vroon BV), Capt. Anoop Sharma (Shipping are fundamental to North. I am confident that we service”
Corporation of India) and Philipp Reith (Orion Bulkers). are achieving this and I believe the overwhelming
support from all Members during the year and
Philipp Reith has joined in succession to his father
at renewal is testament to this. I am sure this will
STRATEGIC VISION
Stephan, after nearly 30 years of combined service on
continue to be the case throughout 2017 and beyond.
the Board of Directors and Members Board, including
as Chairman of the Board of Directors from 1996 to
Pratap Shirke
1999. I would like to thank Stephan for his service
Chairman STRATEGIC AIMS
to the Club. It is particularly pleasing to note that the
appointments of Philipp, James and Dimitris represent May 2017
a continuation of long standing Member relationships
as their responsibilities pass to the next generation.
Marine Risks Leading
Mutually Insurer with
Owned membership
Competitive of the
& Operated Pricing and
Company International
Highest Level Group
of Service

6 ANNUAL REVIEW / CHAIRMAN’S STATEMENT www.nepia.com

GOVERNANCE & COMPLIANCE
North complies with the Solvency II regulatory regime
which came into force on 1 January 2016.
Solvency II introduced new reporting requirements North believes the ability to seek an AOF waiver is a
and the Club has devoted a significant amount of benefit to us as a mutual insurer and to our Members
resource to ensure we meet these requirements. In in maintaining an efficient regulatory capital base.
particular, we have prepared for the publication of our
Sound corporate governance within insurers and
first Solvency and Financial Condition Report (SFCR).
financial service companies remains a priority for
The SFCR will be published annually and will provide
regulators. In March 2016, the United Kingdom
an overview of our business performance, governance
introduced the Senior Insurance Managers’ regime
structure, risk profile, solvency and capital.
which details the requirements of those individuals
Solvency II recognises North’s mutual structure in positions of responsibility. The Club has reviewed
and its ability to call on its mutual Members its governance arrangements to ensure it meets
for additional premium in extreme circumstances. these ongoing requirements.
Whilst the Club has not made an unbudgeted
premium request for 26 years, we are pleased
to report that the United Kingdom’s Prudential
Regulation Authority has renewed North’s
Ancillary Own Fund (AOF) waiver which enables
us to reflect our ability to raise additional premium
within our regulatory capital calculations.

7 ANNUAL REVIEW / GOVERNANCE & COMPLIANCE www.nepia.com

FINANCIAL REVIEW
The overall result for the financial year to 20 February 2017 is a surplus
of US$2.4 million, with the free reserve now standing at US$431 million.
The technical result is strong, with a combined
ratio of 91.8% before the 5% return of premium on
the 2016 policy year (96% after the premium return).
The claims result benefitted from Member claims
falling within a range which has triggered recoveries
on the Club’s reinsurance programme and a
benign result on the International Group (IG) Pool
for the year. Operating expenses also gained from
the continued weakening of GBP Sterling against
the US Dollar reporting currency. The investment
result is +2.79% against a benchmark of +1.82%,
producing a net investment income of US$24.6
million across all classes of business.
The assessed value of the deficits at 20 February
2017 in respect of the group’s defined benefit
pension schemes increased by US$30 million in
comparison to the valuation as at 20 February 2016.
This was a result of the decrease in UK corporate
bond yields and financial uncertainty following the
Brexit referendum result.
8 ANNUAL REVIEW / FINANCIAL REVIEW www.nepia.com
Investment Review The Club utilises a number of risk mitigation
techniques to manage its capital exposure.
The rising markets for both equities and corporate
Actuarial techniques are used to monitor risk
bonds continued through 2016 and contributed to
values within the business and they are managed
a positive result on the Club’s investment assets.
by the Board through a Risk Profile valuation
During the year the investment portfolios were
which leads to the appropriate use of risk budgets
restructured to fit with a Board approved risk budget.
across the business segments. This drives specific
The extended period of market growth for a wide actions such as the purchase of reinsurance
range of asset classes and the ongoing geopolitical and the implementation of hedging strategies.
uncertainty has driven a strategically defensive
The Club holds sufficient capital to cover regulatory
portfolio position.
and rating agency requirements, with a target
Capital and Risk Management capitalisation of “AA” S&P capital plus a buffer of
between 80% and 120% of the Board assessed
The Club’s free reserve increased to US$431
Risk Limit. The buffer is required to enable the
million and the capital position of the Club has also
Club to continue to meet its capital targets in
increased and has been assessed by Standard and
the event of materially adverse financial results.
Poor’s as being extremely ‘strong’ with capital within
the ‘AAA’ range. With a five year average combined
ratio of 94.4%, the Club’s focus on delivering strong
technical results has seen the free reserve increase
over that period by US$118.6 million after allowing
for the 5% return of premium to Members in the
2016 policy year.
 FINANCIAL REVIEW 3.5%
FREE RESERVES AT 20 FEBRUARY ALL CLASSES 0.1% 7.2%
*Inclusion of SMI following acquisition on 28 February 2014
CURRENCY 0.3%
ALLOCATION
450
400
350 AT 20 FEBRUARY 2017
300
US$ (Millions)

OTHERS

428 431
250

338*
200 OTHER EUROPEAN
150
100
312 312 EURO
UNITED KINGDOM 88.9%
50 UNITED STATES
0
2013 2014 2015 2016 2017

UPPER RANGE GUIDE 5.2%

NORTH CAPITAL POSITION AT 20 FEBRUARY 2017

NORTH CAPITAL AVAILABLE
ALL CLASSES 9.7%
ASSET
LOWER RANGE GUIDE
S&P CAPITAL MODEL REQUIREMENT
500
ALLOCATION 11.1%
450 AT 20 FEBRUARY 2017
400
US$ (Millions)

CASH & CASH EQUIVALENTS

350 EQUITIES
CORPORATE BONDS
300 74%
GOVERNMENT BONDS
250
AAA AA A BBB

9 ANNUAL REVIEW / FINANCIAL REVIEW www.nepia.com

FINANCIAL REVIEW
Reinsurance
2017 IG GXL STRUCTURE

The renewal of the International Group’s General

Hydra will therefore now reinsure 100% of the
layer from US$80 million to US$100 million, in P&I
return for reducing its reinsurance share of the 3.1B-
Excess of Loss Reinsurance (“GXL”) Contract was General Excess of Loss
layer from US$100 million to US$120 million
secured in December 2016, one month in advance of Reinsurance Contract Structure
from 60% to 30%. In essence, these structural
the traditional renewal timetable. Overall, there was an Owned Entries (including Overspill
changes have simplified the IG reinsurance
11% reduction across the various layers of the GXL Protection, Hydra Participation,
contract, with the IG now having delivered cumulative
programme structure through the introduction COLLECTIVE OVERSPILL EXCESS OF UNDERLYING
Pooling, Private Placements
of a flat attachment point for both the GXL
premium savings from the programme of approximately and Individual Club Retentions)
and the private placements, at US$100 million.
US$100 million over the last three renewals.
The IG has also collectively arranged a market 2.1B-
The combination of the generally favourable loss 2017– 2019 MULTI-YEAR PRIVATE PLACEMENT
reinsurance cover of US$190 million excess
experience of the programme, increased market
of US$10 million to assist and meet Members’ 2015– 2019 MULTI-YEAR PRIVATE PLACEMENT
capacity, the positive financial development of the IG
certification requirements under the financial 2016– 2019 MULTI-YEAR PRIVATE PLACEMENT
captive, Hydra Insurance Company Limited (“Hydra”), THIRD LAYER EXCESS OF UNDERLYING
security provisions of the Maritime Labour
the effective use of multi-year private placements and

a number of structural changes to the programme, all
enabled the IG to secure another favourable renewal
of the GXL contract at 20 February 2017. This again
resulted in rate reductions across all vessel categories.
OIL POLLUTION
Convention (which entered into force in
January 2017).
Finally, to remove the ongoing need for fall back 1.1B- -1.0B
cover, no US domiciled reinsurers have been
invited to participate on the 2017 programme. SECOND LAYER MARKET SHARE: 85% SECOND LAYER MARKET SHARE: 85%

PRIVATE PLACEMENT 5%
PRIVATE PLACEMENT 5%
PRIVATE PLACEMENT 5%

PRIVATE PLACEMENT 5%
PRIVATE PLACEMENT 5%
PRIVATE PLACEMENT 5%
The individual club retention remained unchanged
at US$10 million, as has the two layer Pool structure In line with the reductions achieved by the
comprising the Lower Pool from US$10 million to
600M-
IG, North has also similarly renewed its various
US$45 million and the Upper Pool from US$45 million FIRST LAYER FIRST LAYER FIRST LAYER FIRST LAYER 350M
existing retention reinsurance programmes on
MARKET HYDRA MARKET HYDRA
to US$80 million. The attachment point of the GXL improved terms. New additional reinsurance SHARE: 55% SHARE: 30% SHARE: 55% SHARE: 30%
contract has now increased to a flat US$100 million partners have once again been introduced 100M- -100M
HYDRA LAYER
from 20 February 2017, together with a corresponding to augment the current high quality panel 80M- -80M
increase in Hydra’s participation. UPPER POOL LAYER – REINSURED BY HYDRA 7.5% ICR
of reinsurers.
45M- LOWER POOL LAYER – REINSURED BY HYDRA
-45M
30M- LOWER POOL LAYER
-30M
10M- INDIVIDUAL CLUB RETENTION (ICR)
-10M

SINGLE PER-VESSEL RETENTION

OWNED ENTRIES
10 ANNUAL REVIEW / FINANCIAL REVIEW www.nepia.com
OPERATIONAL
P&I FD&D

OVERVIEW 140m 82m

GT OWNED GT OWNED

MEMBERSHIP UPDATE
For the 20 February 2017 renewal, the Directors
decided not to ask for any general rate increases.
In recognition of the ongoing challenges faced by
shipowners in almost all sectors, the decision was
also taken to return 5% of the mutual P&I premium
paid in 2016/17. The Club enjoyed overwhelming
50m 40m
GT CHARTERED GT CHARTERED

support from Members, with a 99% retention rate.

190m 122m
GT COMBINED GT COMBINED

11 ANNUAL REVIEW / OPERATIONAL OVERVIEW www.nepia.com

OPERATIONAL OVERVIEW
The 2016/17 policy year was characterised by very
poor freight markets for almost all shipping sectors.
Against this market backdrop, the Club continued
to achieve its key strategic objectives, including:
Controlled and measured growth in alignment
with the Club’s overriding financial KPI’s.
Diversification in terms of vessel type, Member
type and geographical spread.
Diversification into fixed income streams
that should generate long term benefit for
the mutual membership.
Membership Overview
Total owned tonnage entered in the Club increased
year-on-year by almost 7%, in line with North’s strategic
objective to grow in a controlled and measured
manner. Although this exceeded the average rate of
growth of world tonnage, it is predominantly organic
from existing Members. The ongoing Member Review
Programme has also continued to assist efforts to
refine the quality of the membership.
12 ANNUAL REVIEW / OPERATIONAL OVERVIEW www.nepia.com
The type of ships entered in the Club continues
to be representative of the world fleet, with the
organic growth during the year being spread
across all existing vessel segments.
In addition to growth during the course of the year,
there was also a significant increase in entered
tonnage at the 20 February 2017 renewal. This
came from existing Members transferring tonnage
to North. During the year we also welcomed a
number of new Members, primarily from Japan.
The average age of ships entered in the Club remains
well below the world average whilst the average ship
size continues to increase, both reflecting the reducing
risk profile of the Clubs’s overall entered tonnage.
The ongoing economic challenges facing shipowners
show no signs of abating in any significant fashion
during the 2017/18 policy year. As a result we
expect to see further consolidation across various
ship sectors, which will no doubt impact on tonnage
entered. New ballast water treatment and regional
fuel specification requirements could also influence
current scrappage levels across most vessel types.
 OPERATIONAL OVERVIEW
TONNAGE ENTERED GT BY 6%
DEVELOPMENT DISTRIBUTION 35% 8%
AT 20 FEBRUARY CHARTERED OWNED & CHARTERED
OWNED 12%
NORTH AMERICA
200
SCANDINAVIA

180 MIDDLE EAST

50 19%
NORTHERN EUROPE
160

43 49 43 54 SOUTHERN EUROPE
20%
39
ASIA PACIFIC
140

120
3%
GT (Millions)

100
ENTERED GT BY 8%
80 BY SHIP TYPE
60
123 127 131 127 131 140 OWNED & CHARTERED 35%
GENERAL CARGO
22%
40 OTHERS
CONTAINER
20
TANKERS
BULK CARRIERS
0
2012 2013 2014 2015 2016 2017 32%

13 ANNUAL REVIEW / OPERATIONAL OVERVIEW www.nepia.com

OPERATIONAL OVERVIEW
AVERAGE WORLD TONNAGE
Excludes ships below 1,000 GT. *World tonnage projected by Clarksons

AVERAGE SHIP 20.9 20.6 20.6 20.6 20.6

25
19.7 20.2 20.3

AGE (P&I)
20

15

(OWNED TONNAGE ONLY) Years

10
AT 20 FEBRUARY
5 12.5 10 10.1 10.5 10.7 10.8
0
2012 2013 2014 2015 2016 2017

AVERAGE SHIP
45

SIZE (P&I)
35
GT (Thousands)

25

(OWNED TONNAGE ONLY)

AT 20 FEBRUARY
15
31,020 36,498 37,607 36,859 37,962 39,748
5

0
2012 2013 2014 2015 2016 2017

P&I Owned tonnage only. Excludes ships below 1,000 GT

14 ANNUAL REVIEW / OPERATIONAL OVERVIEW www.nepia.com

OPERATIONAL OVERVIEW
Projected by Clarksons

SHIP TYPE BY
40%
35%

GROSS TONNAGE Percentage (%)

30%

WORLD
25%

35
20%

AT 20 FEBRUARY 2017
15%
31
10%
5% 17 3 13
0%
Bulk Carrier Tankers Container General Cargo Others

SHIP TYPE BY
40%
35%

GROSS TONNAGE 30%

Percentage (%)

NORTH
25%

35
20%

AT 20 FEBRUARY 2017
15%
32 23 8
3
10%
5%
0%
Bulk Carrier Tankers Container General Cargo Others

15 ANNUAL REVIEW / OPERATIONAL OVERVIEW www.nepia.com

OPERATIONAL OVERVIEW
NUMBER OF CLAIMS
OTHER
PEOPLE
ADMIRALTY

MAJOR CATEGORIES OF CLAIMS CARGO

AT 12 MONTH DEVELOPMENT POINT 300 10

9
P&I Claims
250
The claims experience during the 2016 policy
8
year was not as favourable as the exceptionally
benign 2015 due to a number of high value

Number of Claims (Thousands)

claims notified during the second part of the 7
year. Despite the lower total number of claims, 200
the higher value claims took the 2016 result
6
US$ (Millions)

to levels more comparable with policy years

prior to 2015.
150 5
We hope that the overall reduction in claims
numbers indicates a positive trend, possibly
as a consequence of improving levels of 4
performance by Members, with greater safety
awareness and better procedures to minimise 100
3
the scope for human error. We are also very
conscious that if trading levels increase, then
pre-existing pressures on resourcing and 2
maintenance in particular are likely to be exposed 50
and the claims environment might again prove
1
challenging. This would result in increasing claims
numbers with the corresponding increased
risk of more high value claims which could have 0 0
a detrimental impact on future performance. 2012/13 2013/14 2014/15 2015/16 2016/17
(Policy Year)

16 ANNUAL REVIEW / OPERATIONAL OVERVIEW www.nepia.com

OPERATIONAL OVERVIEW
NUMBER OF CLAIMS
OTHER
PEOPLE
ADMIRALTY
CARGO

MAJOR
160 60

CATEGORIES 140
50

OF CLAIMS 120

AT 12 MONTH DEVELOPMENT 100

40

Number of Claims
POINT IN EXCESS OF US$1M
US$ (Millions)

80 30

Large Claims Experience

The most significant factor underlying the overall 60
claims result in any policy year is the number 20
of claims incurred in excess of US$1 million.
At the 12 month development point, there were 40
34 claims notified to the 2016 policy year with
a combined incurred value of US$113.2 million. 0
The Club is protected from the volatility of high 20
value claims through the purchase of specific
reinsurances. These reinsurances will respond
to the increase in the number of large claims 0 0
experienced in the second half of the 2016 year. 2012/13 2013/14 2014/15 2015/16 2016/17
(Policy Year)

17 ANNUAL REVIEW / OPERATIONAL OVERVIEW www.nepia.com

OPERATIONAL OVERVIEW
NUMBER OF CLAIMS
OTHER
PEOPLE
ADMIRALTY
CARGO

MAJOR
160 10

CATEGORIES
9
140

OF CLAIMS
8
120

Number of Claims (Thousands)

7
AT 12 MONTH DEVELOPMENT 100
POINT VALUED BELOW US$1M 6
US$ (Millions)

80 5

4
60
Attritional Claims Experience
3
For claims below US$1 million, the distribution
of claims was in line with that experienced in 40
the 2015 policy year. Claims below US$1 million 2
are generally much more consistent than
higher level claims and the lower incidence of 20
1
claims in 2016 is therefore encouraging and
hopefully evidence of improving performance
by Members and not simply a consequence 0 0
of reduced trading. 2012/13 2013/14 2014/15 2015/16 2016/17
(Policy Year)

18 ANNUAL REVIEW / OPERATIONAL OVERVIEW www.nepia.com

OPERATIONAL OVERVIEW NORTH LOWER POOL %
POOL COST TO NORTH
NO. OF IG POOL CLAIMS
The Cost and Number of IG Pool Claims to North and
North’s Pooling Contribution Percentage at 20 February 2017

IG POOL CLAIMS
60 – 14

– 12
50
US$ (Millions) / Number of Claims
– 10
40
Pool Claims
There were eight claims notified to the –8

Percentage
International Group Pool in the 2016 policy
year with a total value at the 12 month 30
development point (excess of the Club
retention) of US$75.2 million. This compares –6
with nine claims in 2015 with a value of
US$343.4million and 10 claims in 2014 20
with a value of US$179.6 million at the –4
12 month development point.
North’s cost of participating in the Pool
reflects the underlying claims notified and 10
–2
also the Club’s own record. The increase
in pool cost and contribution rate in 2013
was largely as a result of North’s own
large grounding and wreck removal claim 0 –0
in South Africa of the MV SMART. 2012/13 2013/14 2014/15 2015/16 2016/17
(Policy Year)

19 ANNUAL REVIEW / OPERATIONAL OVERVIEW www.nepia.com

OPERATIONAL OVERVIEW
Loss Prevention
The focus of the Club’s Loss Prevention team
over recent years has been to work with Members
to reduce the number of claims, particularly high
value claims. The Member Review Programme has
helped evaluate the risk profile of individual Members
and to work with them to improve their systems and
procedures, to minimise the risk of claims in areas
where otherwise they would remain more vulnerable.
The team’s analysis of high value claims indicates
that by replacing poor operational practices with
more effective risk management and ensuring that
procedures are suitably prepared and properly
implemented, the membership should be able to
further reduce the number and risk of such claims.
Crew performance remains an area of ongoing
concern. In addition to the detrimental impact on
our claims, particularly high value claims, it is also
the most critical factor in International Group Pool
claims. The Club’s current crew related loss prevention
initiatives concentrate on improving crew selection,
retention and behaviour in the context of safer and
more effective use of technology, complemented
with a stronger safety awareness culture.
20 ANNUAL REVIEW / OPERATIONAL OVERVIEW www.nepia.com
North remains committed to helping Members
mitigate the risk and incidence of claims through a
comprehensive range of loss prevention initiatives,
publications and general advice. The Club continues
to work with other International Group members,
in particular in the Claims Cooperation, Salvage and Providing legal
assistance
the Large Casualty Working Group Sub-Committees,
to advance the awareness and value of effective
loss prevention. to Members in
difficult trading
FD&D Claims
markets
2016 saw a significant rise in the number of relatively
low value claims under the US$50,000 threshold
and an increase in claims being pursued through to
more advanced stages of litigation, as Members seek
to protect fully their assets in the continuing difficult
trading markets. The challenging economic climate
has resulted in more claims arising from insolvency,
financial pressures or poor cash flow.
Members have also encountered numerous Working with
Members to
unpredictable climate events this year, such as
droughts, flooding and ice movements, which have
led to an increase in delays and groundings. Piracy improve crew
performance
issues and potentially unsafe trading ranges and
routes in known and new risk areas, such as the
Sulu Sea, have also recently proved problematic is high on
for Members. Bunker claims, in terms of both
over-supply and under-supply on redelivery and our agenda
prices to be paid for the same, continue to persist
with the fluctuating oil prices and attempts by
some to use this for profiteering. Claims volumes
are expected to remain high in the year ahead.
INDUSTRY ISSUES
There were a number of significant developments this year within the International Group.
On 18 January 2017, amendments to the Maritime
Labour Convention requiring a shipowner to
have insurance cover for unpaid wages following
abandonment of a vessel came into force. When
these amendments were agreed in 2014, there
was no obvious provider for such insurance cover;
shipowners recognised that the distress the
amendments sought to alleviate was a real one.
Recognising the dilemma, the International Group
and its shipowner members have worked hard
towards providing States and seafarers with a
credible solution to these problems. It is a major
achievement that the Group has been able to
introduce a significant extension to the P&I cover,
at minimal extra cost to shipowners, whilst at the
same time providing States with the comfort of
dealing with a known and credible insurance partner.
It is also gratifying to note that during 2016 the rift
between shipowners and signatories to the Fund
Conventions following the unilateral winding up of
the 1971 Fund has finally been addressed. The risk
that Fund Convention States would not automatically
reimburse a Club, in respect of payments made
on the Fund’s behalf in the course of a large oil
spill presented a real risk to the prompt payment
of compensation to those affected by the spill.
21 ANNUAL REVIEW / INDUSTRY ISSUES www.nepia.com
It is therefore pleasing to record that in December
2016 after eight years of negotiation, the International
Group and the Fund Director concluded an
agreement on the standard terms relating to interim
payments, allowing clubs to resume their practice of
settling claims quickly on behalf of Fund signatories.
The relaxation of sanctions against Iran at the
beginning of 2016 has seen a steady resumption
in trade by non US interests over the course of the
year. At the outset it was realised that because of the
continuation of US primary sanctions, US domiciled
reinsurers participating on the GXL reinsurance
contract would not be able to pay any Iran nexus
claim on the contract. As an interim solution, and to
facilitate trade to Iran by its Members, the International
Group engaged in a series of face to face meetings
with the US government, as a result of which it was
able to arrange a fallback cover that would to an
extent make good any such shortfall in reinsurance
recoveries from US reinsurers. This cover did not
replicate in full the more extensive coverage and
unlimited reinstatements provided under the Group’s
GXL programme and in 2017 the problem posed
by US reinsurers’ inability to pay Iran nexus claim
was finally resolved by replacing their participation
with alternative non US domiciled reinsurers.
Over the past year, the shipping industry began to
grasp the enormity of the threat posed by unlawful
cyber activities. Well publicised data thefts from
high profile companies and individuals, coupled with
press coverage of interference in the US election,
has raised the profile of this form of crime in the
public consciousness. Spam of course is a daily
occurrence but targeted spam – spear phishing –
is becoming increasingly common and the value of
the trades associated with shipping make the industry
particularly vulnerable to this form of attack. Port and
ship infrastructure are today heavily computerised
and, if not properly protected, vulnerable to disruption
for financial gain or otherwise. The hacking attack
on the Port of Antwerp to facilitate a drug smuggling
operation has been well publicised and serves to
illustrate the range of activities associated with
cybercrime. Vessel systems, such as the GPS and
vessel control equipment, if not properly protected
are equally vulnerable.
Unlike many insurance covers, P&I cover in the main
includes liabilities arising from cyber activity. Clubs
recognise the scale of the threat and stand alongside
their Members in their attempts to reduce their
exposure to such attacks. But much of the disruption
caused by a successful cyber-attack often cannot be
made good by insurance and we will continue to look
for ways to assist our Members to protect themselves
against this evolving risk.