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Dec 11, 2023
Lockton Edge

“To merge or not to merge” - On scale, capital usage and risk retention

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1st January 2024.

The EU ETS is limited by a 'cap' on the number of emission allowances. Within the cap, companies receive or buy emission allowances, which they can trade as needed. The cap decreases every year, ensuring that total emissions fall.

Each allowance gives the holder the right to emit:

  • One tonne of carbon dioxide (CO2), or;
  • The equivalent amount of other powerful greenhouse gases, nitrous oxide (N2O) and perfluorocarbons (PFCs).
  • The price of one ton of CO2 allowance under the EU ETS has fluctuated between EUR 60 and almost EUR 100 in the past two years. The total cost of emissions will vary based on the cost of the allowance at the time of purchase, the vessel’s emissions profile and the total volume of voyages performed within the EU ETS area. The below is for illustration purposes:
  • ~A 30.000 GT passenger ship has total emissions of 20.000 tonnes in a reporting year, of which 9.000 are within the EU, 7.000 at berth within the EU and 4.000 are between the EU and an outside port. The average price of the allowance is EUR 75 per tonne. The total cost would be as follows:
  • ~~9.000 * EUR 75 = EUR 675.000
  • ~~7.000 * EUR 75 = EUR 525.000
  • ~~4.000 * EUR 75 * 50% = EUR 150.000
  • ~~Total = EUR 1.350.000 (of which 40% is payable in 2024)
  • For 2024, a 60% rebate is admitted to the vessels involved. However, this is reduced to 30% in 2025, before payment is due for 100% with effect from 2026.
  • Emissions reporting is done for each individual ship, where the ship submits their data to a verifier (such as a class society) which in turns allows the shipowner to issue a verified company emissions report. This report is then submitted to the administering authority, and it is this data that informs what emission allowances need to be surrendered to the authority.
  • The sanctions for non- compliance are severe, and in the case of a ship that has failed to comply with the monitoring and reporting obligations for two or more consecutive reporting periods, and where other enforcement measures have failed to ensure compliance, the competent authority of an EEA port of entry may issue an expulsion order. Where such a ship flies the flag of an EEA country and enters or is found in one of its ports, the country concerned will, after giving the opportunity to the company concerned to submit its observations, detain the ship until the company fulfils its monitoring and reporting obligations.
  • Per the EU’s Implementing Regulation, it is the Shipowner who remains ultimately responsible for complying with the EU ETS system.

There are a number of great resources on the regulatory and practical aspects of the system – none better than the EU’s own:

Lockton Global Marine during the autumn held a series of discussions in Bergen, Oslo and Copenhagen. Attendees included many shipowners as well as representatives from the legal and banking community. Each meeting included a Q&A session on the pressing topics in the P&I sector. The subjects of our interview sessions included Audun Pettersen – Chief Underwriting Officer Gard, Greg Thomas – Chief Business Development Officer Skuld, Paul Jennings and Jeremy Grose – Joint Managing Directors at NorthStandard.

Ahead of each meeting the sources quoted below had received Lockton’s questions and had an opportunity to prepare. Although the executives were interviewed separately and in different locations, the questions were fundamentally the same. In this and subsequent articles we shall be sharing the comments provided to Lockton questions.

It should be noted that the three clubs interviewed are respectively number 1, 2 and 4 in the International Group measured in revenue. As such the view expressed are significantly made from a large club perspective. By the same measure the three clubs simultaneously represent 48.5% of the International Group membership.

The interviewer was Lockton’s Stephen Hawke, Managing Director Lockton PL Ferrari, London.


Stephen Hawke (Lockton)

“Given that as a result of the North Standard merger there are now 12 clubs would further consolidation via acquisitions mergers or absorption  of the smaller clubs create a stronger market both in terms of financial stability but also in terms of competition?”

If we get more competition it is going to make us better.

Audun Pettersen (Gard)

“From a general point I think it is a plus. I think mergers in the P&I business is fine! I think that’s a good thing for the Group that we consolidate. If we can have more that is probably an advantage to the group. And the North Standard merger is going to bring more competition onto the table, which is good. If we get more competition it is going to make us better. That sharpens everyone so I think that is a good thing. It’s a little bit awkward the way it is now where about 40% of the International Group is with 2 clubs, so probably a little more competition would be good.”

It's all about the culture.

Greg Thomas (SKULD)

“I think we have said for several years that we're open to the idea of merging with a suitable partner. And I'm not giving any secrets away here. But obviously, most clubs at different times have spoken with potential dancing partners. It's all about the culture. And if you can't find the right dancing partner, then I think there's no point in forcing that marriage to happen. Which perhaps has been the case historically, with some of the other comings together that we've seen in the wider commercial insurance market. This is the first mutual romance and marriage. We're open to it. But we've got to be very clear with ourselves as to what would come out of it. What's in it for us? What's in it for our members? So, we're happy dancing on our own at the moment at the silent disco. We've got quite a good story. We've been doing a lot of work in our growth strategy, which seems to be working quite well. And as a consequence of that, we start to get our own scale now. And I think what you see is a  change in the dynamics of the market, as a consequence of the moves have been made by NorthStandard. Their assets, which are just short $800 million overall, I think in terms of global income. We expect to be at 550 global income this year. That gives us some degree of scale. And scale has a calming effect on some of the operational blips that might have otherwise been more of a challenge if your income was half the size as of what we are now.”


Stephen Hawke (Lockton)

“Do you use  underwriting models and data analysis. To what extent is your underwriting data driven?”

…being large helps us a lot.

Audun Pettersen (Gard)

“I think being large helps us a lot. Because of our scale the amount of data that we can gather is quite substantial. On P&I we will have around 8,000 ships, on the H&M side we are talking about 17,000 ships that we have some sort of cover on, so we are covering quite a large part of the global fleet. And so being able to deep dive into that data puts us in a position where we can have a pretty good overview of the risks that we are writing and what the cost should be. Of course, having said that, basically we have to have a view of what is going to happen in the future, and that we do on where claims trends are going. And then you have the unknown like what has happened in the world lately, and that is why you have reserves.”

we've collected enough data now to really accurately assess…

Greg Thomas (SKULD)

”I agree, and we have a tool that we've been using for the best part of 25 years, which has obviously been enhanced a little bit over the past few years. So, we're very data driven and that's across all classes. That's P&I, Hull and energy and we've collected enough data now to really accurately assess by vessel, by vessel type, by region. This enhances the predictability of what we're going to offer terms on, and whether it's in our interests to bring that client or member into Skuld as well.

Risk of supplementaries

Stephen Hawke (Lockton)

“How does scale, apart from data analytics, help to manage the possible but unlikely (for the clubs attending our discussions) risk of unbudgeted supplementary calls?”

If you are not able to grasp that risk, it is very very difficult to be successful.

Audun Pettersen (Gard)

“I think it really helps a lot. But I think the likelihood of supplementary calls, effectively cash calls, is extremely slim. The resources that we have in place, the reserves we have, should basically cater for that. And also the analytics that we have put together internally puts us in a different spot when it comes to assessing claims. Personally, for the 20 years that I have been in the club, that is the biggest difference from when I started in Gard and where we are now. Having that sort of a grip on what we are doing risk wise, and knowing what we write and how that is going to be priced, that is a key to success. If you are not able to grasp that risk, it is very very difficult to be successful.”

…it gives us a chance to ride the volatility which becomes less extreme for us as we’re a larger unit.

Paul Jennings (NorthStandard)

“We felt, and our Board agreed that we did need more scale. The rationale being in terms of finances etc it does give us more stability; it gives us a chance to ride the volatility which becomes less extreme for us as we’re a larger unit. And the other thing about scale that perhaps isn't always appreciated, and is massively important to us, is we've got a much larger scale of expertise. And that is available to our combined memberships. So, scale is important in two senses, one it does give us the ability to model better to take away some of the volatility, and simultaneously it gives us a far larger expertise base.”

…are we going to be in a position to be able to buy the reinsurance that we need going forward?

Jeremy Grose (NorthStandard)

“One of the things that was on my mind two or three years ago was, are we going to be in a position to be able to buy the reinsurance that we need going forward? I was thinking particularly for the type of risks that are outside the pool. Having a larger organization, where you're able to go into the market and be better able to get the best deals was really important and that's something that that scale definitely delivers.”

We've chosen to follow a path of diversification…

Greg Thomas (SKULD)

“We've chosen to follow a path of diversification, to help out with those times when the mutual book doesn't really stack up on its own. So as a consequence of having a diversified portfolio, we are in a position to play a slightly different game to some of our peers in the market. And I think the balance that we have as a consequence of having a very large commercial portfolio and a very large growing mutual book, also gives us the ability to obviously take into account what the regulator and S&P are looking for.

It takes away some of the extra volatility that might otherwise be in the figures, and makes us a bit more predictable.”

“Cross promotion is very much a core part  of our activities, one of our focal points for growth.”

…you still need capital to underwrite.

NorthStandard was sympathetic to this strategy of diversification but  offered a word of caution “Firstly, you're not guaranteed to get a profit because you're entering a very competitive commercial market, where the value of service might not always be appreciated in the same way it is within the mutual system. And secondly, you still need capital to underwrite.”

Commenting finally on unbudgeted supplementaries that have recently been levied by other clubs Jeremy Grose (NorthStandard) noted that whilst there was strong loyalty to some of the smaller clubs “I sense that that is waning” and continued to observe that for the larger clubs “it just can't be part of our model”.

Risk retention

Stephen Hawke (Lockton)

“How much easier would it be for you as clubs to manage your risk if you could have a higher retention than $10 million? Or $20 million or  even higher. Would that make your ability to deal with the finances of the club, the underwriting of the club and predictability easier? Or is $10 million still a good figure? Because it's been at $10 million for years..”

…what is a good idea for Gard might not be a good idea for the clubs of smaller scale…

Audun Pettersen (Gard)

“I think so. I think it could also be better use of the capital of the International Group. Because what is a good idea for Gard might not be a good idea for the clubs of smaller scale in the group when it comes to use of capital. We would like to take big retentions because it makes sense for us financially, but if you don’t have the financial muscle to do so it does not make sense. So that’s a bit of a dilemma within the International Group especially when it comes to the pool and the retention level.”

I wouldn't be very supportive of increasing the retention for us.

NorthStandard disagreed with this premise, Jeremy Grose commented “I wouldn't be very supportive of increasing the retention for us” and proceeded to note that it could cause some of the smaller clubs to be driven out of business.

We see the extra scale, we've got the ability to take more risk.

Paul Jennings agreed stating “it would put huge, I would imagine, competitive pressure on clubs with less capital and less premium than us, for example. Now, you can argue for inflation increases maybe 10 should go to 11 or 12. I think it's been seven or eight years since we had an increase. I think we can all argue for that, but as a tool to be able to manage your capital risk better, I think that's a smokescreen for “we don't want to pay other clubs’ pool claims.”

Responding to a question from the audience which noted that a larger capital base allowed higher risk retention, could the foregoing be seen as an indication that NorthStandard would instead pursue a strategy of increasing breadth of cover, Paul Jennings commented “We see the extra scale, we've got the ability to take more risk. So ultimately, our goal would be to buy less reinsurance and take more risk.”

Lockton commentary – what are the Clubs saying?

Firstly, it should be noted that two of the three clubs are themselves results of mergers, so it is perhaps not entirely surprising that they would see scale as a boon. However, also Skuld, who has grown to a size 3/4ths to that of NorthStandard, considers scale an advantage. Their growth comes from a strategy of diversification, yet they remain open and are positive to merging if the fit is right. Gard wanted more mergers, since they believed it would benefit the International Group and increase competition to the benefit of members.

So, with consensus between the three clubs on the benefits of scale, there was wider disparity on how scale comes to benefit clients. All clubs interviewed pointed to the importance of data to inform underwriting decisions and strategies and how these factors clearly were reinforced as the number of data points increased. There was furthermore agreement that scale (be that as a consequence of mergers or from diversification) was likely to reduce volatility.

However, when it came to leveraging the increased capital that scale provided, there was little consensus on how this could be best achieved; Gard (already a multi-liner) was of the view that an increase in club retention was desired so that underwriting at the crucial lower levels could be carried out by the individual clubs on their own criteria, unimpeded by reinsurance requirements, and thus increase competition. Skuld, by implication, had already used their scale to diversify into the marine and energy physical damage segments. NorthStandard was of the view that an increase in retention was not desired since it could have the effect of driving some of the smaller clubs off the market and thus reduce competition. However, NorthStandard also pointed out that their merger was relatively recent and that ultimately the club would be aiming to take more risk. Simultaneously, it offered a word of caution on diversification into other marine segments noting that this posed its own risks and was not guaranteed to be successful.

Lockton Global Marine has also recently published the 2023 P&I Market Review. For further information, please visit the Lockton Protection & Indemnity page, or contact:

Stephen Hawke
Managing Director Lockton P.L. Ferrari, London
Tom Midttun
Head of Production Global Marine