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Operation of the International Group Agreement

Some preliminary thoughts

    One firm of insurance brokers, based in London, says this on their website about the various operating agreements among the P&I Clubs: 

 P&I risks are insured principally through the P&I Clubs, most of which are party to an agreement which restricts the natural competitive forces which regulate commercial insurance markets. The International Group Agreement, the Pooling Agreement, and the P&I Group Excess Loss Reinsurance Contract, are extremely complex. It is not easy to understand how they interrelate. We can help our clients’ understanding by offering an informed view of a market that is both specialist and complex. (Emphasis supplied)

Without meaning to be critical of the effectiveness of this firm, I find this paragraph offensive.  It is both ideologically charged and self-serving  in a way that obscures the real issues from potential clients of the firm.  It also:

  • Assumes that the market is  more "natural" than cooperative forms of business organization and that market forces are a form of "regulation"
  • Ignores the mutual character of the insurance, which is what really distinguishes it from the commercial market
  • Fails to mention that insurance is a regulated industry
  • Ignores the highly competitive nature of the P&I business
  • Attempts to drive a wedge between shipowners and their P&I Clubs by suggesting that things might be better if there were no restrictions on competitive forces
  • Fails to mention the brokers' interest in fostering a market
  • Obscures the fact that the IGA exists to keep the Club managers honest, for the protection of the members

    More to the point, do London insurance brokers really think their clients should agree to be insurers as well as insureds without some protection for rates?

Or do London insurance brokers think that shipowners would be better off without their P&I Clubs?

At present, shipowners are risking their own capital to provide themselves with insurance.  Isn't that a good thing?  Are shipowners deluded amateurs propping up an antiquated system?  Or are they savvy consumers enjoying a historical advantage not available to any other industry?  Do the P&I Clubs bear some responsibility for preserving the minimally regulated, entrepreneurial culture of shipping that has kept far too many sub-standard ships working?  Would shipping look different today if shipowners had to buy their insurance from large publicly held corporations?  Who would benefit from that scenario?

(I don't know the answers to any of those questions.)

 And if the brokers think their clients would be better off without the P&I Clubs, do the brokers think that the insurance market would be willing to take on those risks, and keep losing money, as it has on hull insurance for so many years? 

If you want to discuss these issues further, call me:

John Sandercock
Lester Schwab Katz & Dwyer LLP
120 Broadway
New York , New York , 10271 USA
(212) 341-4479

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