NU Online News Service, Jan. 2, 2:12 p.m. EST

The protection and indemnity market, a broad type of marine legal-liability coverage, delivered a blockbuster financial performance last year, but poor investment returns and increased claims will spell premium increases for 2012.

In a 50-page "2011 Protection and Indemnity market report" issued by Willis Group Holdings, the insurance broker says the 2010-2011 period was benign for claims compared to the previous year.

Paid claims were down more than 11 percent against 2009-2010, although the report notes claims are still high in this market.

When combined with stable income levels, P&I produced an overall market-underwriting surplus of 3 percent, the highest underwriting profit ever recorded by the market.

Meanwhile, a respectable 6.5 percent investment return, which, combined with the positive underwriting result, propelled free reserves to a new record level at Feb. 20, 2011. This represented a 22 percent increase from the position at the end of the previous year, says Willis.

Nevertheless, Willis reports that 2012 renewals will see an average rate increase of 4.25 percent versus the 3.42 percent average rise in 2011.

The increases have been triggered primarily by the dramatic fall and subsequent fragility of world-equity markets since August 2011, and increases in claims and their volatility in the current policy year.

“These factors have produced a climate of apprehension within a number of clubs [mutual insurance underwriters],” says the Willis report. “With no realistic expectation of anything better than nominal investment returns, the pressure to balance the underwriting result is inevitably increased.”

Ship operators are facing one of the most challenging economic periods in a generation, with many of them forced to implement austerity plans. As the Feb. 20, 2012 renewal approaches, the pressure to cut costs is likely to create tensions between buyers and underwriters, says Willis.

Commenting on the report, Ben Abraham, Head of Willis P&I and author of the P&I Market Review, says in a statement, “When faced with decisions that potentially affect the survival of their companies, the pressure on most ship owners will be at least as great as that on their underwriters.  Despite the relatively modest increases proposed, the 2012 renewal has all the early signs of being confrontational.”