In response to questions about the financial health of protection and indemnity (P&I) clubs in the wake of the Baltimore bridge collapse, the International Group of P&I Clubs (IG P&I) has provided an update on the structure, including details on captive reinsurance and excess reinsurance mechanisms for the 2024 to 2025 policy year.
According to the group, P&I clubs utilize a layered claims-sharing system known as “the Pool,” which spans from US$10 million to US$100 million. Beyond US$30 million, the Pool is reinsured through Hydra Insurance Company Limited, a Bermuda-based segregated accounts company.
Each of the 12 group clubs within the system maintains a separate account in Hydra, ensuring that the assets and liabilities of each are kept distinct from one another. This structure allows clubs to retain premiums that would otherwise be directed to external reinsurance markets.
The overarching reinsurance program, the group general excess of loss (GXL), is activated once claims exceed the Pool’s upper limit of US$100 million. The GXL provides up to US$2 billion in cover across three layers.
The first layer provides up to US$650 million in cover, starting from US$100 million. The subsequent layers provide additional coverage up to the program’s aggregate limit. Notably, Hydra retains a significant deductible within the first layer, evidencing a substantial retention of risk.
In addition to these mechanisms, the group purchases an additional US$1 billion in cover, known as the “Collective Overspill”, to safeguard against claims that surpass the GXL’s maximum limit of US$2.1 billion.
Recent adjustments have also been made to the reinsurance structure in response to emerging risks such as cyber threats and pandemics, including COVID-19. New annual aggregate limits have been set for losses over US$750 million related to these specific risks, with distinct provisions for malicious cyber and pandemic/COVID risks.
The structure also now includes “drop-down” features, where reinsurers in the third layer can extend their coverage to lower layers if needed, ensuring robust protection across all tiers of reinsurance.
The significant exposure presented by the event have caused many experts and analysts to tag the collapse as one of the largest marine losses in history, so much so that S&P has anticipated a possible rise in reinsurance costs.
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