Circular 8/97: The International Group Agreement Limit on Cover

TO THE MEMBERS

THE INTERNATIONAL GROUP AGREEMENT LIMIT ON COVER

In 1985, after careful study of the functions and operating practices of the International Group, the European Commission's Competition Directorate, DGIV, granted a formal exemption for ten years of the International Group Agreement (IGA), having satisfied itself that any restrictive elements in the International Group Agreement were more than offset by the benefits provided to shipowners and others by the International Group.

In 1995, the International Group sought renewal of this exemption for the IGA, as it was legally bound to do. In June 1997, DGIV issued a formal "Statement of Objections" (SO) which

a. challenges the necessity of the IGA; and

b. states that the current limit on cover is too high.

Point (b) is in line with arguments set out in a formal complaint lodged with DGIV by representatives of the Greek merchant fleet.

The International Group Agreement

All Club Boards of Directors, including the Board of this Association, have considered DGIV's challenge to the IGA (point (a) above), and have instructed Club Managers to resist DGIV's position on the ground that the IGA is indispensable to the continued existence of claims sharing through the International Group Pool. Club Boards feel that the restraints in the IGA are the minimum necessary to promote the fair sharing of overall costs of the Clubs, bearing in mind that any shortfall in the contributions of a particular Member who is either induced to move or induced to stay by the offer of a reduction in his proper rate must be subsidised by the rest of a Club's Membership.

They feel that without these restraints the highly beneficial pooling and reinsurance system of the International Group would break down. The cost of P & I would rise and the amounts of cover available would fall, and the efficiency of the system of International Group Club guarantees would be lost.

The Club Managers are now striving to urge this case upon DGIV with the assistance of the Group's legal and political advisers. A formal response to the SO must be lodged with DGIV by 16th September, 1997. Meanwhile, very positive support is being received from shipowners and their Associations around the world.

Limit on Cover

So far as concerns DGIV's objections to the current limit on cover (point (b) above), the Directors of all Group Clubs have decided, against the background of the Statement of Objections, that a reduction in the level of individual owners' exposure to overspill calls from 20 per cent of the vessel's limitation funds to 2.5 per cent would provide a level of limitation which should (i) be acceptable to DGIV, (ii) still provide a substantial level of cover to Members (about $2.25 billion above the limit of the International Group's reinsurance contract, currently just over $2 billion), and (iii) set Members' exposure to overspill calls at a level which is tolerable and sustainable.

For this Association, whose Members have for some time supported the Board's call for a realistic limit on cover, this is a positive development. Members will recall from the circular 8/96 of October, 1996 ("Limit on Cover"), and the longer paper "Limit on Cover - Why 4 billion dollars?" issued in February, 1997, that this Association's Board considers a limit of about $4 billion would best represent a realistic balance between shipowners' cover requirements on the one hand, and an acceptable financial obligation on the P & I system and its members on the other.

The limit now agreed is equivalent to about $4.25 billion based on the current reinsurance limit. In endorsing this, the U.K. Club Board recognised the major concession made, for the sake of Group unity, by those Clubs whose Boards had been in favour of maintaining the much higher status quo.

If DGIV are disposed to accept the limit proposal, the necessary Rule changes will be put before the membership for consideration at a General Meeting later in the year.

Further developments will be reported in due course. Meanwhile, further details can be obtained from the Managers' London Agents.