UK CLUB NEWS. Innovation and change. This latest Club News addresses a variety of new and developing issues for our Members.

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1 UK CLUB NEWS ISSUE 37 WINTER 2006/7 New UK Club Directors Nikolas Tsakos, Myles Itkin, Paul Wogan and Kathryn Siggins with UK Club Chairman Tullio Biggi Innovation and change This latest Club News addresses a variety of new and developing issues for our Members. Two key areas arising from the legal and regulatory requirements of Europe are reviewed. Firstly, the establishment of our subsidiary UK Europe in order to obtain the EEA regulatory passport required by some European states and secondly the ongoing development of the future Solvency II regulations. For the latter, we asked for the expert advice of accounting and consulting firm Moore Stephens, which is presented on pages four and five. A short biography of our Directors, newly elected in October, is presented on page seven and demonstrates the continuing high quality commitment by the Members to the direction of the Club. Three specific service issues are covered the Club s new flexible charterer s cover, the extension of online services and the Club s Service Commitment. We now rely heavily on internet-based services and communication to support and inform our Members. Our website at is updated every week with a variety of content including a main editorial on relevant events and developments. We encourage all Members to register with the Club s online services which include a weekly Latest Updates bulletin giving a brief guide to the new content. INSIDE THIS ISSUE PAGE Innovation and change 1 UK Europe 2 Charterers cover 3 Solvency II 4-5 A commitment to service 6 New Directors 7 Mission to Seafarers 8 New online services 8

2 UK Europe A new UK-based Club has been created as a subsidiary to the UK Club that begins with effect from 20th February This subsidiary will provide a route into UK (Bermuda), for Members who need or prefer an EEA passported club. For example, Club Members whose ships fly the flag of certain states, such as Spain and Italy, where local insurance regulations require the insurer to possess an EEA regulatory passport. The rules and cover will be identical for both associations (except for logical amendments) for all Members whether the ship is entered via UK (Europe) or directly in the Association. Management of UK (Europe) will be carried out by the same Thomas Miller staff, using the same systems and following the same procedures and policies. Members will be aware that the Club recently called a Special General Meeting in order to agree the special administrative arrangements required by the establishment of the UK Europe subsidiary. Circular 15/06 provides detailed changes in the Rules and Bye-Laws which need to take effect from 20th February The regulator of UK (Europe), the Financial Services Authority in the United Kingdom, has already approved the new arrangements and UK (Europe) will have the necessary rights to trade into relevant European countries from 20th February For Members from those countries which require their insurance to be placed with a European-based association, it will be necessary for the subsidiary association to collect any insurance premium tax or other taxes required by local national laws. More information Should you have any questions about the new arrangements, please speak to your usual contact or Charles Fenton, Chief Operations Officer of Thomas Miller P&I Ltd. on , charles.fenton@thomasmiller.com UK (Europe) has been created by reinstating the underwriting licence of the Sunderland P&I Club, whose liabilities have been reinsured by this Association since it went into run-off on 20th February Arrangements have been structured between the two associations to run the business of UK Bermuda and UK (Europe) on a unified basis. There will be only one Member of UK (Europe), namely UK Bermuda, and control of the subsidiary will be exercised via that membership. Members who use UK (Europe) as their route into the Club will become Members of the UK Bermuda (as they are at present), although their policy of insurance will be issued by UK (Europe). Charles Fenton, Chief Operating Officer of Thomas Miller P&I Ltd, explained: All assureds will become full Members of the main UK P&I Club in Bermuda, regardless of whether they are routed via UK (Europe) or directly to Bermuda. The only material difference will be whether their policy is issued by Europe or Bermuda. As Members of the UK P&I Club their rights will be identical to those of other Members. The general increase levied will be the same for all Members. They will have the same rights to share in a distribution of funds and the same obligations to contribute to a call for further funds. Frequently Asked Questions Q. What is the need for UK (Europe)? A. UK (Europe) is being created to allow the Club to insure Members whose ships fly the flag of certain states, such as Spain and Italy, where local insurance regulations require the insurer to possess an EEA regulatory passport. Q. Which Club will I be a Member of? A. All existing and future Members will be Members of UK Bermuda. There will only be one Member of the European Club, UK (Bermuda). UK (Europe) will be a mutual Club, as is its parent and positioned as a subsidiary to, and controlled by, UK (Bermuda). Control of the subsidiary will be exercised by this membership. Those shipowners who use UK (Europe) as their route into the Club will become Members of the UK (Bermuda) (as they are at present), but their policy of insurance will be issued by the UK (Europe). Q. What differences will there be in terms of my rights and cover? A. As a Member of UK (Bermuda) your rights will be identical to those of other Members of the Club. The General Increase levied will be the same for all Members no matter which route into the UK (Bermuda) they choose. They will have the same rights to share in a distribution of funds and the same obligations to contribute to a call for further funds. The Rules and cover will be identical (except for logical amendments) for all shipowners even if the ship is entered in UK (Europe). Q. Who is the manager of UK (Europe)? A. Management of UK (Europe) will be carried out by the same Thomas Miller staff as serve Members of UK (Bermuda) using their systems and following the same procedures and policies. 2

3 New Charterers Liability Cover Dr Chao Wu, Legal Director of Thomas Miller P&I Ltd. outlines the key risks to which a charterer is most commonly exposed and for which a new, flexible and extended UK Club cover is now available. A charterer needs standard P&I cover for the same risks as are usually insured by an owner. However, a charterer may need to widen the scope of cover for direct liabilities if he agrees to take on contractual risks that would not fall to him as a matter of law. He will also need cover for liability where he indemnifies the owner for such risks. Direct liability A charterer s direct liability to third parties can arise either in contract or in tort. For example, a charterer will be liable directly to the owner of damaged or lost cargo when he is the carrier under his own bill of lading, or, as may happen in some jurisdictions, if he is considered to be the carrier under an owner s bill of lading. Indeed, some cargo service contracts may be more onerous than the usual standard terms of Hague-Visby. A stevedore, or any third party, who suffers personal injury or property damage may claim liability as a result of the charterer s negligence, e.g. improper description of noxious cargo or a negligent order resulting in injury to a stevedore. Some charterparty terms shift responsibility for negligence during loading or discharging from the owner to the charterer. In certain US and other jurisdictions, a charterer can incur direct and even strict liability for pollution caused by the chartered ship. The United States Oil Pollution Act 1990 (OPA 90) provides that any person owning, operating or demise chartering the vessel may be liable. Although, a time charterer should be liable under OPA 90 only if they are the vessel operator individual US states have enacted legislation potentially targetting a time charterer as a transporter of oil, person having control over oil or person taking responsibility. A further hazard is some states, e.g. Alaska, impose strict liability for pollution on cargo interests. Manifest System Regulations hold the controller of the vessel liable. Determining ports of call, controlling loading and discharging cargo even knowledge of cargo information are sufficient grounds for responsibility. Indemnification of owners A charterer has an obligation to indemnify the owner for third party liability resulting from breaches of the charterparty or other activities which are the charterer s responsibility. Breach of a safe port or berth warranty could result in P&I liabilities such as cargo loss or damage, personal injury, pollution, or even wreck removal. Whilst a charterer will rarely be liable for the owner s crew, he may have to indemnify the owner for liabilities towards stevedores and other such personnel. Owners require indemnities for property damage or personal injury arising from the carriage of dangerous cargo. Even if cargo has not been properly declared by the shipper, the charterer remains liable to the owner for such severe consequences as cargo damage, death or personal injury, pollution, or wreck removal. Such consequences can arise from bad stowage for which a charterer can also be liable to indemnify the owner. Charterer responsibility to supply bunkers to the vessel will usually include indemnifying the owner for any damages resulting from the supply of off-specification bunkers or from the failure of the ship to meet maximum sulphur content requirements of an applicable emission control zone. Although most countries (excluding USA) are party to the Civil Liability Convention (CLC) where tanker pollution claims are channeled to the shipowner, the cause of the pollution may be the charterer s responsibility, e.g. an unsafe port situation, obliging him to indemnify the shipowner. Damage to Hull The standard P&I cover that is provided to shipowners excludes cover for damage to the entered ship. However, for the charterer, such cover can be important because of the variety of ways in which a charterer may become liable for damage to a ship. Situations which give rise to traditional P&I liabilities are also situations where the chartered ship may be damaged, for example, by stevedores, poor stowage or caused by the nature of the cargo itself. Substantial damage can arise from failure to provide a safe port or berth or damage to ship s engines from off-spec bunkers. The costs of general average and salvage contributions in respect of loss or damage to the ship may be recoverable from the charterer. For more information A comprehensive brochure explaining this cover is available from the usual Club contacts, including the Club website. A charterer held to be a carrier can be subject to fines. The US Automated 3

4 Mutual appreciation of Solvency II requirements The slogan of the EU Single Market is Fewer Barriers, More Opportunities. The doctrine is well-intentioned, but tells only part of the story. Michael Butler, Partner at Moore Stephens LLP, tells us the rest. estimating, reinsurance (and other risk mitigation techniques), and safety measures and solvency control levels applied by the regulators. FSA Insurers which come within the ambit of the FSA in the UK and that includes nearly half of the International Group of P&I Clubs will be no strangers to stricter financial regulation. In most respects, the FSA is several steps ahead of the EU. Single markets produce singular problems. Replacing with one, single body of regulation the various sets of rules which previously governed a number of individual markets cannot hope to embrace all the national characteristics, customs and sometimes even jealously guarded loopholes of the original rules. Loss of individuality is an inevitable consequence of harmonisation, the price to be paid for attaining the aspirational level playing field. But the price may be deemed worth paying if the end result is increased security. The single financial services market in Europe is a case in point. Harmonisation of the regulatory approach to the supervision of insurers is part and parcel of the development of the European single financial services market. Minimum solvency standards have already been harmonised through the implementation of the Solvency I Directive. Fundamental review Now we are well into the process of implementing Solvency II, which has been in the making since It is a fundamental review designed to establish a revised set of EU-wide capital adequacy requirements for the insurance industry. Solvency II is based on the principles of the Basel II Accord developed for banks, and especially on the second pillar of Basel II, which provides for, Supervisory review of capital adequacy and internal assessment processes which involves the establishment of a framework of management, governance, systems and operational processes. Solvency II represents a radical change to the way in which the insurance industry is regulated in Europe. Its requirements are intended to help protect the interests of policyholders more effectively. Although it is not expected to come into effect before 2010, at the earliest, it is incumbent on the insurance industry to familiarise itself now with the issues at stake, in order both to protect its competitive position and to remain aware of any wider rules and alternative principles that may arise from the ongoing Solvency II debate. Solvency II will demand more sophisticated and analytical thinking on capital, risk and internal controls. It will also demand more robust transparency, particularly with regard to the unbiased reporting of insurance liabilities and assets. In particular, insurance companies may need to strengthen their modelling abilities and the documentation of financial models which will underpin a Solvency II approach. Consistency The intention is that Solvency II will replace existing European directives covering the prudential regulation of insurance. At the moment, conduct of business rules are used as a primary tool in each member state, resulting in a general lack of common market principles. Prudential standards are often neglected and subject also to each member state s interpretation and individual legal process, resulting in different statutes across different countries. Capital and risk management standards, in particular, are notable for their limited consistency. Solvency II will encompass prudential regulation issues, such as: adequacy of capital; quality of reserves and assets covering them; systems and controls; and reporting obligations. It is also therefore likely to involve reconsideration of technical provision The FSA has earned a reputation for exceeding the minimum standards set out in EU directives, and for adopting a one size fits all and super-equivalence approach, whereby smaller insurers are required to meet the same standards as large composites. This is frequently cited as one of the main reasons why large sectors of the UK insurance industry are seen as uncompetitive when viewed alongside insurers operating in other less stringent regulatory environments. FSAregulated insurers have already been required to meet Enhanced Capital Requirements and to develop their own Individual Capital Adequacy Standards, based on principles similar to those that seem to be developing under Solvency II. From this, it may be deduced that UKregulated insurance entities should not find anything to fear in Solvency II. For others in Europe, however, this may not be the case. There are clear signs that many of the senior players in the insurance industry in some parts of the recently enlarged and still growing European Union are only now waking up to some of the more onerous implications of Solvency II. In particular, there seems to be a feeling that less stringent rules something more than the minimum capital adequacy requirements of Solvency I, but something rather more formulaic than the current Solvency II proposals would be more appropriate for smaller insurers. Niche markets The views of Charlie McCreevy, the European Commissioner for Internal Market and Services, may provide some encouragement. Mr McCreevy told a Solvency II conference in Brussels recently, We need to keep in mind that Solvency II will apply to some 5,000 insurance and reinsurance companies in the EU. The majority of these companies are small and medium-sized. 4

5 Solvency II should not be so sophisticated that it is no longer accessible to these companies. The standard formula which is being developed now should therefore not be too difficult to apply. With regard to smaller insurers, we want to take the proportionality principle extremely seriously. We have no intention of introducing excessive and unwarranted requirements on smaller firms. Not only do we want to put the proportionality principle clearly into the framework directive as a guiding principle for action by supervisors, but we are also sympathetic to the recommendation of the Committee on European Insurance and Occupational Pensions Supervisors (CEIOPS) that all insurance under-takings which are exempted from the current Solvency I regime should be exempted from Solvency II as well. Mr McCreevy concluded, I do not want to see an insurance market entirely dominated by large players. We need to ensure that small and medium-sized insurers which offer excellent services in a particular niche market can continue to offer their products and flourish. There must be a way in which the standard formula can take care of this issue. The recent capital proposals put forward by CEIOPS advocate three tiers of capital that are eligible to cover the solvency requirements. Tier 1 capital includes all the highest-quality components, such as retained earnings, reserves and shareholder equity. Tier 2 includes capital components such as perpetual cumulative preference shares and perpetual subordinated debt. Mutuals Most relevantly for mutuals, a new insurance Tier 3 capital has been proposed to recognise eligible contingent capital, including the right of mutual insurers to make supplementary calls on their members. The ability of Tiers 2 and 3 to cover solvency requirements is clearly comparatively limited. So the need for a strong Tier 1 which, for mutuals, means strong free reserves is evident. There is still some way to go before the Solvency II regime becomes clear cut. A first draft of the Directive is expected in July Given that it will take up to two years to implement the regime once it is finalised, it is likely to be somewhere between 2010 and 2012 before Solvency II becomes binding. Those Clubs that have achieved FSA compliance should not find anything more stringent in Solvency II. Indeed, in my experience, FSA and other regulated Clubs which have implemented their own capital adequacy models have demonstrated that free reserves built up over the last few years and those forecast ahead should provide sufficient capital. Independent regulation should make the market stronger, and more secure. All insurers, mutual or otherwise, should welcome that, and no well-founded and well-funded insurer should have anything to fear from Solvency II. Michael Butler, Partner, Moore Stephens LLP Insurance Industry Group, has worked extensively with P&I Clubs, Lloyd s brokers and managing agents for over 30 years. He also specialises in regulatory and taxation matters for mutuals. Moore Stephens LLP is recognised as the leading accountant to the P&I sector and it s insurance clients also include other mutuals, London underwriters, reinsurance companies, and London market and retail brokers, to whom it provides advice on a wide range of issues, including loss reserving, taxation, solvency and regulatory compliance, management information systems, litigation support and forensic accounting. Editor s notes A dedicated website on Solvency II has been produced by the International Underwriting Association of London (IUA). This site provides useful guidance on various aspects of Solvency II including a glossary of the technical terms used. Visit The UK P&I Club is regulated in a number of countries, specifically in the UK by the FSA. The Club has complied with the FSA s Enhanced Capital Requirement (ECR) and Individual Capital Assessment (ICA) requirements. The subsequent receipt of the Individual Capital Guidance (ICG) marked the successful completion of that process. The Club is engaged together with the International Group in the development process of Solvency II. Countdown to Solvency II End of Quantitative Impact Study No.2 CEIOPS conference in Frankfurt First Draft of Solvency II Directive Results of QIS2 sent to European Commission Second Draft of Solvency II Directive Quantitative Impact Study No.3 Final Draft Legislation EC legislative proposal published / start of discussion by EU parliament Earliest date for incorporation into EU law Completion of details of new regulations Adoption into laws of EU states Implementation arrangements made by national regulators and insurers New regime begins 5

6 A commitment to service What can Members can expect from their dealings with the Club, both in general terms and specifically on underwriting, claims and loss prevention matters? One of the service initiatives agreed by our Board in the Club s current Corporate Plan is a Service Commitment. The terms of this commitment are set out in the panel below. The Service Commitment GENERAL 1. Our dealings with you will be conducted with integrity The service commitment is intended to set out what Members can expect from the Club, in terms of their dealings generally and on underwriting, claims and loss prevention matters specifically. 2. We will strive to maintain the Club s leading position in terms of influence and innovation and be prepared to embrace change 3. We value feedback on our performance and will deal with it constructively and promptly. We will also actively seek your feedback on a sample of cases UNDERWRITING 4. We will charge you a fair, transparent and competitive rate for the risk you bring to the Club 5. We will provide you with a comprehensive explanation of the risks covered by your entry 6. We will make available to you Certificates of Entry and other documentation within 24 hours of confirmation of entry 7. We will reply to all enquiries with the Club within 24 hours of receipt CLAIMS 8. We will give you, as soon as it is possible to do so, an assessment of the likely result on a claim, together with an indication of the cost of achieving that result. We will then work with you to resolve the claim 9. We will reimburse authorised claims within 10 days 10. We will provide you with an explanation of any items of a claim not recoverable from the Club 11. We will make your claims information available to you via the website and will work generally to increase the information available to you via the web 12. We will estimate the claim on your record on the most likely outcome basis LOSS PREVENTION 13. We will provide you with loss prevention advice in order to minimise your claims exposure 14. We will, at your request, review your claims experience, produce a report and review the findings with your insurance and operations staff to identify claims trends and suggest loss prevention solutions 15. We will give you prior notice before one of the Club s ship inspectors visits your ship and will provide you with a copy of their report thereafter. It provides Members with a benchmark against which they can compare the service they receive. The commitment has been put together based on feedback received from Members on what is important to them in their dealings with the Club. Some of the commitments, for instance payment of claims as quickly as possible, have long been regarded as important. The commitment is to make reimbursement within 10 days of authorisation. Others reflect recent feedback. A notable example concerns loss prevention advice. The Club has received a number of requests recently to assist Members in understanding and managing the risks generating claims on their record. Item 14 of the service commitment covers this aspect. The managers intend to review the service delivered by the Club with each Member over the course of the next twelve months. Action plans will be agreed to ensure each Member is receiving the standard of service they are entitled to. The managers will proactively seek feedback on the quality of the Club s claims service (including the service provided by suppliers employed on Members behalf and their overall satisfaction with the result of the case). Members will be asked for their comments on the closure of cases. A database to compile this feedback centrally in the Club will be in operation early this year. We welcome any comments you have on the commitment, either in terms of the service you receive or on the terms of the individual commitments themselves. Please direct your comments either to your usual contact at the Club, or alternatively to Charles Fenton, the Chief Operations Officer (charles.fenton@thomasmiller.com) 6

7 Profile of the new UK Club Directors Lone Fønss Schrøder Wallenius Lines Mrs Lone Fønss Schrøder was appointed President of Wallenius Lines in Prior to this, Mrs Fønss Schrøder was Chairman at Kvaerner ASA and worked for A.P. Moller-Maersk for twenty years. She is a member of several boards, including Wallenius Wilhelmsen Lines and United Car Carriers AS. Kathryn Siggins Northstar Group Holdings Kathryn Siggins is Vice President of Northstar Group Holdings, Ltd., a Bermuda based life and annuity reinsurance company. Mrs Siggins spent thirteen years with the Bank of Bermuda in their Global Fund Services Division, she also served as General Manager of the Bank s Dublin office. She is a Fellow of the Institute of Chartered Accountants and has served as Past President of the Institute of Chartered Accountants as well a numerous boards and committees of the Bermuda and Canadian Institutes of Chartered Accountants. Nikolas Tsakos Tsakos Energy Navigation (TEN) Limited Mr Nikolas Tsakos is President and CEO of Tsakos Energy Navigation (TEN) Limited. Mr Tsakos has been involved in ship management since Prior to that, he spent two years at sea gaining hands-on experience. From 1982 to 1985 he was Shipping and Operations Manager of Tsakos Shipping and Trading Ltd in the USA. Mr Tsakos is an active member of many maritime organisations including HELMEPA, INTERTANKO and the Union of Greek Shipowners. Myles Itkin Overseas Shipholding Group Mr Myles Itkin is Senior Vice President, Chief Financial Officer and Treasurer of Overseas Shipholding Group. He has a professional background in strategic planning and corporate finance functions. Prior to joining OSG, Mr Itkin was with Alliance Capital Management L.P. as Senior Vice President of Finance. He previously served as Vice President of Finance at Northwest Airlines, Inc. Paul Wogan Teekay Tanker Services Mr Paul Wogan is President of Teekay Tanker Services. Prior to joining Teekay, Mr Wogan was CEO of Seachem Tankers. He holds a first class honours degree from Exeter University and has twenty years of experience in the shipping industry with several years at the highest level. He is a Board Member on the International Tankers Owners Pollution Federation Ltd. 7

8 The Mission to Seafarers The UK Club has made a Christmas donation to The Mission to Seafarers. This donation was in place of Christmas cards. This organisation cares for seafarers of all nationalities and creeds, in some 300 ports around the world. The organisation maintains a network of chaplains, lay staff and volunteers who offer seafarers a welcome, friendship and practical and spiritual help. Details of their work can be obtained on the web at: and pr@missiontoseafarers.org Thomas Miller staff would like to wish all Club members and friends a happy and prosperous Online and Updates This year, there has been a major revision of the Club s web-based services. There is a new Underwriting Online service which enables Members to create electronic copies of their policy documentation for download and printing. This documentation includes both the individual ship s Certificate of Entry and the Blue Card the ship s evidence of P&I cover under the Civil Liability Convention. In addition to their documentation, Members can access the latest report on their loss record, showing the balance of premium and claims over the past eight years as well as the progress of the current year. Members can still interactively compile copies of their loss record (as at 23rd October 2006) via the Club s Renewal Online facility. The Club is engaged on a long term process of researching Members needs and then implementing web-based solutions to make service provision effective and immediate. For example, we anticipate more interactive underwriting services being introduced in the near future, such as charterers and US oil voyage surcharge declarations. In addition to these specific service developments, the Club website has been extensively redesigned to aid easier and quicker navigation of the wide range of resources made available to Members, with enhancements in areas such as password security and faster and more frequent updating of content. Members who register on the website receive a short weekly bulletin every Friday entitled UK Club Latest Updates. The update is now sent as either a text version or a full HTML where registered users can view images and content without having to first visit the site. As the website is updated on a daily basis, this provides users with a snapshot of all the latest information on the site including essentials such as the emergency and after hours contact numbers for the coming weekend. UK Club News is published by Thomas Miller & Co Ltd International House 26 Creechurch Lane London EC3A 5BA Tel: Fax: Editor: Nick Whitear Tel: Fax: nick.whitear@thomasmiller.com Thomas Miller P&I Ltd Tel: Fax: Thomas Miller (Hellas) Ltd Tel: Fax: /8 Thomas Miller (Americas) Inc Tel: Fax: Thomas Miller (Hong Kong) Ltd Tel: Fax: