Insurance Day interview: Charles Fenton chief executive, and Andrew Kemp, EMEA regional director, TT Club

Transport Mutual Insurance Services Ltd (better known as the TT Club) is the leading provider of insurance and risk services to the transport and logistics industry. Managed by Thomas Miller it is part of a stable of mutual insurers including UKP&I, UK Defence, UK War and Hellenic War Risks Clubs. Although similar to other marine mutual insurance organisations such as the Protection and Indemnity (P&I) clubs, there are also a number of important differences.

The TT Club provides insurance cover to its members on a mutual basis. But while the membership of the P&I clubs are mainly composed of ship owners or operators, the membership of the TT Club is significantly more diverse. In addition to the ship operators, the Club also provides insurance cover to logistics operators; road, rail, air and sea freight operators; port authorities, container terminals; bulk facilities; cargo handling facilities; container and equipment lessors; fixed operators and road hauliers, and since 2010 has also offered a cargo product. The Club insures 80% of the world's containers and has insurable interests in 30% of the world's ports.

Charles Fenton, the TT Club's chief executive, says the profile of the Club's membership changed over the course of a number of years. For example, when the TT Club was established in 1968 to address the need for a new kind of insurance cover in the shipping industry created by the growing phenomenon of containerisation, its membership was pretty much the same as that of the P&I clubs. "For the first five years, by far the major part of the Club's membership was ship operators. But they started to extend their operations and began to run terminals and provide logistic and other services so the Club evolved its range of covers and services inline with their extended activities. Of course, the membership gradually came to include non-shipping companies engaged in a single activity such as managing a port, a terminal or transporting goods inland."

Back in 1968, a particular risk management challenge for ship operators, according to Andrew Kemp, the TT Club's regional director for Europe, the Middle East and Africa, was to obtain adequate insurance cover for transporting sealed containers. Although containerisation, transporting cargo in a single steel box using several modes of transport, had been gaining momentum since the early 1950s, it only became clear by the middle 1960s, that it was not only there to stay but that it would take off globally. "But a particular issue for the ship operators was the hull insurance market would not insure the containers as part of the hull, while the cargo insurance market would not insure them as part of the cargo." The P&I clubs, for their part, were not comfortable with having any exposure on land as the containers, once offloaded from the vessel, were transported further inland by road, rail or river.

Fundamental

Significantly, the TT Club is not member of the International Group of P&I Clubs that collectively cede their excess of loss reinsurance into a common pool and thereby obtain preferential rates and conditions from the international reinsurance markets. According to Fenton, this sets the TT Club apart from the International Group P&I clubs quite fundamentally. "But we were founded out of the P&I world by people who managed the clubs and so our model is broadly the same and objective is the same as those clubs-to provide great service and the lowest sustainable price. We continue to be heavily involved with ship operators and in many ways they are at the heart of the Club but, over the years, as the Club has grown, we have focused our new business efforts on ports terminals, and logistics. Ship owners were our founding patrons and the shipping industry is still very important to us. Of all the sectors we are involved with, ship operators in particular understand how the mutual model works, continue to value the service the Club provides to them and are the market sector in which the Club has a very large market share. But while the services we provide to our ship operator members continue to develop and while we hope to grow as the ship operators themselves grow, the bigger part of our future growth will come from the other sectors. So, in terms of the sorts of risks we write, we are now focused on property and liability risks on terminals, whether fixed or mobile and in third party liability risks for logistics operators."

Kemp says there has been a notable transformation in the risk portfolio of the TT Club. "In the early 1970s, we were focused on the physical loss of or damage to the container only. However the product range has developed in line with the changing needs of the international transport and logistics market. A lot has changed since the 1970's when everything was pretty straightforward, with standard trading conditions that people respected. We have seen a big change in the legal frameworks and the responsibilities that shippers are trying to transfer to transport and logistics operators. Consequently we are now providing a much wider range of covers which also includes the cargo itself."

Anniversary

Despite responding to the changing needs of the industry, the TT Club which celebrated its 45

^th

anniversary last year, remains firmly attached to the principles of mutuality. "The majority of our business is written on a mutual basis although we do have a small number of risks that are written on a non-mutual basis with the service delivered to fixed premium members is the same as that provided to mutual". Fenton says "A key benefit that comes from being a mutual is that we are not focused on creating profits for shareholders. Ours is a very different model which concentrates on building strong and enduring relationships with Members. Relationships that ensure we really understand how Members businesses operate, the challenges they face and which enable us to tailor our service to directly benefit their businesses.

The TT Club does not make a supplementary call or charge (in addition to the annual subscription paid by its membership, the equivalent of a premium payment in the commercial insurance market) to replenish reserves in years when the loss experience is unexpectedly high.

According to Kemp, the Club's position on supplementary calls was something which, in addition to the particular nature of the portfolio of risks written by the Club, also evolved along with the change in the profile of the membership. "When the Club started out, a supplementary call was familiar to its ship operator membership. In those days it was acceptable to shipowners and regulators for clubs to run with less free reserve capacity to absorb losses. But when we expanded beyond ship operators to cover ports, road hauliers, stevedores, freight forwarders and warehouse operators the approach to underwriting had to be familiar to those who had never experienced mutuality in their insurances. There was no way you could start talking to these guys about supplementary calls, because previously they only had the commercial market as an option. Anyhow, since those days mutual insurers have raised their levels of capital significantly and focus on maintaining balanced underwriting employing considerable actuarial and claims reserving expertise."

While we are a mutual, the majority of our competitors are commercial insurers in the London market, global composite insurers or local insurers in the different jurisdictions. So, we have a mixture of competitors. There is not really one single competitor that offer all of products that we do and no one seeks to compete with us on service. So, we have in different markets, it would be different people we would see as a big competitive threat. So, different markets in terms of products and in terms of geography as well." Kemp says.

Financial Strength

The TT Club's management as you would expect pays particular attention to maintaining the financial strength of the Club. Fenton says in terms of the financial bench marks for the business, the key objective for him and his team is to maintain the Club's A-(excellent) rating with AM Best. Indeed, AM Best rates the TT Club's capital position as equivalent to A++, the highest rating on the agency's capital adequacy scale. "What that means is that our key financial measures, notably the combined ratio has to be at a level that it does not reduce the Club's capital base and also our free capital levels have to be high enough that we can absorb most shocks. For a long time now, the board's policy has been to run the Club as if it were a fixed premium insurer. So we have to meet all the standards required to do that which means we get no credit at all from the rating agencies or regulators for being a mutual. We are considered by them to be a fixed premium mutual. Which is fine by us because that's the board's vision too"

To maintain that vision, the TT Club relies on its risk management and loss prevention programmes, which Knud Pontoppidan, the Club's chairman, describes as being at the heart of the Club's proposition to its membership. Another measure to ensure the stability of the Club's finances is the design of its reinsurance programme which, Fenton explains is the result of years of experience. "What we do is we design our reinsurance programme so that we take out those claims that, although they rarely occur, could, if we paid them on a gross basis, threaten our stability. We make sure the level of our retained risks is comfortable to maintain year in and year out. We have long term relationships with our reinsurers and they in turn take the trouble to understand the nature of the risks we right"

The fact that the TT Club is a mutual means that whether it writes business on a mutual or a fixed fee basis is not very important to most members. "It is not a distinction that our members have got a lot of time for, really. Our aim is to create a sense of belonging, of providing a service to our members and brokers irrespective of the basis on which we provide the cover."

Following the membership

According to Kemp, there are those occasions when a TT Club member needs insurance cover to be provided on a non-mutual basis. "There could be regulatory reasons, or for example, the member may be in a contractual relationship with a port authority which stipulates that the insurance issued is on a fixed premium basis."

This an important issue for the TT Club board, that the Club's development should be based around the needs of its members both geographically and through its product lines. "We have in many instances entered new geographical markets because our customers have wanted us to be there. Quite simply, it could be a terminal operator building a new terminal somewhere. But it could also be they wanted us to insure their subcontractors or their agents in a geographical area where we have not had much of a previously. Twenty years ago, that would have been the former Soviet Union. More recently, these regions tend be Eastern Europe including the Balkan states. There is more demand from Africa. Our members want us to work with them. To provide them with the same protection we do in other territories. In this regard, we have had an office in China for the last 15 years and a network partner in Moscow for 21 years. So, we have been in these places either at the behest of an existing member or through relationships with businesses who themselves channel business to us." Kemp says. Indeed, the Club has just added a network partner based in the India sub-continent. Until recently, claims from this region were handled from the TT Club's Dubai office.

According to Fenton, the TT Club does not target emerging markets for their own sake. "We don't see those as major sources of new income. Our product line and value added proposition is one that is best appreciated by a relatively sophisticated client base. For example, it is best suited for companies trading across international boundaries or undertaking operations which are very complex so that we can help them with the claims they face. We also require their home jurisdiction to be one that takes these claims seriously. Certain markets just don't understand the concept of liability."

Performance

The last two years have been good for the Club, according to Fenton. In 2012, the TT Club generated a surplus or operating profit of US$4.2m on a gross premium income of US$182.3m. The only large claims were from the explosions on MSC Flamini in July and from Superstorm Sandy in November. The combined ratio of 96% for the year was very much within the Club's target range. "So those two events impacted us, but because of the reinsurance arrangements we have in place, they put a relatively small number of points on the combined ratio." Fenton says. "2013, however, was a very good year with an unusually low number of large claims for the Club".

2011 was a year which proved quite a bit tougher than previous years for the Club as it was hit by claims from Members caught up in the Christchurch earthquakes, the flooding in Queensland, and the earthquake and tsunami in Japan which served to inflate the Club's combined ratio from the significantly lower levels in 2009 and 2010. Commenting on 2011, Fenton says some, but not all, of the big claims made it into the reinsurance layer. "So it meant that we made some claims on reinsurers, which is not something we like to do. But the level of claims also meant that our own profitability was impacted back in 2011. For us, they were big claims but they were not anywhere near the size of claims reported by some of the big reinsurance companies."

So, all of the recent years have been pretty good for us. It is just that they have either been by our standards very good or good depending on those big claims. But I have to say, in the last four or five years in particular, we have maintained the stability demanded by the board. For us, the Club's financial position is not an end in itself. It is a means to an end. The board wants the stability that comes with maintaining our financial strength rating so that we can provide the claims handling and the loss prevention services to our members and their brokers. Growing the free reserves is, of course, helpful from a capital position, but it does not go to anyone, although were the capital position to become strong enough the Board would consider some form of return of premium to members. From our members' perspective it is better that we invest in the scope and quality of our service provision."

END