Collude or compete : choice of P&I Clubs and role of marine mutual insurance cartel

Abstract

Protection and Indemnity (P&I) insurance covers the third-party liability of a shipowner. The mutual insurance company offering such protection is called P&I Club. The thirteen largest P&I Clubs are bound by an agreement (the Inter-Club Group Agreement, IGA). The main purpose of the IGA is to prevent one group Club from undercutting the rates charged to a shipowner who is currently entered with another holding group Club. The EU commission questions the Group’s constraints on competition among the Clubs. In order to demonstrate the impact of competition, in this research, the following tasks are accomplished to develop the competition theory of marine mutual insurance. First, this research summarizes previous studies with regard to classic mutual insurance and stock insurance by the literature review. The research compares the marine mutual with them. It is found that marine mutual insurance, i.e., P&I insurance, has certain particular characteristics that distinguish P&I Clubs from the classic mutuals. Secondly, this study develops the pricing model of marine mutual insurance based on the theory of Pareto efficiency. The exante and expost Pareto efficient contracts of P&I insurance are proved respectively. The equilibrium contract of P&I insurance integrates the expost and exante Pareto efficient contracts. This integrated P&I insurance contract reflects not only the fundamental principle of mutuality, but also the particular ways in which P&I Clubs differ from the classic mutual. Thirdly, given the exponential utility, the research derives the optimal Club size. This research rejects the findings of the previous studies on the size of mutual. The results show that: (a) When the per capita loss of a single Club is increasing along with the Club size, the welfare of an individual member might worsen as the Club size increases; and (b) neither freely competitive nor monopolistic markets can be formed in the P&I insurance market. Fourthly, three competition strategies are discussed separately to verify that, in most cases, premium competition cannot benefit simultaneously the entered members and the primary members of the New Club. For each competition strategy, the research provides three criteria to (a) help the entered members to decide whether to switch membership, (b) help the primary members of the New Club to decide whether to reject the entry of the entered members, and (c) help the Holding Club to decide whether it should impose certain countermeasures. Finally, a case study is provided to examine the proposals and criteria obtained through this research. Two P&I Clubs, North of England Club and Britannia Club, are taken as the examples for simulating the competition strategies. The results reveal that Britannia Club has a competitive advantage when compared with North of England Club, but that the three competition strategies cannot be accepted by the New Club’s primary members.