October 2016

Turkey’s Omni backs diversification in volatile financial market / Tradewinds

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1st January 2024.

The EU ETS is limited by a 'cap' on the number of emission allowances. Within the cap, companies receive or buy emission allowances, which they can trade as needed. The cap decreases every year, ensuring that total emissions fall.

Each allowance gives the holder the right to emit:

  • One tonne of carbon dioxide (CO2), or;
  • The equivalent amount of other powerful greenhouse gases, nitrous oxide (N2O) and perfluorocarbons (PFCs).
  • The price of one ton of CO2 allowance under the EU ETS has fluctuated between EUR 60 and almost EUR 100 in the past two years. The total cost of emissions will vary based on the cost of the allowance at the time of purchase, the vessel’s emissions profile and the total volume of voyages performed within the EU ETS area. The below is for illustration purposes:
  • ~A 30.000 GT passenger ship has total emissions of 20.000 tonnes in a reporting year, of which 9.000 are within the EU, 7.000 at berth within the EU and 4.000 are between the EU and an outside port. The average price of the allowance is EUR 75 per tonne. The total cost would be as follows:
  • ~~9.000 * EUR 75 = EUR 675.000
  • ~~7.000 * EUR 75 = EUR 525.000
  • ~~4.000 * EUR 75 * 50% = EUR 150.000
  • ~~Total = EUR 1.350.000 (of which 40% is payable in 2024)
  • For 2024, a 60% rebate is admitted to the vessels involved. However, this is reduced to 30% in 2025, before payment is due for 100% with effect from 2026.
  • Emissions reporting is done for each individual ship, where the ship submits their data to a verifier (such as a class society) which in turns allows the shipowner to issue a verified company emissions report. This report is then submitted to the administering authority, and it is this data that informs what emission allowances need to be surrendered to the authority.
  • The sanctions for non- compliance are severe, and in the case of a ship that has failed to comply with the monitoring and reporting obligations for two or more consecutive reporting periods, and where other enforcement measures have failed to ensure compliance, the competent authority of an EEA port of entry may issue an expulsion order. Where such a ship flies the flag of an EEA country and enters or is found in one of its ports, the country concerned will, after giving the opportunity to the company concerned to submit its observations, detain the ship until the company fulfils its monitoring and reporting obligations.
  • Per the EU’s Implementing Regulation, it is the Shipowner who remains ultimately responsible for complying with the EU ETS system.

There are a number of great resources on the regulatory and practical aspects of the system – none better than the EU’s own:

Moves by the protection-and-indemnity (P&I) clubs to diversify into other areas of marine insurance, including the fixed premium market, are endorsed by Omni, the Turkish broking group in its annual market review.

October 27th, 2016 17:00 GMT  by Jim Mulrenan London

Published in WEEKLY

Against a background of a challenging financial climate, the broker sees diversification as a potential solution and expects to see more clubs moving into the Lloyd’s market or even buying existing insurance operations.

“As long as the traditional investment market, be it government bonds or equities, are either paying a small interest or are very volatile, clubs have to look for other ways to invest their funds, and hull business is, in spite of strong competition, an obvious choice for the shipowner boards of the clubs. Therefore, we expect to see more of that,” said the broker.

Omni raises the question of whether the many clubs that now offer fixed premium cover are undermining their traditional mutual P&I business but comes to the conclusion it is not a real threat.

“If an owner wanted fixed cover, and he cannot get it with a [International] Group club, he will find it elsewhere. So, if the group clubs want to have a share of that business, they need to have a fixed premium facility. And we are not concerned about too many facilities being around, as it is an advantage, with strong competition, for the owner seeking fixed cover for his vessels,” declared Omni.

Omni also indicates it expects to see mergers in the P&I market in the not too distant future despite the failure of a bid to bring the Britannia and UK clubs together.

“We doubt if this will put off other club’s talking but it has highlighted the difficulties in bringing together two parties and members who have different ethos and underwriting philosophies,” said the broker.

But Omni appears hesitant to accept that mergers will lead to premium savings.

“There is some suggestion that such mergers of club’s might lead to reductions in premium for the members of between 5% to 10% but that remains to be seen, although a merger of two clubs should inevitably result in cost savings,” it added.

The broker welcomes the moderation of P&I clubs general increases and indicates it is among those expecting reductions on premiums already due.

“There is no good reason [for general increases] and we believe that most of the clubs will avoid general increases in the coming renewal and renew fleets on expiry terms. Many of the clubs have excellent reserves and with the favourable claims development we expect that more clubs will either return premium or abstain from calling the full estimated total call premium, as we have seen a few clubs do in recent years,” noted Omni. “We are still disappointed to see that there has been little impact on addressing the issue of release calls and we would like to see this ‘ball and chain removed or the percentage substantially reduced going forward,” added the broker.

Omni is an Istanbul headquartered broking group with an obvious interest in developments in the Turkish market.

The report highlights the commitment of Rotterdam-based Raets­Marine to the Turkish fixed premium market and says its approach recognises ongoing freight market difficulties. But British Marine, which withdrew from Turkey in 2011, is not showing any sign that it is interested in returning.

Omni is pleased with the progress that the relatively new Turk P&I insurance company is making, predicting that there will be 1,750 vessels on its books by the end of 2016.

The venture, which has the very favourable combined loss ratio of 25%, has been able to attract larger passenger vessels since raising its cover limit to $1bn in 2015.

From May this year it has also been writing hull and war risks insurance

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