The Norwegian Shipowners' Mutual War Risks Insurance Association (DNK) to return USD 300 million to members

DNK on Friday announced it is calling an Extraordinary General Meeting on 30 October to approve a USD 300 million equity distribution to members. The distribution will be made to shipping companies that are present members and the USD 300 million will be distributed pro rata to the premium payment of its individual members over the past 10 years.

The decision to distribute has been a long time coming; DNK has for several years struggled with the conundrum represented by its apparent overcapitalisation with approaching USD 1 billion in free reserves against a premium income that for several years has been hovering in the USD 20 million range.

In recent years its solvency ratio has increased from 111% to 233%. The club generally writes for break even, but with its considerable reserves will be accumulating significant financial results (2019 saw a financial result of USD 75 million which is more than 4 times its average premium income during the preceding four years – a quite descriptive reflection on the capital utilization conundrum) – also with falling war risk insurance premiums the solvency ratio increases.

To justify the amount of bound capital DNK has continuously expanded the cover it is providing and has now an unmatched offering which includes cover against war or warlike conditions between any of the fixed member nations of the UN Security Council (“major powers war”), RACE and requisition by own Flag State, construction pre- and post-launch cover. Loss of Hire to 180 days is included as a standard feature of DNK’s cover as an open policy. Since some of these risks are systemic DNK has aggregate overall limitations to payments in many of these areas; major powers has an aggregate limit of USD 1 billion and provides cover for the first 60 days, RACE and requisition USD 150 million per year, biochem USD 75 million per year, and pre-launch (“war on land”) construction USD 500 million per year.

Above all, DNK has consistently been the most competitive provider of war risk insurance to its Norwegian members. This has been achieved by leveraging its capital base to run each loss or aggregate retentions to source very competitive reinsurance on an “excess” basis. Also it has extended its loss prevention services to the highest standard offered in the segment operated from a state of the art emergency centre in Oslo.

Finally it has significantly digitalised and standardised its insurance operations, in an otherwise arcane segments with very significant distribution costs. These efficiency gains have been passed to its members, thus providing a gain approaching 50% to the “off the shelf” cover provided by the market.

Yet, with a capital to premium ratio approaching 50, DNK has never sought credit rating and in this lies the conundrum; due to the catastrophe nature of its additional covers, their substantial limits, and their systemic nature with therefore unpredictable outcomes not least on investment portfolios, it is quite likely that DNK as it was until recently would be struggling to gain a satisfactory credit rating.

The Board of Directors have therefore during the past four years reviews its strategic position and implemented risk mitigation measures which as a result has increased solvency margins, and allowed the proposed USD 300 million equity pay back. The main mitigator has been increasing its reinsurance protection, without effecting the overall insurance coverage for its members. Since 2018 DNK has transferred insurance risk corresponding to USD 325 million to the reinsurance market. As a result, DNK’s risk retention for the major powers’ war cover has been reduced from USD 700 million to USD 400 million. A further reduction in risk retention of USD 100 million is planned for the 2021-renewal program. While the aggregate cover for major powers’ war is maintained at USD 1,0 billion, its duration was doubled in 2020 from 30 to 60 days. A second layer, or reinstatement, of USD 300 million protecting the major powers’ war cover was added in 2018 to strengthen DNK’s overall insurance capacity.

DNK in its present form was founded as a mutual war risks insurer for Norwegian shipowners in 1935. In connection with World War II the Norwegian State commissioned large parts of the Norwegian merchant fleet in the war effort, and war risk insurance though DNK was provided to protect the financial interest of the vessel owners. Since this time DNK has operated in a cooperative relationship with the Norwegian State and has communication channels to the Foreign Office, and liaisons with the Defence Department and the Norwegian Navy. In kidnapping cases it has also had benefit of the soft diplomacy resources that come from Norway considerable foreign aid contributions. Above all, it has until recently for all intents and purposes been tax exempt.

DNK has 450 members and insures 3,500 vessels with a combined sum insured of USD 222 billion.

At the time of the distribution the equity stood at USD 811 million – at 1.1.2021 after the distribution it is forecasted to be USD 570 million which is estimated to give a solvency margin of 191%.

As a rule of thumb, the distribution is equivalent to 10 years premium payment – therefore the average member can expect to receive a payment equivalent to the premium it has paid in the preceding 10 years. For tanker owners with much trade in the Arabian Gulf the refund will be significant.

DNK notes that the equity distribution comes at a time when many of its shipping members struggle with the effects of Covid 19.