The basic definition of a mutual P&I club is that it is an association of shipowners (called “members”) who group together to insure and cooperate with each other on a mutual, not for profit basis, proportional to their tonnage. They pool common risks and obtain at cost collective insurance and reinsurance. The main principle that governs the clubs is that of the mutuality, i.e. the members are both insured and insurers having rights and obligations towards each other.
A mutual P&I club has no shareholders to collect dividends, its owners being the members themselves. Thus, the contributions (“calls”) paid by the members are entirely devoted to settling claims, administration costs of the club and reinsurance for larger claims. The surplus of the funds collected in one policy year are passed back to the members in the next year by way of reduced or returned calls, investments in club’s assets and, of course, to make financial reserves to pay up future claims.
Unlike the commercial insurance facilities, the clubs also invest heavily in training, education and loss prevention initiatives in benefit of their membership.
Nevertheless, at the same time that the clubs do not make a profit out of their own members, they cannot afford to make a loss either. Therefore, they build up sufficient reserves to meet unpredicted or catastrophic claims. Indeed, because of the high limits on the wide variety of covers available, there is actually no limit for the amount that the members have to pay in as much as the underlying objective is to collect sufficient funds to keep a financial balance even through times of trouble. On the other hand, as long as the clubs are owned and effectively controlled by its members, only sufficient funds are called on them, with no element of profit.
The club members pay the calls and, through boards/committees elected by them, establish the policies and rules. Since the shipowners are mariners rather than insurers, most of the clubs have professional club managers to run their day-to-day activities, such as collection of calls, administration, handling and settlement of claims etc.
All the P&I clubs are based in Europe, mostly in England, with the exception of one Club based in Japan, the United States and China each respectively and two P&I clubs in Norway.
The vast majority of today’s world deep-sea merchant fleet has at least P&I cover made available by the mutual P&I clubs and, to a much lesser extent, the commercial insurance market that operates with fixed premium.
Although quite a few vessels would still trade without any P&I cover, such as those navigating in brown waters, most of the port and maritime authorities worldwide require the vessel to have at least P&I insurance to be allowed to enter the ports under their jurisdiction. Many charter-parties have this requirement as well.