A Guide to Reinsurance Law by Robert Merkin

Author:Robert Merkin
Language: eng
Format: epub
Publisher: Informa

The Premium

The amount of the premium

The amount of premium varies as between classes of insurance. The premium for proportional reinsurances is based on a percentage of the premium charged by the reinsured to its policy holders, whereas the premium for non-proportional reinsurances is determined by the reinsurers’ own assessment of the risk. Where the insurance is a front for reinsurers, the entire premium will be passed on to reinsurers subject to deduction of commission for the reinsured for its participation.

The general rule is that the premium is fixed at the outset and stays at that level irrespective of later events during the currency of the agreement. reinsurance contracts may, however, be long-term engagements which are reviewed on an annual or other basis, and such contracts may contain premium review clauses which allow the premium to be increased in response to the amount of claims faced by the reinsured and the reinsurer. A clause of this type was considered in Charman v. New Cap Reinsurance Corporation Ltd [2003] EWCA Civ 1372, [2004] Lloyd’s Rep. IR 373, the issues being the manner in which the clause could be invoked and the consequences of doing so. The clause in Charman was regarded as being very poorly drafted, and the Court of Appeal did its best to ascertain what had been intended.

Charman v. New Cap Reinsurance Corporation Ltd [2004] Lloyd’s Rep. IR 373

The reinsurance agreement in this case ran for the period 1997 to 1999 and contained a premium review clause which provided that “The reinsurer reserves the right to increase the Annual Premium at any Anniversary Date during the Term on a pro rata basis, if prior to the Termination Date, there is a material change in the normal underwriting guidelines, classes of business, volume of business or proportion of business, as described in the submission and/or any extraordinary claims developments. Material change to be deemed to be substantial and as mutually agreed”. The reinsurer gave notice of cancellation at the end of the first year and asserted that the contract had come to an end at that point. Morison J., at first instance, held that the notice at the end of the first year was ineffective, but that the notice given in 1997 remained in place and that there was good ground for terminating the policy at the end of the third year as there had been an unusual claims experience.

Held (C.A.): that the contract had not come to an end.

(1) The review clause had no effect unless it was invoked.

(2) There had not been any separate attempt by the reinsurer to invoke the clause at the end of the second year. The original 1997 notice could not be regarded as a continuing one.

(3) The attempt to invoke the clause at the end of the first year was invalid, as no notice had been given to the reinsured stating the policy was to be cancelled and providing the reasons for the giving of notice. There was nothing to indicate that there had been exceptional claims development so as to bring the clause into play.

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