Circular 21/99: Mutual Premium for the 2000 Policy Year
TO THE MEMBERS
MUTUAL PREMIUM FOR THE 2000 POLICY YEAR
The New “Mutual Premium” System
With effect from 20th February 2000, the Association will change the system for charging calls to mutual Members following the amendments to the Rules adopted at the Annual General Meeting on 25th October 1999. Under the new system a single “Mutual Premium” will be charged with the possibility of a "Mutual Premium Discount" to reduce the ultimate cost to Members, should the Directors so decide. The new Mutual Premium will be equivalent to the advance call plus the original estimated supplementary call for the policy year under the current system. It will therefore be calculated at 140 per cent of each entered ship's premium rating. In order to reflect the cash flow pattern of the current system the new Mutual Premium will be payable in four equal instalments, three during the policy year by 20th March, 1st June and 1st September, and the final instalment to be paid by 1st December in the following year (2001). Members have already been advised that there will be no general increase for the 2000 policy year.
Before the final instalment becomes due, the Directors will consider the projected underwriting result of the policy year and the financial position of the Association as a whole, in the same way as they currently do when assessing the supplementary call to be charged to Members. On the basis of this review, the Directors will decide whether and to what extent a Mutual Premium Discount can be declared. If a Mutual Premium Discount is determined by the Directors, the discount will be deducted from the fourth instalment of the Mutual Premium.
The Mutual Premium Discount will therefore take the place of a reduction in the planned supplementary call under the present system. The planned supplementary call has been reduced in six of the last seven policy years and a Mutual Premium Discount would therefore have been declared in these years. The benefit of any equivalent reduction in total cost for any policy year from 2000 onwards will be declared as a Mutual Premium Discount.
The Rules of the Association will still provide for the possibility that the Directors may order a "Supplementary Premium". However, this Supplementary Premium will not be part of the Association’s planned calling policy as is the current supplementary call. The Supplementary Premium estimate will therefore be zero. A Supplementary Premium will only be ordered by the Directors in the event that the total planned contributions from Members for the policy year (the Mutual Premium), together with investment income plus such contribution to a policy year deficit as the Directors may order from the Association’s reserves, are inadequate to fund a policy year deficit.
Protection of the Association’s Reserves
As at 20th February 1999, the reserves of the Association stood at an historic high. However, the Directors are aware that reserves can be eroded by adverse claims experience and are conscious of the need to give Members as much reassurance as possible that a Supplementary Premium will not be required. To this end, the Directors have authorised the Managers to conclude negotiations with Swiss Re, a major reinsurer, for a reinsurance contract designed to protect the Association against the need in future policy years for a Supplementary Premium.
Under the proposed contract, the Association will be entitled to make reinsurance recoveries from Swiss Re in respect of any unexpected increase in claims above a level which can be safely funded from the Association’s reserves. This reinsurance protection is designed to respond to any future adverse development in the Association’s aggregate claims experience and not merely in respect of a single policy year.
The support which Swiss Re will provide for the Association is intended to be of a long-term nature and expected to continue over the next ten years. The extent of the reinsurance protection will be in the order of $300 million. It will protect the erosion of the Association’s reserves to the extent that claims can be recovered from the reinsurers, thus reducing deficits which would otherwise be funded from reserves. The contractual terms will also ensure that the Association benefits to a significant extent from good loss experience over the expected life of the contract.
The Directors have made it clear that they do not intend that the benefit of this reinsurance protection should be used artificially to subsidise the cost of the Association’s Mutual Premium to Members in future years. However, the ability to make reinsurance recoveries in respect of an unexpected deterioration in claims experience, coupled with the long-term nature of the relationship with Swiss Re, means that the risk of a Supplementary Premium will be yet further reduced.
The contract is intended also to provide the Association with increased protection against the risk of an overspill claim, whether from a Member of the Association or another Group Club. Although the risk of an overspill call on Members will not be entirely eliminated, the new reinsurance from Swiss Re together with the Association’s own catastrophe reserve and the Association’s current reinsurance protection over and above the Group reinsurance limit, will mean that the potential cost to Members of the Association of an overspill claim up to the full value of the cover will be reduced to a fraction of the limit of each Member’s liability for overspill calls.
As noted in the Chairman’s Statement in the Association's annual report, the Directors have concluded that the mutual club system remains the best option and are determined to enhance the Association’s strengths. The new Mutual Premium arrangements will preserve the ability of the mutual system to return to Members part of their premium to the extent that this is not required by the actual claims experience. The reinsurance contract with Swiss Re will significantly enhance the financial position of the Association and, when combined with the strength of the Association’s reserves, will make the likelihood of a Supplementary Premium even more remote.
THOMAS MILLER (BERMUDA) LTD