Companies beware. If what you are about to read rings a bell, take action now!
What is premium? Premium charged is the price/cost due to insurers for underwriting a certain risk or bouquets of risks. The premium charged is computated based on an established premium rate which is derived through risk modelling, burn ratios, and underwriting data specific to a particular risk. This premium, which is usually payable within 90 days, warrants that subject to payment within a premium payment warranty period, that the underwriter will hold covered for that particular insured or reinsured.
What is a claim? A claim is a loss or suspected loss registered by the insured with the aim of recovery so long as it is within the agreed terms of the policy underwritten and claims due process observed. A claim is not automatically payable. A claim is not automatically recoverable. A claim represents no monies due in such time underwriters admit liability and agree to indemnify the reinsured/insured.
The main problem with accounting for Premium and Claims in any running statement between a reinsured and their reinsurer is the tendency to offset premiums due with claims receivable. With more and more companies in the Middle East making use of this incorrect practice, cedants should not be surprised when reinsurers reject their claims due to nonpayment of premium. Irrespective of whether reconciliation is taking place, a premium is unaccounted for,or reinsureds are owed claims by a particular reinsured, no claims dues should be offset by cedants unless written agreement is received by reinsurers to offset those claims against premiums due. Doing otherwise as is the case in the MENA region, only creates a recipe for disaster when a major claim hits.
Ceding companies must segregate absolutely between claims recoverable and facultative premiums due statements. There is no excuse for not making Fac premium payments on time. The law will also support this point of view. The premium due on one particular risk for a particular insured is unconnected to the misfortunes of another. Linking the two is the worst thing a local insurer can do.
Finally, your brokers are not a bank and are not obliged to fund a single dollar of premium on behalf of a cedant nor mix and match accounts with other cedants on reinsureds’ behalf. This creates unfair E&O exposure and no broker with a sense of corporate governance will agree to undertake such an exercise.
Do not offset premiums against claims without your reinsurers’approval ! Do so at your own risk !
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