Premium Reserve Clause
The premium reserve clause allows the reinsurer to withhold part of the reinsurance premium as a security reserve until the final loss experience of the treaty year is known.
- Clause type
- Premium provision
- Origin/Market
- Reinsurance market
- Favours
- Insurer
- Negotiability
- Negotiable
Purpose
Under proportional and facultative treaties, premium is often settled in advance, while the actual loss burden only develops over subsequent years. The premium reserve clause gives the reinsurer the right to withhold an agreed percentage of gross premium as an interest-bearing reserve, instead of paying it out in full to the cedent or its reinsurance intermediary.
Effect and limits
The withheld reserve serves as security for future claims payments and is usually released in instalments over subsequent accounting periods as loss development stabilises. It is not a full substitute for a deposit or letter of credit but can substantially reduce the reinsurer’s counterparty risk vis-à-vis a financially weaker cedent.
Negotiation and practice
The level of the withholding, the interest credited on the reserve, and the release schedule over several years are the main negotiation points. For facultative single risks with high volatility, the clause is a common instrument for protecting the reinsurer.