1.          Relationship to the PICC

C1        Article 2.3.1 governs the reinsured’s main duty under the contract of reinsurance, i.e. the payment of premiums. In particular, it regulates the time of payment as well as the consequences for untimely payment.

C2        Article 2.3.1 is to be considered an addition and modification to the general rules as laid down in the PICC, in particular in Chapter 6, Section 1 PICC. Article 6.1.1 (Time of performance), Articles 6.1.7–6.1.10 and 6.1.12 PICC (special rules concerning monetary obligations) deserve special mention.

C3        Where premium is set-off against a monetary obligation of the reinsurer, such as its obligation to pay insurance money, such set-off will be governed by Chapter 8 PICC.

2.          Time of payment

C4        Insurers and reinsurers traditionally make much of their revenue from investment income on the “float” – premium payments received that are not paid out in claims until a future date. During this period, the insurer or reinsurer earns investment income. As a result, both reinsureds and reinsurers have an imbedded incentive to delay payments of money. Accordingly, it is important that both parties perform their obligations to pay money in a timely manner. Following the principle of utmost good faith, Article 2.3.1 provides such a duty on the part of the reinsured regarding the payment of premiums. The reinsured is required to pay the premium at the time set in the contract of reinsurance or where no specific time is set in the agreement, promptly after the payment has been demanded by the reinsurer. A corresponding duty of timely payment of claims on the part of the reinsurer is set forth in Article 2.4.4.

3.          Interest on late payments

C5        Where payment of premium is late, the reinsurer is entitled to a reasonable and fair rate of interest applied from the time the late premium was due until the time of payment. Article 7.4.9(2) PICC provides for interest at the “average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment.” If neither of these measures of interest is available, the interest rate is “the appropriate rate fixed by the law of the State of the currency of payment.”

4.          The parties may modify the general premium payment standards of the Article

C6        Article 2.3.1 provides only a default rule in the event the contract of reinsurance is silent or its meaning cannot be discerned. It is not an immutable rule. This follows from Article 1.1.3 and is highlighted again in the first sentence of Article 2.3.1. In practice, the contract of reinsurance will typically provide specific guidance regarding when premiums are due (a premium payment clause), as well as a provision specifying when premium payment is considered overdue and the specific interest rate to be applied to overdue payment.

5.          Payment through set-off

C7        Reinsurance premium payment is more complex than premium payment in the insurance context, which generally involves the policyholder simply writing a check to the insurer (although there can also be retroactive premium rating and adjustment). Many reinsurance transactions involve set-off of entitlements and liabilities concerning a given contract or a number of transactions involving the reinsurer and the reinsured.

C8        Payment by set-off is common and is consistent with this Article of the PRICL. Similarly, particularized agreement regarding set-off protocol is common. Furthermore, either by agreement or trade usage in some markets (e.g. London), set-off is often administered by the reinsured’s broker and the reinsurer rather than by the reinsured itself.

C9        Unless otherwise agreed by the parties, set-off in contracts of reinsurance shall be governed by the rules set forth in Chapter 8 PICC (setting forth criteria and protocol for set-off and providing illustrative commentary).