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If, at the time of the closing of a Policy Year pursuant to Rule 16, the Advance Calls, Deferred Calls and Supplementary Calls in respect of that year shall exceed the claims, costs, expenses and outgoings of the year, the Association may decide that such excess shall be distributed, in whole or in part, to the Members entered in that Policy Year in proportion to their net Advance Calls.
The repayment of excess premium to Members under Rule 17 must be distinguished from the distribution of surplus assets upon dissolution of the Association.1
Furthermore, the right to participate in a distribution of any such excess is restricted to mutual Members since they are the ones that share the risk of claims arising during the relevant Policy Year and contribute funds to cover such risks. Consequently, it is logical and fair that they are the ones that are entitled to benefit from any excess. Therefore, Members who have fixed premium entries are not eligible to receive any such excess or a return of premiums in respect of the fixed premiums that they have paid in respect of their entries.2
(A) …the Association may decide that such excess shall be distributed… (Rule 17)
A Policy Year may be closed pursuant to Rule 16 when the Association decides that no further Deferred Calls or Supplementary Calls will be required for that Policy Year. If, at that time, the Policy Year’s accounts are in surplus because the total income from premium and investment returns exceeds the actual and anticipated claims, costs, expenses and outgoings for that Year, the Association may decide to distribute the excess to the Members.
A decision to distribute the excess can be made only at the time that the Policy Year is closed. The Association has complete discretion3 whether to distribute all or part or none of the excess to Members or whether to allocate all or part or none of it to the reserves.4 Normally, it is the practise of the Association consistent with that of most P&I clubs, to decide to allocate any excess to the reserves.
(B) …distributed…to the Members entered in that Policy Year… (Rule 17)
All Members who have paid Advance Calls in that Policy Year are entitled to participate in a repayment of premium with the exception of Members who have elected to be released from their obligation to pay Deferred Calls or Supplementary Calls by payment of Release Calls.5 Members who have failed to pay all or part of their Advance Calls, Deferred Calls or Supplementary Calls are entitled to participate in a repayment of premium, but the Association is entitled to set off6 any amounts due to the Association from the Member against such repayments.
The allocation of excess premium to reserves may result in funds generated by Members in one Policy Year being used to offset losses of (other) Members in another Policy Year. However, Members very often continue their membership of the Association from year to year, which means that, in practice, the majority of those Members who benefit from the fact that the reserves that have been accumulated in one Policy Year are used in order to balance the accounts in another Policy Year are those same Members that have contributed to the allocation of that excess to reserves in the other Policy Year.
The maintenance of such ongoing reserves benefits existing and future Members and is essential for the Association’s continued financial strength. From a regulatory7 point of view, it has also become increasingly necessary for providers of insurance, including the P&I clubs, to keep adequate reserves to cater for unexpectedly large claims, whether caused by single, catastrophic incidents or an unprecedented large number of claims.
(C) …in proportion to their net Advance Calls. (Rule 17)
A repayment of premium to Members is made in proportion to the net Advance Calls levied in respect of those Members for that Policy Year. The net Advance Calls are calculated after deducting any applicable premium discount granted by the Association under special terms of entry and laid up returns.8
1 See Article 12.2 of the Bye-Laws of Gard P. & I. (Bermuda) Ltd. and 19.2 of the Statutes of Assuranceforeningen Gard -gjensidig-.
2 See Rule 10.2.
3 The discretion rests with the Board of Directors pursuant to Article 6.2.e of the Bye-Laws of Gard P. & I. (Bermuda) Ltd. and 9.2.d of the Statutes of Assuranceforeningen Gard -gjensidig-.
4 See Rule 19.
5 See the Guidance to Rule 15.
6 See Rule 21.1.
7 The legal requirements for the Association in this regard are governed by regulations issued and monitored by the Financial Supervisory Authority of Norway (Finanstilsynet). Furthermore, the European Union is expected, with effect from 1 January 2016, to enact new regulations concerning solvency requirements for insurance companies operating within the EU/EEA area (Solvency II) that will make P&I clubs subject to more stringent requirements in relation to the reserves which must be held to meet unexpected claims, shortfalls in reinsurance recoveries and other insurance and operational risks.
8 See the Guidance to Rule 22 considering laid-up returns.