Manuscript Cancellation Provision
Posted on April 16, 2007
Filed Under Insurance |
Take a look at this endorsement to a property policy. The endorsement provides a method for the company (which I blacked out because it is irrelevant) can charge any earned premium they need to cover the cost of facultative reinsurance. On many property risks with wind, especially going into hurricane season, Excess and Surplus (E&S) carriers in Florida are paying through the nose for reinsurance. Since facultative reinsurance is taken out on the specific risk, the insurer gets skinned if the policy cancels right after storm season. The normal 25% earned premium would not even come close to covering the cost of reinsurance. As one of the last companies willing to write large properties in Florida, what do you do?
Several E&S companies are attaching an endorsement similar to this one when covering a risk with wind through hurricane season. I doubt the average policy holder would even notice this endorsement. In the event of cancellation, it could be used to cut the return unearned premium down to nothing. Perhaps this is not the intent, but you can read it as a hidden 100% minimum earned premium.
In the long term, this is a very bad response to a hard reinsurance market. It is not going to make consumers happy when they are surprised by this provision in their policy. It also has the potential to kill the premium finance market for E&S property. The reason is that finance companies are not going to tolerate arbitrary earned premiums when their money is at stake. They will simply refuse to finance the risk. If they are surprised enough times, they will refuse to finance any E&S risk that covers wind and hail.
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