Are release calls fair in current environment, JLT asks Clubs (part 4)

In its 2017 report on the P&I Clubs, broker Jardine Lloyd Thompson asked all of the clubs a list of questions. Here are the responses of Swedish Club, UK P&I Club and West of England to one of those questions. Over coming days IMN will be printing in the responses of the P&I Clubs to other questions.

Q: Is it still fair for P&I clubs to levy release calls, even at today’s reduced levels? Some argue the traditional requirement for release calls – that departing club members should not avoid their responsibility towards unexpected adverse development in club finances – has in effect been “pre-paid” through the accumulation of record levels of surplus funds

Swedish Club

Swedish Club said that the release call mechanism was part of IGA underpinning the pooling agreement. The Club said that it was designed to safeguard mutuality amongst the members in any one year. It observed that, overall, release call levels had been reduced, reflecting an improved underwriting performance, but emphasized that underwriting results were driven by better than expected outcome on large claims. Finally, Swedish Club noted that the release call mechanism gave the clubs Tier 2 capital values in solvency assessments.

UK P&I Club

UK P&I Club said that release calls preserved fairness amongst members, by requiring payment of a fee if a member wishes to be released from a potential supplementary call obligation which all other members continue to have.

“If it were a valid argument to suggest that the fee has somehow been ‘pre-paid’ by the accumulation of surplus funds, the argument would apply equally to all the members of a club and would release everyone from their potential supplementary call obligations, not just the departing member”, said the club Were it valid, the pre-payment argument would make a supplementary call impossible and would damage the clubs’ capital position, which currently has an allowance within Ancillary Own Funds for the right to make supplementary calls.

UK Club said that its managers recognized that the release call system was not much liked by members and for that reason it said that it was” worthy of review to consider whether there is any possible alternative way to preserve fairness”.

West of England

West of England Club said that release calls remained a necessary feature of the mutual system and safeguarded fairness. It noted that if a departing member wished to divest itself of the obligation to contribute towards any supplemental capital requirement faced by those who remained, then it was reasonable – and mutual – that they should make a contribution for obtaining that benefit.

West of England said that a club had to retain the right to make supplementary calls, however unlikely, not least for Solvency II purposes. It said that adopting the view that all members had “pre-paid” their contributions would negate that mechanism.

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