IPTM8190 - Policy review clauses: general principles

Review clauses in a policy are a common area of difficulty in relation to the qualifying policy rules on significant variations and options.

A policy review clause is any term of the policy that allows an insurer to review a particular aspect of it, and provides for some action to be taken depending on the outcome of the review. A policy review clause may specify when the reviews are to occur or it may be flexible, allowing for reviews when the insurer thinks necessary.

A common example is a premium review clause in a mortgage endowment policy. Under such a clause, the insurer reviews the level of premiums to see whether they are likely to provide a sum on maturity that is sufficient to repay the mortgage and either gives the policyholder the option to increase premiums or requires them to do so. A less common example is where the term of the policy is reviewed to see if it should be extended.

Policy review clauses may be either advisory, where a policyholder has the choice whether to follow the advice or mandatory, where the policyholder must accept under the terms of the policy the change indicated by the review. The position under the qualifying policy rules will depend on the actions that follow the outcome of the reviews.

Advisory review clauses

An advisory review clause is one where if the review shows that a particular action is advisable, for instance increasing the premiums, the policyholder can choose whether to follow the advice. Therefore, an advisory review clause will contain an option. As with options in policies generally, the possible outcomes of such reviews will have been considered at the outset when determining whether a policy made on or after 1 April 1976 is qualifying.

Mandatory review clauses

A mandatory review clause is one where the policyholder is required under the terms of the policy to accept the outcome of the review, for instance an increase in premiums. As any change following a mandatory review clause arises under the terms of the policy, it is not a variation of the policy but must be restricted under the terms of the policy so that any alteration remains within the scope of the qualifying policy rules.

An example is where any mandatory premium increases are restricted to ensure that the premium spreading rules are not breached. Another example is a provision that the sum assured is increased following an increase in premiums in order to meet the minimum required.

If, however, the insurer agrees with the policyholder not to implement the result of the review that is a variation in the policy and it will require re-testing to see if it still qualifies, as described at IPTM8165 and IPTM8170.

From 21 March 2012 onwards the variation of a policy or the exercise of an option in these circumstances may require the beneficiary under the policy to consider the annual premium limit – see IPTM2070.