LLM3010 - Reinsurance to Close (RITC) and section 107 FA2000: how the rules are applied to Lloyd’s members

The legislation at FA00/S107 aims to compensate the Exchequer for over-reserving for future liabilities by general insurers, and to impose discounting. The rules operate by using hindsight to compare, in a later year, the original technical provisions for a period of account with the present-day cost of settlement, that is, the claims paid and the revised provision for that period. Where the original provision was excessive (that is, exceeds the cost of settlement), an amount based on interest on the difference is added to the profits of the general insurer. Where the original provision was insufficient, a deduction from profits is made.

Primary legislation: section 107 FA 2000

FA00/S107 applies to the ‘technical provisions’ of a ‘general insurer’. ‘General insurer’ includes an underwriting member of Lloyd’s – FA00/S107 (7)(d).

FA00/S107 (7) also contains definitions which are relevant to the application of the legislation to Lloyd’s members. These are ‘closing year’, ‘reinsurance to close’, ‘syndicate’, ‘underwriting year’ and ‘open syndicate’. These largely follow the definitions in FA93/S184 and FA94/S230 (see LLM1010). ‘Technical provisions’ in relation to a Lloyd’s member means the RITC premium or provision for unpaid liabilities of an open syndicate (usually referred to as the estimate of future liabilities – EFL).

FA00/S107 (8) to (10) contain special rules adapting the application of the legislation to Lloyd’s underwriters:

• FA00/S107 (8) allows Regulations to be made for Lloyd's
• FA00/S107 (9) and (10) ensure that the legislation applies at member level, not at syndicate level
• FA00/S107 (11) and (12)(c) repeal the previous legislation at FA93/S177 and FA94/S224, in relation to profits declared after 1 January 2000.

The General Insurance Reserves (Tax) Regulations 2001

Regulation 7 of SI2001/1757 adapts the regulations so that they apply to Lloyd's members. The calculations required under the regulations are made in the same way as for any other category of general insurer. However, the membership of a syndicate, and each member’s share of the capacity of a syndicate, may change from year to year. The meaning of ‘technical provisions’ and ‘claims paid’ are adapted so that they apply correctly in circumstances where there is no continuity of membership from the syndicate paying the RITC (the ‘reinsured syndicate’) to the syndicate receiving the RITC (the ‘reinsurer syndicate’).