LLM3040 - Reinsurance to Close (RITC) and section 107 FA2000: why the rules need to be adapted for Lloyd's: what are the technical provisions?
FA00/S107 refers to the “technical provisions” of
general insurers. The rules work by comparing the original
provisions taken into account for tax purposes, with the cost of
settling the liabilities to which the original provisions relate.
Lloyd's members do not have “technical
provisions” in the same way as other general insurers.
Instead, all liabilities of the syndicate are settled by payment of
the RITC premium, or in the case of a single member syndicate, by
setting a provision. In many cases the same member participates on
both the paying and receiving syndicate.
The RITC premium is paid under a reinsurance contract and
does not remove the syndicate member from ultimate liability for
the claims of policyholders. This reflects both the legal position
that a member cannot contract with himself, and the economic
substance of the arrangement. To that extent, the RITC premium is
broadly equivalent to the technical provision made by a general
insurer, as is the estimate of future liabilities of a run-off
syndicate (
LLM2070).
In the case of a single corporate member syndicate (
LLM1060), a provision for future
liabilities of the closing year is deemed by Lloyd’s rules to
be an RITC contract.
In relation to Lloyd’s members, therefore, technical
provisions are defined as
- the lesser of the RITC premium paid or received (or deemed to be paid/received under Lloyd’s rules) by the continuing member of a syndicate (regulation 7(1)) ( LLM3080)
- the provision for unpaid liabilities (that is the EFL – LLM2070) in the case of an open syndicate (regulation 7(8)) ( LLM3090).
In both cases, this is subject to the 4% rule ( LLM3020).
Managing Agent’s role
FA00/S107 applies at the member level, not at syndicate level. However, the amount of the RITC is determined by the managing agent at syndicate level. The managing agent is, therefore, required (by regulation 7(11)) to provide details of claims payments and either the RITC premium paid (if the syndicate closes) or the estimate of future liabilities (EFL) (if it is in run off) to enable the member to produce the calculations.
