LLM3060 - Reinsurance to Close (RITC) and section 107 FA2000: why the rules need to be adapted for Lloyd's: changes in a member’s share of the syndicate’s business: examples

Example 1 – share of business stays the same

Syndicate 7777 (2000) pays an RITC to syndicate 7777 (2001) of £100M. Member X has a 20% share of the syndicate’s business. Member X has therefore paid and received £20M.

For the purposes of FA00/S107 in 2001 X’s original provision for 2000 is £20M. This will remain the original provision for 2000 against which the future cost of settlement will be compared.

Example 2 – share of business increases

Syndicate 7777 (2000) pays an RITC to syndicate 7777 (2001) of £100M. Member Y has a 20% share of the syndicate 7777’s business in 2000, but a 25% share in 2001.

Member Y has therefore paid £20M, but received liabilities of £25M.

For the purposes of FA00/S107, in 2001 Y’s original provision for 2000 is £20M. The £5M assumed relating to 2000 is, for Y, a new provision in 2001.

Y’s original provision for 2000 will remain £20M. The £5M is part of Y’s original provision for 2001.

Example 3 – share of business decreases

Syndicate 7777 (2000) pays an RITC to syndicate 7777 (2001) of £100M. Member Z has a 20% share of the syndicate 7777’s business in 2000, but a 15% share in 2001.

Member Z has therefore paid £20M, but received liabilities of £15M. The £5M is treated as the cost of settling one-quarter of Z’s liabilities.

Z’s original provision for 2000 will be £15M.

Further more complex examples covering these and other points are at LLM3130 onwards.