LLM3170 - Reinsurance to Close (RITC) and section 107 FA2000: example of a calculation where a member reduces their share of the syndicate’s business (page 1 of 4)
Where the member’s share of business
increases (say from 20% to 25%) it seems quite
logical that the original provisions were only 20% of the
syndicate’s total. But where the member’s share of
business
reduces (say from 25% to 20%) the original
provision is still only 20% of the syndicate’s business. The
other 5% is payment of claims of the earlier year.
This brings out how the “lesser of” rule in
regulation 7(1) described at
LLM3080 operates. As outlined at
LLM3050, where a member reduces their
share of the syndicate’s business, part of the RITC premium
paid will be paid to a third party. This part therefore represents
not a provision, but the cost of settling liabilities. It is
therefore treated as such for the purposes of the calculation
required by FA00/S107.
Example
| Year of account | Liabilities for
| RITC paid |
| Claims paid |
| 1997 | 1997 | £50M |
| - |
|
|
|
|
|
|
| Z has 40% share |
| £20M |
| - |
|
|
|
|
|
|
| 1998 | 1997 | £40M |
| £20M |
|
| 1998 | £60M |
| £60M |
|
| total | £100M |
| £80M |
|
|
|
|
|
|
| Z has 25% share |
| £25M |
| £20M |
|
|
|
|
|
|
| 1999 | 1997 | £30M |
| £10M |
|
| 1998 | £60M |
| £20M |
|
| 1999 | £60M |
| £80M |
|
| total | £150M |
| £110M |
|
|
|
|
|
|
| Z has 20% share |
| £30M |
| £22M |
Note that the RITC premium for 1997 would actually be paid at
31 December 1999 and that claims against it would be paid in year
ended 31 December 2000.
The figures for the FA00/S107 calculations are at
LLM3180 to
LLM3200.
