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What Is A Loss Portfolio Transfer Agreement

Since a partial system VII leads to the renewal of the policies to which it refers, it has the effect of transferring fully the legal and economic responsibility of the company and its management. The ceding entity does not retain any residual risk or risk in the context of the policies concerned. Insurers use loss portfolio transfers to withdraw their debts from their balance sheets, the most common reason being to transfer risk from a parent company to a prisoner or to leave a business line. Debts may already exist (. B for example, receivables processed but not yet paid) or occur quickly (p.B. receivables created but not declared (IBNR). Tell them, for example, that an insurance company has set up reserves to cover debts arising from employee compensation policies it has taken out. The current value of these reserves is $5 million. Currently, the $5 million will likely cover any losses it may suffer, but the insurer may ultimately have claims that exceed the reserves. Thus, it enters into a portfolio transfer of losses with a reinsurer who takes care of the reserves. The repayment of the receivables is now the responsibility of the reinsurer. But it can use reserves to generate a greater return than the receivables it may have to pay.

LPT reinsurance is not easy and, in many cases, it will only be part of a much larger transaction. However, as is still the case in the area of alternative risk transfer, the importance of identifying key issues and properly documenting the parties` agreement on how to deal with them cannot be overstated. From a commercial point of view, the provisions relating to the payment and possibly the adjustment of the premium will inevitably be considered central. In the LPT reinsurance, the price (or premium) generally reflects the reserve assessments associated with it that were made at a given time. In many cases, the agreement provides for a reassessment at a future date, the premium may eventually be adjusted in light of this revision. To the extent intended, the agreement should also take into account the risk of adjustment associated with disputes and provide an appropriate mechanism to ensure a timely and effective resolution of potential disputes. Careful documentation of agreements is therefore essential for each LPT transaction and a properly developed reinsurance contract, adapted to the particular circumstances, will be at the heart of this documentation. The literature must also look at the current management provisions and, in many cases, the implementation of security.

However, when an insurer uses a portfolio transfer of losses, it also transfers the risk of time and investment. The latter may generate less investment income if claims losses are paid more quickly than expected.