Loss portfolio transfer

[cherrera]

What is a loss portfolio transfer?

[Mobile Actuary]

A loss portfolio transfer is the transferring of a group of insurance liabilities from one insurance company to another, along with a mutually agreed amount of assets.

At one time, LPT's were sometimes used to evade the prohibition some regulators have on discounting property and casualty reserves. The selling company would transfer a group of liabilities (booked at 100% of nominal value) to a second company, along with assets worth less than 100% of nominal value. The selling company got a surplus boost.

The buying company booked the reserves at something like the purchase price, in effect discounting them to present value.

Various requirements and disclosures have been added in the annual statement and actuarial opinion to allow the regulators to crack down on abuses.

[johnny storm]

That's accurate, MA, but not the only reason (it sort of sounds like you're saying that's the only way they were used), you can also do it to transfer liabilities off your books to get a better rating. For example, if you have $100 million in asbestos liabs on your books, and they are risky enough that you get a lower rating, you can sell them to Swiss Re - you bolster your rating so that you can sell more business, while it's not big enough to hurt Swiss Re much.

There's other reasons, but basically, you have liabilities associated with future payments and you pay somebody to take them away.

[johnny storm]

Originally Posted by Mobile Actuary

The buying company booked the reserves at something like the purchase price, in effect discounting them to present value.

I thought the whole point was that they were pension-type payments, and it was P/C companies selling them to L/H companies, who were explicitly allowed to discount? I could be wrong.

[cherrera]

thanks for all the replies..... I am working on a presentation for a rating agency and they are asking about that...

[Arlie_Proctor]

You will want to review FAS 60 and its successor FAS 116 in preparing your presentation. LPT's can take many forms, according to the provisions of the contract (i.e. some are discounted and some are not). The accounting treatment afforded the LPT depends on its structure.

[cherrera]

thanks for the info guys..