LLM3130 - Reinsurance to close (RITC) and technical provisions: section 107 FA2000: example: member increases their share of the syndicate’s business (page 1 of 4)

As outlined at LLM3050, where a member increased their share of a syndicate’s business, the amount of the RITC premium received would exceed the amount of the premium paid by that member. The excess received by a member over that paid by the same member represented new liabilities taken over. For the purposes of the calculation required by FA00/S107, those liabilities taken over are not referable to their year of origin, but to the year in which they become a liability for that member.

So if a member’s share goes up from 20% to 25% from 1997 to 1998, the additional 5% of the business taken on is new to that member.

There is an added complexity when the RITC is paid in subsequent years. The RITC paid for 1997’s liabilities in 1998 would normally be part of the cost of settlement of those liabilities. But for the additional 5% of ‘new business’, it forms part of the original provision for 1998.

Example

Year of account	Liabilities for	RITC paid	-	Claims paid
1997	1997	£50M	-
Y has 20% share	£10M	-
1998	1997	£40M	£20M
	1998	£60M	£60M
	total	£100M	£80M
Y has 25% share	£25M	£20M
1999	1997	£30M	£10M
	1998	£60M	£20M
	1999	£60M	£80M
	total	£150M	£110M
Y has 40% share	£60M	£44M

The RITC premium for 1997 would actually be paid at 31 December 1999 and claims against it would be paid in year ended 31 December 2000.

The figures for the FA00/S107 calculations are at LLM3140 to LLM3160.