LLM3170 - Reinsurance to close (RITC) and technical provisions: section 107 FA2000: example: 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 straightforward 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, and not a provision.

This brings out how the ’lesser of’ rule in regulation 7(1) described at LLM3080 operated. 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 was 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

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 LLM3180 to LLM3200.