SolvedLLM3170 | Reinsurance to close (RITC) and technical provisions: section 107 FA2000: example: member reduces their share of the syndicate’s business (page 1 of 4)
From HM Revenue & Customs · Lloyd's Manual
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.