A transaction by which a cedant transfers to a reinsurer a portfolio of losses that have already occurred, ceding the development risk and releasing capital.
The loss portfolio transfer, known by the acronym LPT, is a retrospective reinsurance transaction by which a cedant transfers to a reinsurer a set of losses that have already occurred, together with the reserves associated with them, in return for the payment of a premium. Unlike classic reinsurance, which covers future and uncertain losses, the LPT relates to past commitments whose residual uncertainty lies in their development, that is, in the possibility that they will ultimately cost more than expected. By ceding this development risk, the cedant stabilizes its result, releases the capital tied up to carry these reserves and closes out an inherited exposure. This tool is central to the management of so-called legacy portfolios and run-off situations, where it allows old activities to be put behind. A close variant, the adverse development cover, or ADC, does not transfer the portfolio but protects the cedant against the deterioration of reserves above a certain threshold alone. For long-tail lines, such as certain liabilities or, in time, cyber, these transactions offer a valuable means of mastering the uncertainty over the ultimate burden of old claims.
An insurer wishes to exit a loss-making line whose old claims continue to develop. It transfers this portfolio to a specialist reinsurer through an LPT, thereby fixing its cost and releasing the capital it had tied up.
loss portfolio transfer, LPT, transfert de portefeuille de sinistres, couverture de développement défavorable, ADC