Loss portfolio transfer (LPT)

A loss portfolio transfer (LPT) is retrospective reinsurance: the cedant transfers to a reinsurer a set of losses already incurred, with their reserves, for a premium. Ordinary reinsurance covers future losses. An LPT covers past obligations, and what remains uncertain is development, the risk that they end up costing more than reserved. The premium is set off the discounted value of expected payments plus a margin for development risk, and the reinsurer earns as much on investment income from the float as on underwriting. By ceding that development risk, the cedant steadies its earnings, frees the capital backing those reserves and closes out an inherited exposure. It is the standard tool for legacy and run-off books. Lloyd's, 1996: the Reconstruction and Renewal plan moved the liabilities of the 1992 and prior years of account, asbestos and pollution above all, into Equitas so the market could keep writing. In 2006, National Indemnity, a Berkshire Hathaway subsidiary, agreed to reinsure that book. Both steps are the same trade, taking on losses that have already happened. Its close relative, the adverse development cover (ADC), leaves the portfolio where it is and only responds to reserve deterioration above a set threshold. An LPT is also confused with a legal portfolio transfer (a Part VII transfer in the UK, Article L. 324-1 of the French Insurance Code), where the policies change hands. In an LPT the cedant stays solely liable to its policyholders. On long-tail lines, some liability classes and, in time, cyber, these deals give the cedant control over the ultimate cost of old claims.