Syndicate accounts: reinsurance to close (RITC)
A syndicate ceases writing new business at the end of the underwriting year of account, although it might continue to receive premium income from the business written in its first 12 months. 24 months after the end of the underwriting year (that is, at the 36-month point of the syndicate) the managing agent evaluates the outstanding risks. In most cases the outstanding risks are reinsured by payment of reinsurance premium to enable the accounts for the underwriting year to be closed. This premium is referred to as a reinsurance to close (RITC) premium. Once a syndicate year of account closes in this way it ceases to exist and its profit or loss is finally determined.
The RITC is normally paid to the same numbered successor syndicate, which takes over all unpaid liabilities arising from the business underwritten by the closing syndicate. For example, Syndicate X (2000) closes its accounts at 31 December 2002 by paying an RITC to syndicate X (2001) which is then at its 24-month point. The RITC will be paid during 2003, but is included as a trading receipt in the accounts of syndicate X (2001), that is, as if it were received in year ending 31 December 2001. The RITC premium is the exception to the rule that the syndicate accepts business only during its underwriting year.
Lloyd’s rules require the amount of the RITC to be fair and equitable to the members of both the paying and receiving syndicates.
Occasionally a syndicate will reinsure to close into a different syndicate or, even more rarely, outside the Lloyd’s market altogether. This kind of third party RITC is generally more expensive than placing the reinsurance with the successor syndicate.
What does the RITC include?
The RITC premium should cover all of the remaining liabilities of the syndicate that is closing. This includes liabilities from previous years’ syndicates that had been reinsured into that syndicate. It will include amounts in respect of
- outstandings: all claims notified to the syndicate that have not yet been paid, or have not yet been quantified
- IBNR: claims incurred but not reported - an estimate of the claims that the syndicate believes that it is likely to receive in the future
- claims handling (that is, administrative) costs.
The term ‘outstanding liabilities’ is used rather differently in Lloyd’s syndicates from its use in general insurance companies, which use the term to include outstandings and IBNR.
Single member syndicates
In the case of a single member corporate syndicate, no actual payment is made when it reinsures into its successor. Instead, the syndicate makes a provision (or reserve) for the liabilities passed on. Lloyd’s Definitions Byelaw (LLM2030) deems this to be a reinsurance to close premium, so that the RITC rules apply to it.