Reinsurance to close (RITC) and technical provisions: section 107 FA2000: adaptations for Lloyd's members: meaning of technical provisions
FA00/S107 referred to the ’technical provisions’ of general insurers. The rules worked by comparing the original provisions taken into account for tax purposes, with the cost of settling the liabilities to which the original provisions relate.
Lloyd’s members do not have ’technical provisions’ in the same way as other general insurers. Instead, all liabilities of the syndicate are settled by payment of the RITC premium, or in the case of a single member syndicate, by setting a provision. In many cases the same member participates on both the paying and receiving syndicate.
The RITC premium is paid under a reinsurance contract and does not remove the syndicate member from ultimate liability for the claims of policyholders. This reflects both the legal position that a member cannot contract with himself, and the economic substance of the arrangement. To that extent, the RITC premium is broadly equivalent to the technical provision made by a general insurer, as is the estimate of future liabilities of a run-off syndicate (LLM2070).
In the case of a single corporate member syndicate (LLM1060), a provision for future liabilities of the closing year is deemed by Lloyd’s rules to be an RITC contract.
In relation to Lloyd’s members, therefore, technical provisions were defined as
- the lesser of the RITC premium paid or received (or deemed to be paid/received under Lloyd’s rules) by the continuing member of a syndicate (regulation 7(1)) (LLM3080)
- the provision for unpaid liabilities (that is the EFL - LLM2070) in the case of an open syndicate (regulation 7(8)) (LLM3090).
In both cases, this was subject to the 4% rule (LLM3020).
Managing Agent’s role
FA00/S107 applied at member level, not at syndicate level. However, the amount of the RITC is determined by the managing agent at syndicate level. The managing agent was, therefore, required (by regulation 7(11)) to provide details of claims payments and either the RITC premium paid (if the syndicate closes) or the estimate of future liabilities (EFL) (if it is in run off) to enable the member to produce the calculations.