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HMRC internal manual

Lloyd's Manual

Names: other Lloyd’s-related expenditure: quota share contracts and Estate Protection Plans: FA 2002: details

The details of the legislation are set out in FA93/S178 (1)(c), FA93/S178 (3A) and FA93/S178 (3B). Definitions of the terms used in the rules are in FA93\S178 (4). The key new term is that of “transferred loss” which means the loss for which liability is taken over by the reinsurer under the quota share contract. The amount of any transferred loss does not include any part of a declared loss for which the member has paid a cash call.

Premium paid after loss declared

FA93/S178 (1)(c)(i) allows a quota share (QS) premium to the extent that it exceeds the transferred loss declared before the contract takes effect. For example, a syndicate declares a loss for a year of account of which the member’s share is £100,000. After the loss is declared but before it is called the Name pays a premium of £120,000 under which the reinsurer takes over responsibility for all future losses including those already declared. The deduction for the member’s QS premium is restricted to £20,000 (£120,000 premium less £100,000 transferred loss).

If, however, the member had already paid a cash call of £50,000, the deduction for the premium would only be restricted to £70,000 (£120,000 less £50,000 transferred loss, that is disregarding the £50,000 cash call already paid.)

FA93/S178 (1)(c)(ii) allows the premium payable where the contract does not take effect. This applies to the EPP situation where the member pays a premium but the reinsurer does not take over the liability for losses unless the member dies.

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Premium is less than the declared loss

FA93\S178 (3A) taxes the amount by which a premium for a quota share is less than the declared amount. This will be an unusual case, but if applied to the first example above, if the premium paid was £90,000, all of the premium would be disallowed and £10,000 would be a profit of the year in which the contract came into effect. In effect the member is denied relief for £10,000 losses they will not be required to pay.

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Cash call paid before loss declared

FA93/S178 (3B) gives a deduction for cash calls paid in respect of transferred losses before declaration. For example, a member has paid cash calls of £50,000 in respect of a year of account losses. Before the syndicate declares its loss, the member pays a premium of £100,000 to the reinsurer to take over liability for the uncalled losses. The member is entitled to a deduction of £150,000 (£50,000 cash call paid and £100,000 premium, both paid before declaration).