How insurance companies can protect their core capital amid Covid-19? Is Loss Portfolio Transfer (LPT) one of the ways to go?Sachin Mohan
A type of alternative #risk financing- Loss Portfolio Transfer, is one of the ways which can help insurance and non-insurance companies remove liabilities from their balance sheet. If an insurer wants to exit a line of business; LPT is one of the ways to do it. It is also used as a way to transfer risk from parent to its captive insurance company. If any company wants to transfer large amount of accumulated claims which is piled up either due to M&A or otherwise, loss portfolio transfer can be a way to do it. This will help in getting rid of the necessity to maintain the reserve to service claims. The loss portfolio transfer acts like a cleanser for your balance sheet and frees up capital and liability so that you can use it for the growth of your firm. LPT can be done by both insurance and non-insurance companies. In case of insurers, in most of the cases it is the re-insurers who is the other party in the transaction. I am focusing more from an insurer’s perspective.
So loss portfolio transfer is a sort of financial reinsurance in which transfer of portfolio of loss liabilities is done from insurers to re-insurers at a certain price. Sometime LPT is also done by re-insurers. These policies that is being transfer from insurer to re-insurers are often the policies where liability exists or it is incurred but not reported. The benefit insurers get is that they can instantly monetize the reserve that they have. Reserves are maintained to pay out the claims. So in this way insurers remove liability from their balance sheet, and it can also help insurers in maintaining the solvency capital requirement.
There are billions of dollars inactive P&C book of business globally that doesn’t make any economic rationale. We all know that there is an increase need of intelligent usage of capital, and these legacy portfolios will carve out a chunk of capital with a low return. It would be prudent to get rid of these legacy businesses and use capital more prudently. The key point to be considered by insurers is whether it is prudent to keep having exposure to long-tail risk or rather the capital that is in reserve can be used to for growth?
Loss portfolio transfer deals have gained momentum in last few years. Some of the key Loss portfolio transfer deals in Quarter 1 2020 are:
- Deal: Hiscox
- Currently exploring selective loss portfolio transfers
- Reason: To release capital
- Deal: QBE
- Loss portfolio transfer on around US $300 million of North American excess & surplus lines reserves
- Reason: To protect its core capital and balance-sheet
- Deal: Houston International Insurance Group
- Houston International Insurance Group entered an agreement for an LPT.
- Reason: To minimize future prior period adverse loss and loss adjustment expense -LAE reserve development.
- Deal: LPT between DARAG (Legacy acquirer) Insurance Guernsey Limited and a multinational insurance company
- Advisor: Tiger risk
- Deal: Randall & Quilter with Repwest
- Randall & Quilter entered into contract of LPT with Repwest Insurance Company.
- Reason: Repwest wanted to deal with its Assumed Re run-off business.
- Advisor: Aon
Consider LPT as a capital management tool. Other such tool is adverse development covers or ADCs which is similar in objective but different in a way it is structured. There has definitely been a shift in strategy of insurers to streamline their portfolio to utilise their capital more prudently and also to protect their core capital in current scenario.