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Risk Intelligence

Loss Portfolio Transfer Model

Strategic Risk Transfer Solutions

A Loss Portfolio Transfer (LPT) or Reserve Buyout is a risk management strategy commonly used by insurance companies to transfer the liabilities associated with a portfolio of insurance policies or claims to a third-party reinsurer or financial institution.

Here's how it typically works

Identification of Portfolio

The insurance company or self-insured employer identifies a portfolio of insurance policies or claims with significant liabilities, such as long-tail liabilities or high-severity claims.

Negotiation with Reinsurer

We advise the Insurance company and assist with negotiating with a reinsurer or financial institution to transfer the entire portfolio of liabilities to them. This transfer includes both the outstanding reserves for existing claims and future claim payments.

Valuation and Pricing

The parties involved conduct a thorough valuation of the liabilities to determine the appropriate price for the transfer. Factors considered in the valuation may include the severity and frequency of claims, claim reserve adequacy, and potential future liabilities.

Agreement Terms

Once the valuation is complete, the insurance company and the reinsurer agree on the terms of the transfer, including the purchase price, payment terms, and any conditions or warranties.

Transfer of Liability

The insurance company transfers the liabilities associated with the portfolio to the reinsurer in exchange for payment. This typically involves a lump-sum payment from the reinsurer to the insurance company or self-insured employer.

Closure of Transaction

Once the transfer is completed, the insurance company or self-insured employer no longer bears the risk associated with the transferred portfolio. The reinsurer assumes responsibility for managing and paying claims associated with the transferred liabilities.

Benefits of Loss Portfolio Transfer

Risk Reduction: LPT allows the insurance company to reduce its exposure to large or uncertain liabilities, thereby improving its risk profile and financial stability.

Capital Management: By transferring liabilities off its balance sheet, the insurance company can free up capital that can be deployed for other purposes, such as underwriting new business or strategic investments.

Predictable Costs: LPT provides the insurance company with greater predictability of future claim costs, as it transfers the risk of adverse claim development to the reinsurer.

Solvency Improvement: LPT can enhance the insurance company’s solvency position by reducing its reserve requirements and improving its financial ratios.

Overall, a Loss Portfolio Transfer or Reserve Buyout can be an effective risk management tool for insurance companies or self-insured employers looking to mitigate liabilities, improve capital efficiency, and enhance their overall financial position.

What can we help you achieve?

Contact our market intelligence team now to initiate and deploy CI for the future of your organization and become the Next Market Leader!

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