A loss portfolio transfer can help to uncouple your company (or captive insurer) from legacy liabilities from the past.

Many corporations have legacy items on their balance sheets which relate to uninsured or underinsured liability risks. Some may be aware of impending losses. Some may or may not be aware of claims which have not yet been reported or settled. Some may be aware that a future expense, which has been allowed for, risks exceeding that budgeted cost. And all of these risks are an administrative headache.

Example risks

Corporations may build up very significant exposures to latent risks which have not been notified (IBNR) or provided for. These might include passive smoking, repetitive stress or whatever the next big issue may be; past latent risks include asbestosis, silicosis, pollution, etc. Alternatively, a corporation may have been allowing a certain sum for the eventual decommissioning of plant or equipment, such as an oil platform, which may turn out to be considerably more expensive than anticipated.

Handling these risks in-house is problematic

Businesses have often chosen to deal with such ‘retained’ liability risks by self-insuring, or using captives (in-house insurance companies) or similar financial vehicles. While this approach may significantly reduce the external insurance premium cost, it can lead to a build-up of liabilities and associated collateral obligations.

Fronting insurers may insist on captives collateralising their liabilities, usually with letters of credit (LOCs), and these fronting insurers often try to hold onto the LOCs for each successive year. As they stack up, this becomes inefficient from the client’s perspective and can lead to significant LOC requirements. In order to determine prospective premiums and retentions, insurers tend to base their calculations on past activity, which can lead to disputes over the accuracy of reserves. As reserves build up within a captive, not only does the LOC obligation increase but the captive then requires additional capital injected to ensure it is able to meet local solvency requirements.

Why not hand these risks over to a specialist insurer?

An increasingly shrewd option is to consider transferring your potential loss portfolio to an insurer on the open market in exchange for an insurance premium. This takes these legacy risks off your balance sheet so that they can be managed by insurers.

Advantages of a loss portfolio transfer

  • Fully transferring all liabilities (and, most importantly, latent/unreported risks) to a third-party insurer can prevent a nasty surprise in years to come
  • A loss transfer portfolio can clean up your balance sheet, and you’ll no longer need to account for, monitor or report on these liabilities
  • Striking an acceptable loss transfer deal can release significant amounts of cash and collateral back to the parent profit & loss account
  • Converting legacy liabilities to an insurance premium can improve your credit appeal to potential lenders and investors
  • You may be able to reduce your ongoing capital requirement, or even allow its closure if that is the preferred course of action
  • Costs over and above budgeted allowances for future expenditure will be borne by the insurer; any difference between the actual costs and your allowance will be refunded to you
  • Loss transfer may release all letters of credit (LOCs) or other collateral back to the company, captive or parent for the years in question
  • Loss transfer can validate or disprove past over-reserving practices (if a well-rated third-party insurer will accept the risk for a certain price, then that is inherently the right price)
  • Any claims will be managed by the insurer, not you.

Talk to us about loss portfolio transfer

Our alternative risk transfer team handles specialist types of insurance which most brokers don’t deal with. These risks are also only written by a handful of London underwriters, whom we know well. For the best chance of success with one of these underwriters, you’ll need a strong proposition presented in the most accurate and favourable light – which is something we can help you with.

We will back up your proposal with an actuarial report, and take it to the underwriter who most likely to have an appetite for your risks, and we will also judge the timing of the proposal. Sometimes, our best advice may be to retain your risks yourselves, in which case we’ll take you though the reasons why.

Please get in touch

If you’d like to explore transferring your legacy liabilities out of your balance sheet (or captive) and to a third-party insurer, please talk to our specialist alternative risk transfer team. Our key contacts are listed below.

View our glossary of insurance terms

Loss Portfolio Transfers Key Contacts