The ‘reinsurance to close' market is not being actively serviced, believes Dermot Joyce.
Under the existing Lloyd's regulations, a Lloyd's syndicate can only be closed by reinsurance into a later year of account of the same syndicate or be absorbed into another one. As an example, where a syndicate has ceased underwriting, there is clearly no later year of account and the entity, known now as an orphan syndicate, has to find another syndicate in order to close.
At present, there are only three Lloyd's syndicates showing any interest in offering reinsurance to close (RITC) to orphan syndicates. These are managed by the Liberty, Imagine and Marlborough (Berkshire Hathaway) managing agents. As a result of the limited choice of RITC providers, the expected risk premiums can range as high as 30% to 45% of net undiscounted reserves.
To put the problem into context, as at 31 December 2004 there was £3,668m of net reserves held by 2001 and prior years of account that had not closed and an additional £926m held by 2002 years of account. In total £4.5bn of reserves were held by orphan and other run-off years of account.
The hinge factor is to drive the RITC premium lower by de-risking the syndicate book before transfer. The best solution is to have the best in class run-off commutation resources available, that have not only the market relationships but are highly efficient in resolving litigious claims and/or avoiding the need for litigation; working effectively with “reluctant” reinsurers; reducing long-term expenses; simplification of prior year accounting; and ability to realise the reinsurance asset through negotiation and commutation.
Speed, absolute operational scale and ability to commute are the only tools available to bring the parties together and make transactions in finality a reality. Lloyd's should consider bringing the resources and capability of external managed services providers to provide the platform for both parties. Lloyd's can be the agent of convergence by vetting and appointing a select group of approved service providers.