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A couple of weeks ago, I touched down in Bermuda – a rather curious grouping of islands in the North Atlantic Ocean with insurance roots dating back to the mid-nineteenth century. Today it is home to numerous insurers, reinsurers, legacy acquirers and insurance-focused accountancy and law firms, most of which look west to the US.
Bermuda has become a hive of legacy market activity, primarily as a significant market for North American risk carriers seeking Loss Portfolio Transfers (LPTs). In essence, an LPT is a 100% quota share reinsurance solution that transfers the economics of a portfolio to a legacy acquirer’s balance sheet.
But something new lies on American insurers’ expansive horizon. In Episode 2 of A Rough Guide to Legacy I mentioned the current US-market buzz about Insurance Business Transfers (IBTs) and the legal finality that comes with them. So, what are the pros and cons of LPTs vs IBTs?
LPTs are a tried-and-tested method for divestment of legacy portfolios. They are typically coupled with a Run-Off Management Agreement (ROMA) that provides clients with operational as well as economic finality. They can be effective immediately upon signing and deliver capital relief.
Missing from the LPT solution is the notion of legal finality. Claims can still be made against the original insurer, although payment will come from the reinsurer instead. The reinsured retains ultimate liability for any claims.
IBTs allow exactly for this missing piece of the puzzle. In fact, solutions currently provided in Europe tend to involve an upfront LPT that transfers economic risk straight away, followed by a legal portfolio transfer through an IBT. Depending on the jurisdiction, the IBT can take anywhere from a few months to more than a year to complete.
However, the US market is still eagerly awaiting the completion of the first local IBT, which could take place later this year in Oklahoma, under its as-yet untested Insurance Business Transfer Act, according to recent press reports. Only the future will tell how this may affect the North American legacy market!
Next week I will be dividing my time between Finland, Germany, and London, after which I will be returning to Vancouver for a much-needed summer vacation and rest.