For many large and mid-size organizations, the utilization of significant deductibles or self-insured retentions can be a cost effective risk management strategy. Over a period of years, such a strategy can result in the accumulation of large balance sheet reserves. This is especially true for risks with long tail liabilities such as workers' compensation, products liability, medical malpractice, and environmental exposures. Loss Portfolio Transfers, also know as Reserve Buyouts provide an opportunity to eliminate these reserves by transferring them to another party, usually an insurance company. These transactions are often used in preparation for a sale, merger, or refinancing.

Benefits

• Reduction or elimination of balance sheet liabilities;
• Removal of uncertainty over future expenses;
• Increased debt capacity;
• Release of security/collateral supporting the reserves;
• Potential acceleration of tax benefits;
• Possible favorable P&L impact depending on prior recognition of reserves.

The Process

• The ultimate value and projected payout pattern of the liabilities is actuarially determined;
• Present Value calculations are used to adjust the projections to current;
• A premium is determined based on the actuarial projections plus an additional risk charge to protect the buyer against possible adverse development.

Required Information

• Historical insurance policy wording including program structure, exclusions, per occurrence and aggregate limits, retentions, and deductibles;
• Summarized paid, incurred, and outstanding loss data as well as details on individual large claims;
• Description of reserving practices;
• Triangulated loss data for the past 5-7 years.