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U.S.

Casualty Practice

LOSS PORTFOLIO TRANSFERS:


A STRATEGIC PORTFOLIO SOLUTION

In todays business environment change is inevitable and the


only certainty is uncertainty. Loss portfolio transfers (LPTs)
can be an effective way for companies to eliminate some
volatility and gain financial predictability. The LPT market is
likewise evolving: new carriers are entering the market and
are expanding coverage for both known and unknown risks.
This growing field of insurers has made LPTs an attractive
and viable risk transfer option for many companies.
LPTs are structured to package and
sell off outstanding liabilities, thereby
achieving collateral relief, as well as
other potential economic and
operational benefits. The goal of a
loss portfolio transfer is to have a
third party assume, for a premium,
the obligations of historical losses
(projected ultimate losses, including
incurred but not reported (IBNR)
losses) emanating from a variety of
liabilities. An LPT transfers a
companys obligation for historical
retained loss programs (e.g.,
deductible, self-insured retention
(SIR), captives, etc.) to a third party.

An LPT can provide budgetary


certainty for future development of
self-insured/retained liabilities. LPTs
are predominately executed for
workers compensation and general,
product, and hospital professional
liabilities coverage, on losses that are
generally 24 months and older.
Greener policy years often generate
higher premiums than the
corresponding benefits of transfer.
Marshs Casualty Practice created the
Collateral Solutions Group (CSG) to
help clients design and negotiate risk
financing options, inclusive of LPTs,
with a variety of specialized insurers.

Who its for:


Any company, regardless of
industry sector, that has
significant retained liabilities;
typically more than $5 million
in outstanding liabilities is
necessary to create a true
financial advantage.
Companies looking for
budget certainty.
Companies that are dealing
with legacy collateral issues.
Companies with discontinued
operations or those involved
in mergers and acquisitions
that wish to transfer historical
liabilities (balance sheet
impact).
What you get:
Elimination of legacy
collateral and related costs.
Financial predictability and
budget certainty.
Access to industry-leading
experts and a vast global
network of collateral experts.

KEY BENEFITS
Financial predictability by
eliminating volatility and removing
balance sheet accrual.
Provides certainty on medical
inflation and indemnity awards;
additionally, helps control the
unpredictability of Medicare setaside amounts.
As letters of credit costs rise and
credit constriction worsens, LPTs
may offer a company an opportunity
to secure a return of the collateral
securing a companys self-insured

obligations, and achieve potential


cost savings.
Relief of administrative burden results
in potential savings on surcharges
and assessments as well as the
elimination of future adjustments.
Potential accelerated tax
deductibility (subject to tax counsel).
Potential positive impact on return
on investment calculations through
comparison of current discounting
(low interest rate environment)
versus the potential against adverse
loss development.

SAMPLE PROGRAM: LARGE DEDUCTIBLE PROGRAM OBLIGATIONS


Insurer
Insured
Layer

Insurer
pays on
behalf

Deductible
$(X)

Insured

Loss
Reimbursement

Bank

Fee

LOC
Insurer

Insured

Assumption of insureds statutory liability


Pay on behalf

Contractual agreement to reimburse


deductible payments

Seeks reimbursement

Post required collateral

SAMPLE PROGRAM: LARGE DEDUCTIBLE PROGRAM CLOSEOUT


Insurer

Insurer
pays on
behalf

Insured
Layer

Insured

Insurer
Pays claims
Insured
Pays premium

Deductible
$(X)

Premium

Marsh is one of the Marsh & McLennan Companies, together with Guy Carpenter, Mercer, and Oliver Wyman.
This document is not intended to be taken as advice regarding any individual situation and should not be relied upon
as such. The information contained herein is based on sources we believe reliable, but we make no representation or
warranty as to its accuracy. Marsh shall have no obligation to update this publication and shall have no liability to you
or any other party arising out of this publication or any matter contained herein.
Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as
insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for
which you should consult your own professional advisors.
Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be
materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or
should change.
Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition
or solvency of insurers or re-insurers. Marsh makes no assurances regarding the availability, cost, or terms of
insurance coverage.
Copyright 2012 Marsh Inc. All rights reserved. Compliance MA12-11440

MARSHS COLLATERAL
SOLUTIONS GROUPS LOSS
PORTFOLIO TRANSFER
PROCESS
We view the management and
negotiation of loss portfolio transfers
as a strategic alternative risk financing
product. Our Collateral Solutions
Groups process for negotiating loss
portfolio transfers includes the
following steps:
Analytics: Understanding the
projected and remaining ultimate
unpaid liabilities for the policy years
in question is essential.
Program Design: There are a
number of program design options
available to facilitate a close out or
loss portfolio transfer, each differing
somewhat in their respective
features. Using our analytical
toolscombined with our extensive
knowledge of potential insurers
risk appetite, flexibility, and
financial analysishelps to drive
our ultimate recommendations of
the viability of an LPT.
Claims Management: Effectively
managing claims and conducting
an appropriate assessment of the
effectiveness of the past claims
handling has a direct effect on the
success of an LPT negotiation.
Program Documentation: Our
dedicated experts are well versed in
all aspects of the administration of a
loss portfolio transfer.