Indexed limits/retention on XoL contracts: How does it work with part payments in practice? For example, if a claim was incurred in mid 2004, and there was a risk XL contract in-force with a retention of £4m, and the claim was settled by making 2 payments of £4m each (one in June 2005 and one in June 2006), and inflation was running at 5% pa, how much is recoverable when a stability clause is in place? Also, regarding financial reinsurance, I'm struggling to tell the difference between run-off solutions and loss portfolio transfers - can anyone explain how they differ? And finally.. a question about the SA3 notes on credit securitisation and ILS: Under the credit securitisation heading, the non-core reading section looks to me like it's roughly describing CAT bonds (ie it speaks of placing capital in an SPV etc). However, CAT bonds are then also mentioned in the ILS section. Does this mean that ILS and Securitisation are essentially different names for the same types of contract? I was once under the impression that one made banking products look like insurance contracts and the other did the opposite? Is this not true? Help! Many thanks. Steve
Stability clause - see Subject 303, Sept 2002 Q7. Run-off solutions vs LPTs. See Course Notes, Chapter 3, first paragraph under section 4.3. ILS vs Scecuritisation. Take both terms (along with other definitions of ART products) very generally, as there's lots of overlap between all ART products and lots of variations in terminology. Hopefully any exam question would be clear about the product being examined, in terms of cover and objectives.
I appreciate the comment in the notes, and also the fact that any ART product will be defined in the exam, but I am still stuck on the issue SteveD raised - what is the difference between a Loss Portfolio Transfer and Run off Solutions. Let's just say that the exam question was exactly that - i.e. explain the difference between the two. Going by the description in the notes, the only difference I pick out is that the Loss Portfolio Transfer falls under the umbrella of finite reinsurance, and hence it may be a multi-year deal. Can anyone out there put me out of my misery and explain what the difference is between the two products?...so that I can move on and focus on something else?!
Have another look at the notes, and you'll see that a run-off solution is not a product in itself - it's a generic term that describes a transfer of a book of run-off business. An LPT is a type of run-off solution. So is a commutation. So is a Scheme of Arrangement. (see the S2007 exam to see how these were examined). Hope this clarifies it!
legal liability- Do RITC and securitisation transfer legal liability? RITC is not really reinsurance but a portfolio transfer so I think it should transfer legal liability. Securitisation, if setup using an SPV should also transfer legal liability. Perhaps the method of transfer is a part VII transfer?
RITC The short answer is yes, legal liability is transferred. The long answer is more complicated - just do an internet search for "RITC legal liability" and you'll find dicusssions about legal technicalities which challenge this. But for the sakes of the exam, I think you only need the short answer. Securitisation Not quite sure what you're getting at here. If you're securitising future profits say, you gain an asset, but not a liability. So what liabilities are you talking about when you're talking about a transfer? The SPV changes the risks involved in the securitisation. This is discussed further in Subject ST5 (and a little bit in CA1).
