Reserve buy-out plan frees Lloyd's capital

A group action to settle casualty treaty reinsurance business aims to bring hundreds of millions of pounds back into the Lloyd's and London company markets.

Lloyd's insurer SVB is forming a group to undertake a mass commutation of business.

Fifteen syndicates and companies have signed letters of intent to join and free up capital currently held in reserve against expected losses. Others are considering joining, SVB said.

Commutation occurs when a reinsurer buys itself out of its obligations to a ceding company.

The sum paid is determined by negotiation.

If successful, commutation would bring finality to accounts that could otherwise fester for years, requiring additions to reserves or generating large legal bills as insurers and reinsurers contest claims.

The group will focus on North American long-tail casualty treaty business, with some medical malpractice and healthcare, from 20 core cedants.

Depending on the eventual size of the group, the value of the business under negotiation is likely to run into the hundreds of millions, if not billions, of pounds.

The success of the mission will depend on the price negotiated by the reinsurers to buy themselves out of the policies.

And the negotiation process is likely to be lengthy.

SVB chief executive Matthew Fosh said: "I don't expect to have my first win until the end of next year.

"We could carry on doing this business every day, but it's in everybody's interest that we have finality on contracts we no longer write."

Peter Goss managing director of Axiom Claims Consulting, which is handling the initiative, said: "This is the first initiative I've known where an on-going Lloyd's syndicate is trying to solve its discontinued lines of business to create financial certainty. It takes away some of the uncertainty about adverse loss development.

"Even if we add nothing, we will have taken away risk."