A Loss Portfolio Transfer (LPT) is a reinsurance contract or agreement in which an insurer cedes policies, often ones that have incurred losses, to a reinsurer. That reinsurer then assumes and accepts an insurer’s existing claims liabilities through the transfer of the insurer’s loss reserves. More simply put, an LPT is the transfer of liabilities from one group to another. For years, it has proven to be a successful type of alternative risk financing.

“Self-insurance has been the most straightforward environment for the application of an LPT, but the positive effects of this type of agreement can be realized in other situations as well,” said Michael Kim, Vice President – Loss Portfolio Transfers at Safety National. “For example, if an entity is currently insured under a Large Deductible program, the LPT can reduce or eliminate the need for holding reserves for prior policy periods.”

The following are just a few of the many and varied benefits of LPTs.

1. Ability to convert all known and unknown liabilities into a fixed payment.

An LPT is a way of organizing an insurer’s liabilities into one permanent, final cost, improving the insurer’s balance sheet. Most claims close within 2-3 years, but sometimes they can remain open for 10, 15 or 30 years. Instead of having that liability drag out year after year, insurers use an LPT to transfer the liabilities to a carrier or reinsurer in a one-and-done payment.

2. Removing the potential for additional assessments of members.

When you look at qualified self-insureds versus qualified self-insured groups, there is little difference. As the group runs out of money, they can go back and assess their members to replenish funding.

3. Possible release of collateral from the state.

As part of the LPT process, the carrier works to secure approval from the jurisdiction, and if the jurisdiction approves, it typically returns the collateral. When a qualified self-insured transfers their claims to a carrier that meets rating requirements, the collateral is typically released.

4. Elimination of administrative costs and future assessments.

Self-insureds are forced to handle many frictional costs. Actuarial reports, auto and financial statements, loss control, etc. — all those frictional expenses are removed with an LPT. Although some might decide to remain self-insured and run off their liabilities, they will still be required to perform the same responsibilities as any qualified self-insured.

5. Improves a balance sheet.

Removing the liabilities that an organization is responsible for, in turn, improves its balance sheet. For example, if there is a $10 million liability for a workers’ compensation claim on the balance sheet, removing it through an LPT strengthens overall financials.

6. Useful for mergers and acquisitions (M&A) transactions.

As entities combine or embark on an asset sale, they often opt for an LPT to eliminate liabilities and start clean. Because an LPT improves the health of the balance sheet, it has become very popular within the mergers and acquisitions space.