The writing of retrospective reinsurance includes the writing of run-off covers, stop loss policies, adverse development covers, portfolio transfers and all similar arrangements. Such policies may be written in respect of whole books of business or to cover particular risks. Their common feature is that the reinsurance provides retrospective cover, covering business that has already been written by the reinsured and where losses may already be developing. The purpose of the reinsurance is to cap or take over entirely the liabilities of the reinsured in respect of the developing losses.
Although not reinsurance, Part VII Transfers are for these purposes considered to be equivalent to retrospective reinsurance.
The Lloyd’s market is primarily a market for writing live risks and prudential concerns can arise where Lloyd’s syndicates write retrospective reinsurance of company market risks. The writing of retrospective reinsurance can involve taking on very large exposures in circumstances where it can be difficult to assess the underlying risks either due to poor records or other uncertainties. These issues can make it difficult for Lloyd’s to assess whether syndicates have the necessary competencies to take on the business and whether the business is being appropriately priced and reserved.
Retrospective reinsurance also exposes the Central Fund to risks that were not written in the Lloyd’s market.
Lloyd’s does not believe that it will ordinarily be prudent to write retrospective reinsurance into the Lloyd’s market. Given the concerns involved, Lloyd’s considers that it is appropriate to require that any managing agent that wishes to provide retrospective reinsurance for non-Lloyd’s business should first obtain the agreement of Lloyd’s for each retrospective reinsurance contract that it proposes to write.
This section does not apply to the writing of RITC or the reinsurance of portfolios in run-off within the Lloyd’s market, which are subject to separate requirements.
Performance Management – Supplemental Requirements and Guidance, pages 35-36