Loss Portfolio Transfer

A loss portfolio transfer (LPT) is a retroactive reinsurance deal that moves a defined block of already-incurred, open claims from the party that originally carried them to a reinsurer. In exchange for a single lump-sum premium, the reinsurer assumes responsibility for paying out those existing liabilities as they run off. The premium is calculated from the present value of the expected future claim payments plus a risk and profit margin, so the ceding party trades an uncertain, long-tail obligation for a fixed cost booked today.

LPTs matter to businesses beyond insurers, especially self-insured employers and captives with legacy workers' compensation claims. Old comp and liability claims can develop for years, and rising medical costs or reopened files create adverse development that blows through original reserves. An LPT caps that tail: it removes the volatile old claims from the balance sheet, frees up collateral and case-reserves, and lets management focus on current operations. For a company being sold, an LPT can clean up legacy liabilities so a buyer isn't inheriting an open-ended obligation.

A practical nuance: an LPT transfers the economic risk and the claim-handling burden, but the ceding party often remains legally liable to the original claimants, so the reinsurer's financial strength and its A.M. Best rating are critical — if the reinsurer fails, the obligations can flow back. LPTs are also distinct from a commutation, which unwinds a reinsurance relationship, and they hinge on accurate IBNR and loss-development estimates; misjudge the reserves and the lump-sum premium is mispriced. For a self-insured buyer, an LPT is a powerful tool to put a hard ceiling on runaway legacy claims — but only worthwhile when the certainty is worth the margin the reinsurer charges.