Editing Lloyd's of London (section)

====Reinsurance to close====
It may not be immediately clear how current members of current Lloyd's syndicates, which accept business one year at a time, could be liable to pay historical claims. This came about as a result of the Lloyd's accounting practice known as [[reinsurance to close]] (RITC).

A member "joined" a syndicate for one calendar year only, known as the "annual venture". At the end of the year, the syndicate as an ongoing trading entity was effectively disbanded. However, usually the syndicate re-formed for the next calendar year with the same identifying number and more or less the same membership. Since claims can take time to be reported and then paid, the profit or loss for each syndicate took time to realise. The practice at Lloyd's was to wait three years (that is, 36 months from the beginning of the year in which the business was written) before "closing" the year for accounting purposes and declaring a result.

To calculate the profit or loss, reserves were set aside for future claims payments, for claims that had already been notified but not yet paid, as well as estimated amounts for claims that had been [[incurred but not reported]] (IBNR). This estimation is difficult and can be inaccurate; in particular, long-tail liability policies tend to produce claims long after the policies are written.

The reserve for future claims liabilities was set aside in an unusual way. The syndicate bought a RITC policy to pay any future claims; the premium was equal to the amount of the reserve. This transaction allowed the year to be closed, and the syndicate's profit or loss declared. The reinsurer was always another Lloyd's syndicate(s), often the succeeding year of the same syndicate: the members of syndicate '1' in 1985 reinsured the future claim liabilities for members of syndicate '1' in 1984. The membership might be the same, or it might have changed.

In this manner, liability for past losses could be transferred year after year until it reached the current syndicate. A member joining a syndicate with a long history of such transactions could – and often did – pick up liability for losses on policies written decades previously. As long as the reserves had been accurately estimated, and the appropriate RITC premium paid every year, then all would have been well, but in many cases this had not been possible: no-one could have predicted the surge in APH losses. Therefore, the amounts of money transferred from earlier years by successive RITC premiums to cover these losses were grossly insufficient, and the current members had to pay the shortfall.

As a result, a great many Names whose syndicates wrote long-tail liability at Lloyd's faced significant financial loss or ruin by the late 1980s to mid-1990s.