Insurance/Reinsurance Bulletin May, 2009

Brokers and Limited Liability Partnerships

By Nick Hutton, Kapil Dhir and Andrew

Carpenter

Conversion to LLP status is something that is growing in

popularity and we are working with several brokers keen to

investigate the advantages it may confer.

LLP status was introduced in the UK in 2001 and has been popular

with those businesses using the traditional partnership model, for

instance, lawyers and accountants. Brokers, perhaps using a more

traditional company structure, are now alive to the benefits that

LLP status may afford. LLP status brings with it a number of

benefits:

LLP members are taxed as if they are self-employed, meaning

that the LLP pays less in National Insurance.

Members of the LLP do not have shares or employment contracts;

they are signatories to the membership agreement, which is a

confidential document (unlike, say, articles of association).

The membership agreement can provide for profit share in a

number of different ways with a level of flexibility that is not

possible in a private company structure, when board and shareholder

majority votes at meetings are required. This makes

incentivisation, a huge current issue for brokers, more

flexible.

The LLP structure is less hierarchical than the private company

structure, arguably encouraging a greater sense of cohesion or

camaraderie between members.

The LLP is tax transparent and is not charged corporation tax

– each individual member is individually taxed on their

share of profits.

Brokers should weigh the obvious potential benefits against the

costs of conversion. Conversion to LLP status can be labour

intensive; this is after all the incorporation of a new entity

meaning a transfer of all existing business of the company to the

LLP. For example:

Regulatory authorisation will have to be in place for the new

business.

Any existing terms of engagement with clients or suppliers will

need revision in order to provide that the services will be given

to the client by the successor LLP.

Bank accounts, client monies and facilities including leases

will need to be transferred.

An LLP agreement governing the operation of the LLP and the

interaction between the members will need to be drafted.

However, the enormous advantages set out above may well be

deemed to mitigate those expenses.

For new broker start-ups, however, the position is simpler

(including the delivery of an application form and fee to Companies

House and the drafting of a members' agreement) and certainly

one that we believe will increase in popularity. The basics for

incorporating an LLP can be seen in further detail on the Companies

House website at http://www.companieshouse.

gov.uk/about/gbhtml/gbllp1.shtml.

Australia: APRA1 Prudential Standards Alert

By Richard Jowett and Celina Fang

The revised Australian Prudential Standards (GPS 230 and 114)

have important implications for non-APRA authorised reinsurers

wishing to continue and/or enter business in the Australian

reinsurance market and for Australian insurers who have claims

which potentially have a long tail. This includes, for example, BI

claims with a 24 month indemnity period, long tail IBNR claims and,

for "claims made" policies, claims which are not resolved

within 12 months of being notified.

One of the effects of the changes is that Australian insurers

who reinsure with non-APRA authorised reinsurers now face an

increased investment risk capital charge unless their reinsurer is

able to provide appropriate collateral/security to the insurer in

Australia.

Furthermore, stringent new requirements on when reinsurance

recoveries must be paid by reinsurers potentially creates problems

for those Australian insurers who have outstanding claims. In

particular, Australian insurers who have claims which may take more

than 12 months to resolve may be caught by a greater investment

risk capital charge in certain circumstances.

Revised APRA standards

Increased Investment Capital Factors

Recent amendments to Australian prudential standard GPS 114 mean

that all reinsurance placed with non-APRA authorised reinsurers

will now attract an increased investment risk capital charge unless

the non-APRA authorised reinsurers provides certain types of

collateral2 in Australia to the Australian insurer

against reinsurance recoverables.

Furthermore, the investment risk capital charge will be

significantly increased if:

There is a recoverable that is due and payable ("the

receivable");

The receivable is overdue for more than six months since a

request for payment has been made to the reinsurer; and,

There is no formal dispute between the insurer and reinsurer in

relation to that receivable.

The above changes apply to all reinsurances incepting on or

after 1 July 2008.

In addition, for reinsurances incepting on or after 31 December

2008, insurers who have claims which have the potential to remain

outstanding for a period past the second balance date of when the

claim occurs (or, in the case of a claims made policy, is notified)

also face a significantly increased investment risk capital charge

for those claims. Again, this may be avoided if the reinsurance

recoverables are supported by collateral, guarantee or letter of

credit.

The possible implication of these changes is that an Australian

insurer is effectively being penalised for reinsuring with a non-

APRA authorised reinsurer. Potentially affected reinsurers should

therefore give consideration to becoming APRA authorised or,

alternatively, to making arrangements with their Australian

reinsureds for acceptable collateral to be put in place.

Contract certainty of reinsurance arrangements

In addition, GPS 230 now provides for a "two month"

and "six month" rule in respect of documentation...