Loss Portfolio Transfer

Loss portfolio transfers happen when an insurance company transfers a policy to a reinsurer after it sustains a loss through claims made but not yet paid, or those not yet completed (Incurred But Not Reported, a.k.a. IBNR). This is done to remove the loss from their books, or just to get out of selling that product.

For example, if a company sees too many losses with a particular type of claim, they may transfer all those to a reinsurer (i.e., they generously pass on that line of business to some other schmuck to take it over). The reinsurer (buying group) can take over these assets for less than book value, giving the ceding (selling) company a profit, but they can also settle claims for less than the ceding company estimated and keep the reserves they take over.

If you're wondering why someone would buy a potential loss, you've got good reason to raise that right eyebrow. The reason: the reinsurer is betting on the ceding group having overestimated their reserves. If they did overestimate and have a surplus in their reserves, the resinsurer would get to keep it.