Chapter 16-Reinsurance

Question 1

Describe the following:

1. Direct writing company
2. Reinsurer
3. Retrocession
4. Indemnity reinsurance
5. Cession
6. Assumption reinsurance

Answer 1

1. The ceding or primary company
2. The assuming company
3. The act of the reinsurer transferring part of a cession to another company
4. Reinsurance undertaken for general business purposes
5. The act of transferring insurance to a reinsurer
6. Reinsurance undertaken to transfer all or a large part of an insurance company’s liabilities

Question 2

What are some characteristics of assumption reinsurance?

Answer 2

• Used to bail out insurers experiencing financial problems
• Reinsurer may place a lien against the cash value of the policies it assumes
• May be used by an insurer who ceased writing life policies in that state
• Typically, reinsurers acquire the right to receive all future premiums on all coverage it has been reinsured

Question 3

What are some characteristics of the retention limits of a life company?

Answer 3

• Companies set retention limits to prevent wide fluctuations in mortality costs
• The larger the insurer’s surplus, the higher it may safely set retention limits
• The longer a company has been in business, the higher it may safely set its retention limit
• The larger the volume of insurance in force, the higher a company can set its retention limit (industry giants can set higher limits than newly established, small companies)

Question 4

What are some logical reasons for an insurer to use reinsurance?

Answer 4

-Reduce total liabilities by transferring a portion or all to a reinsurer
-Achieve Specific Corporate Objectives:
(-To take advantage of a company’s underwriting judgement of the reinsurer)
(-Reduce the strain of surplus from underwriting new business)
(-Avoid a large concentration of risk on one life)
(-Transfer certain classes of substandard business)
(-Turn over existing business if an insurer will no longer write policies in that state or of a specific type)
(respected life companies do not transfer policies with errors, that is fraud)

Question 5

What are the proportional plans of reinsurance?

Answer 5

• Coinsurance
• Modified Coinsurance
• Yearly Renewable Term Insurance

Question 6

What are the advantages of yearly renewable term basis of reinsurance?

Answer 6

• The primary company enjoys more rapid growth in assets because it retains a large part of the original policy’s annual gross premium
• Chosen when the reinsurer is not licensed in the primary company’s home state (the primary company may not deduct the reserves on reinsured policies from its reserve liabilities, if the reinsurer is not licensed in the primary company’s state (the primary company retains most of the gross premiums and holds all reserves)
• Easier to administer than the coinsurance plan
• Appropriate for nonparticipating plans because costs are fixed in advance (stock and mutual companies prefer YRT reinsurance)
• Maintenance of adequate reserves is the responsibility of the primary insurer

Question 7

What are some characteristics of of reinsurance under the coinsurance plan?

Answer 7

• Reinsurers assume a share of risk according to the terms that govern the original policy
• The reinsurer accumulates and holds the assets supporting the policy reserves for the amount of insurance transferred
• The reinsurer is responsible for the percentage of the face amount they accept and is liable for that same percentage of the death claim (as well as the net amount at risk)
• Reinsurer is responsible for it’s pro data share of the cash surrender value and dividend owed to the insured
• The reinsurer is responsible for the percentage of the face amount they accept and is entitled to receive that amount of the premium minus agent commission, premium taxes, and other expenses
• The reinsurance plan is based on the same type of policy issued by the primary company
• Primary companies have a less rapid growth of assets than with the yearly renewable term plan (the reinsurer accumulates more assets because it accumulates and holds policy reserves for the amount reinsured)
• The reinsurer reimburses the primary company for the acquisition expenses for acquiring the reinsured portion of the business
• The reinsurer contributes nothing toward the medical and other selection expenses

Question 8

What are the primary company’s advantages of using the modified coinsurance plan vs straight coinsurance for reinsurance?

Answer 8

Assets will increase more rapidly because the primary company retains the full amount of the assets supporting the reserve under the reinsured policy (the straight plan accurately and holds the assets supporting the policy reserve for the amount of the policy reinsured)

(-premiums paid to the reinsurer is based on premiums received by the primary company)
(-reinsurance costs are based on the incidence of expenses and surplus drain incurred by the primary insurer)
(-reinsurer is required annually to return a dollar amount equal to the increase in reserves [minus one year’s interest on the initial policy reserve] plus the ceding commission)
(-the net cost of reinsurance for the primary company is likely to be less for the early years than under the yearly renewable term plan)

Question 9

What is the basic characteristic that differentiates non proportional plans vs proportional plans of reinsurance?

Answer 9

Non proportional plans relate the reinsurer’s liability to the loss experience of all or specified blocks of business (rather than individual or specific policies)

Question 10

What are some characteristics of stop-loss reinsurance?

Answer 10

• Non proportional reinsurance
• Designed to reimburse the primary company if aggregate mortality losses exceed normal losses by a specific percentage of tabular mortality
• The insurer’s liability is typically limited to a specified dollar amount for a specified contract period
• Ease of administration because there is no need to maintain individual policy records (compared to proportional reinsurance)

Question 11

What are some characteristics of catastrophe reinsurance?

Answer 11

• Designed to be used as a supplement to a proportional reinsurance
• Provides 90%-100% coverage of aggregate losses in excess of some specified limit during catastrophic events
• Appeals to Insurers that have a concentration of risk in one location
• Reinsurer’s potential liability may be high but probability of any loss is low
• The expense element of the reinsurance premium is low because of the use of aggregate reporting procedures

Question 12

What are some characteristics of spread-loss reinsurance?

Answer 12

• Primary purpose is to spread an unfavorable mortality experience for the primary company over the designated recapture period (usually 5 years)
• The primary company pays an annual premium of a specified minimum amount (a certain percentage ex. 20%) to the reinsurer for expenses and profit. The remaining percentage is credited to a “refund account” (ex. 80%) that provides funds to pay losses for the primary company
• The only significant risk assumed by the reinsurer is the risk of the continued solvency of the primary company
• The premium may be adjusted upward any year where the primary company’s death claims exceed a specified limit
• Any dollars paid to the primary company, plus the designated profit and expense percentage, can be recaptured by the reinsurer from the primary company during the specified recapture period, usually 5 years
• The specified percentage for the reinsurer’s expenses and profit is included in the annual premium (not in addition to)

Question 13

What are the characteristics of the facultative method of reinsurance?

Answer 13

• The primary company forwards to the reinsurer a copy of the application for each risk before the primary company accepts the application
• The reinsurer reviews the application and other information before accepting the risk
• Advantageous to a new primary company with limited underwriting experience

Question 14

What are some characteristics of the automatic method of reinsurance?

Answer 14

• Method involves less delay (compared to the facultative method)
• Agreements specify the conditions for the primary company’s use of the automatic method
• Primary company retains a part of each risk that is reinsured
• Agreements include a schedule of the limits of retention for primary company and coverage in excess of the limit must be offered to the reinsurer who must accept up to a specified maximum explained in a “jumbo clause” (beyond the max, coverage is accepted on a facultative basis)

Question 15

What are some characteristics of the cession form used for reinsurance?

Answer 15

• The form is the same (whether it a facultative or automatic agreement)
• Details the risk and the schedule of reinsurance premiums
• If a coinsurance plan is used, the cession form sets forth details for payment of a ceding commission
• Provision is usually made in the form for the primary company to pay a the reinsurance premium on an annual basis

Question 16

What are some characteristics of claim settlements for reinsurance agreements?

Answer 16

• The policy owner is not a party to the reinsurance agreement
• The reinsurance agreement states that the settlement agreement agreed to by the primary company is binding on the reinsurer
• The reinsurer pays its share of the death proceeds on a lump sum, even if the policy settlement is to be on an installment basis
• The reinsurer shares in any savings resulting from a settlement payment that is less than the face amount of the policy

Question 17

When is the amount at risk for the reinsurer reduced?

Answer 17

• The primary company increases its retention limits

- The total amount of life insurance on a specific life is reduced

Question 18

What are some characteristics of the recapture provision in reinsurance?

Answer 18

• Recapture is permitted only after the policy/policies have been in force for a minimum period of time
• The recapture provision is more liberal under a yearly renewable term (recapture is permitted only after 5 years) than a coinsurance plan (10 years must expire under a coinsurance plan before recapture by the primary company is permitted)

Question 19

What is the effect of a primary company’s insolvency on the reinsurer or claimant?

Answer 19

• Most reinsurance agreements require the reinsurer to pay to the insolvent primary company 100% of the amount promised
• Claimants normally are not permitted to bring legal action directly against the reinsurer

Question 20

What are some characteristics of experience rating for reinsurance purposes?

Answer 20

• Experience rating is designed to permit the primary company (not the insurer) to share in mortality gains and losses
• The sharing is typically based on the combined mortality experience for all reinsurance amounts involving the two companies
• Arrangements that permit the primary company to share on favorable mortality experience reduce the importance of recapture provisions

(the primary company is the insured, the insured is the entity that normally shares in the gains and losses when experience rating is used.

Question 21

What are some characteristics of reinsurance for supplementary coverages?

Answer 21

• If facultative reinsurance is arranged, the same agreement is likely to cover both the life risk and any accidental death benefits
• Many Insurers have lower retention limits for accidental death benefits than for basic life coverage
• If coinsurance reinsurance is arranged, the premium charge for reinsurance part of the accidental death benefit is based on the premium the primary company charged the insured for the accidental death benefits
• The reinsurer will not accept coverage of disability benefits for an amount greater than the face amount of the reinsurance coverage on the life risk

Question 22

What are some common provisions found in reassurance agreements?

Answer 22

• Cession form (details for acceptable risk for coverage, schedule of reinsurance premiums to be paid, and a ceding commission to a primary company)
• Procedure for claims settlement (primary company settlement claims are binding on the reinsurer-including savings from those settled for less than face amount and when an installment is involved the reinsure still pays the primary company a lump sum)
• Permanence of reinsurance (reinsurer may not cancel reinsurance unless there is a coverage reduction that affect the reinsurer or the primary company increases its retention limits)
• Duration of reinsurance (reinsurance should be for the life of the original party but for new policies either party can cancel by giving 90 days notice)
• Contingency for primary company’s insolvency (usually the reinsurer must pay proceeds due even if death claim may be reduced)
• Provision for experience rating (the primary company shares in gains and accepts penalties for losses in reinsurance amounts that do not exceed specified max limits-experience rating applies to smaller amounts of reinsurance but not larger amounts)
• Treatment of supplementary coverages (when limitations do not cover certain policies a special reinsurance policy may be required)