Chapter 25 - Reinsurance Flashcards
Uses of Reinsurance
Reasons for entering into a reinsurance contract?
1) financial or surplus relief: objectives include improving the surplus-to-assets ratio (the so-called “surplus relief ”), increasing surplus, improving the surplus-to-premium ratio, and obtaining cash to pay commissions
2) risk transfer,
3) consulting services: provided by reinsurers are useful for actuaries, underwriters, policy service personnel, and claims handlers
retention limit: Prudent management dictates that a company set a limit on the amount of insurance they will carry on any one life. Amounts of insurance exceeding the limit are reinsured with another company.
Reinsurance Agreements
Two basic forms of Life reinsurance consists?
Indemnity - is the payment by the reinsurer, either proportionally or nonproportionally, of the reinsured’s losses from its policies, as specified in the reinsurance agreement. The reinsurance reimburses the reinsured for claims, but the reinsured remains directly liable to the policyholder
Assumption - is the transfer from the reinsured to the reinsurer (the purchaser) of all the reinsured’s obligations in one or more life insurance policies, with notices to each policyholder affected. The three parties - original insurer, policyholder, and new insurer (or reinsurer) - agree that the old policy will be terminated and replaced by a new policy or a certificate will be issued as evidence of the transfer. and that the original insurer will be released from liability.
Reinsurance Agreements
Indemnity Reinsurance (either proportionally or nonproportionally)
Nonproportional indemnity ?
Nonproportional: provides reimbursement to the reinsured only when there is a catastrophe or the amount of a loss exceeds a certain threshold (deductible or loss retention to be borne by the reinsured).
Examples: • Catastrophe reinsurance, • aggregate excess, • stop-loss covers, and • reinsurance of extended waiting period disability income benefits.
Reinsurance Agreements
Indemnity Reinsurance (either proportionally or nonproportionally)
Proportional indemnity ?
Three major plans to proportional indemnity?
- If the indemnity agreement provides for proportional reimbursement to the reinsured (as most life reinsurance provides), the reinsurer’s claim payment is in constant and proportional ratio with that of the reinsured’s portion of the loss (as in P/C quota share). That ratio is whatever percentage or fractional amount of the policy death benefit each party has agreed to bear.
- There are three major plans or contracts for proportional indemnity reinsurance:
• yearly renewable term (widely referred to as YRT),
• coinsurance (used differently than in P/C insurance),
• modified coinsurance (also called Modco).
Reinsurance Agreements
Indemnity Reinsurance (either proportionally or nonproportionally)
Proportional indemnity (YRT, Coinsurance, Modco)
Yearly Renewable Term?
*The Yearly Renewable Term (YRT) reinsurance passes the mortality risk, and sometimes passes lapse risk.
Under YRT, the reinsured in effect buys term insurance on a renewable yearly basis. * YRT is also called “risk premium reinsurance” and the death benefit is the “net amount at risk”
The YRT premium rate typically varies by issue age, sex, policy duration, underwriting class, and smoker or nonsmoker class. The reinsurer usually only assumes mortality risk usually for a one-year renewable term, or monthly renewable term insurance for interest-sensitive products.
Reinsurance Agreements
Indemnity Reinsurance (either proportionally or nonproportionally)
Proportional indemnity (YRT, Coinsurance, Modco)
Coinsurance?
*Coinsurance passes mortality, lapse, and investment risks if these risks are significant for the underlying products.
In coinsurance the policy premiums and benefits are split proportionally between the reinsured and the reinsurer, according to the agreed fraction or percentage.
The reinsured pays the reinsurer its portion of the net underlying policy premiums, less allowances to cover expenses and commissions, less surrenders and death claims, and in some cases less policyholder dividends.
Reinsurance Agreements
Indemnity Reinsurance (either proportionally or nonproportionally)
Proportional indemnity (YRT, Coinsurance, Modco)
Modco?
- Modified coinsurance can be described as coinsurance with the assets equal to the ceded reserve liabilities retained or held by the reinsured.
Modco passes mortality and lapse risk and may pass investment risk if the Modco rate is based on a portfolio or segregated asset portfolio.
Modco is, therefore in form at least comparable to P/C quota share reinsurance written on a funds withheld basis.
In P/ C quota share, the reinsured cedes a pro rata share of the premium and the insurance liability to the reinsurer, transferring the assets equal to the ceded premium to the reinsurer.
Reinsurance Agreements
Indemnity Reinsurance (either proportionally or nonproportionally)
Slicing the Risk: Quota Share and Excess Share
Indemnity reinsurance can also be classified according to the method of slicing the risk.
In quota share the reinsured cedes a quota or a percentage of each risk, beginning with the first dollar of premiums and loss (as in P/C quota share reinsurance).
Under “excess share” (more precisely, “excess-of-the-policy-retention” share), the reinsured retains a portion of the policy face amount equal to its policy retention and the excess amount over its policy retention is reinsured by the reinsurer.
Reinsurance Agreements
Indemnity Reinsurance (either proportionally or nonproportionally)
Types of Underwriting
life reinsurance is underwritten as facultative, automatic, and facultative obligatory.
• Facultative: Risks are underwritten on an individual basis. Most facultative life reinsurance is ceded on an excess share (excess-of-the-policy-retention) YRT basis and covers large face amounts
• Automatic: risks are submitted individually to the
reinsurer, and the reinsurer obligates itself to accept each risk, provided it has not already retained its full retention on the affected life.
Accounting for Reinsurance
In order for contracts to be accorded reinsurance treatment, there must be a transfer of risk. If the treaty does not transfer the relevant risks no risk transfer occurs, the exchange of funds between the insurer and reinsurer is considered to be a financing arrangement. Financing arrangements are accounted for using deposit accounting.
- Premiums, benefit payments and reserves are reported in the statutory financial statements net of reinsurance.
- While commissions and expense allowances are separately reported in the Summary of Operations.
- Reinsurance receivables and payables are separately reported in the assets and liabilities of the insurer.
Accounting for Reinsurance
Reinsurance Premiums
Premiums, benefit payments and reserves are reported in the statutory financial statements net of reinsurance.
Premiums collected and earned on reinsurance from other companies are recorded in separate ledger accounts to facilitate reporting.
Accounting for Reinsurance
Reinsurance Benefit Payments
Premiums, benefit payments and reserves are reported in the statutory financial statements net of reinsurance.
Benefit payments paid or payable by the reinsurer reduce the total benefits reported by the ceding insurer in the Summary of Operations.
The reinsurer must establish a liability for any unpaid claims and the ceding insurer would establish a receivable for the amount due from the reinsurer.
Accounting for Reinsurance
Reinsurance Policy and Claim Reserves
YRT: The ceding insurer’s reserve credit for YRT reinsurance is the 1-year term mean reserve for the risk using a valuation interest rate and mortality table. Since the terminal reserves are zero, the mean reserve is 50 percent of the net valuation premium.
Coinsurance: Coinsurance reserves are the proportionate share of the policy reserves that represent the portion of the policy ceded or assumed.
Modco: Generally, there is no reserve adjustment for MODCO transactions since the ceding company retains the reserves.
Accounting for Reinsurance
Commissions and Expense Allowances on Reinsurance
Premiums charged for reinsurance usually include two components.
1. is the charge for the risk assumed, which may be a proportional part (the percentage of the policy which is reinsured), or the premium charged by the direct writer (coinsurance), or a premium based on the actual risk reinsured (YRT).
- since the ceding company incurs expense in issuing and maintaining the entire policy, there is a commission or expense allowance paid by the reinsurer to the ceding company.
* A company assuming reinsurance will show these commissions and expense allowances in the Expense portion of the Summary of Operations. A ceding company will report receipt of these amounts in the Income portion of the Summary of Operations. No offsetting or netting of expenses is permitted.
Accounting for Reinsurance
Deposit Accounting
Reinsurance contracts that fail to meet the requirements for reinsurance accounting are considered to be financing arrangements. Deposit accounting is applied in these cases.
The net considerations received by the ceding company are recorded as a liability and the reinsurer establishes an asset for the same amount. The admitted amount is subject to the limitations for transactions with unauthorized reinsurers.
