Chapter 9 - Fundamentals of Life Reinsurance Flashcards
The transfer of risk provides 2 basic benefits (policy holder to life insurance company)
- The death benefit offsets any financial loss incurred by the beneficiary due to the death of the insured.
- The payments made to the life insured policy help stabilize the financial obligation of the policyholder. The policy owner is responsible for a series of relatively small, ongoing, regularly-scheduled premium payments instead of a single, large, lump-sum payment due at an unknown future date.
Purpose of reinsurance
No direct contractual relationship with the insured.
Insurers can minimize the adverse financial impact of death claims on the first insurer.
Insurance on insurance companies.
Most reinsurance arrangements are “indemnity” arrangements, in which on of the key provisions is that there is no contractual relationship between the insured and the reinsurer.
Reinsurance and Claims
The reinsurer is not obligated to make payment to the beneficiary but to the first carrier only. The reinsurer’s obligation to pay is determined by the terms of the reinsurance cession and the reinsurance treaty, not by the insurance contract.
Important when there is a difference of opinion between the first carrier and the reinsurer. The direct carrier is always obligated to pay a legitimate claim.
Ceding Company
Is the company that transfers its risk to a reinsurer.
Cession
Is the document or electronic transmittal that describes the risk transferred, usually on an individual policy level.
Reinsurance Treaty
Is the written contract defining the reinsurance agreement. The treaty defined the relationship between the ceding company and the reinsurer, the business to be covered under the treaty, the reinsurance to be provided, and its cost.
Retention Limit
IS the specified maximum amount of insurance that a life insurer is willing to carry at it’s own risk on any one life.
Retrocessionaire or “retro”
Is a reinsurer that contractually accepts risk from another reinsurer.
Retrocession
The risk cede by a reinsurer to the retrocessionaire.
Benefits of Reinsurance - 5 Broad Categories
- Capacity
- Prevention of Catastrophic Loss
- Market Entrance
- Market Withdrawal
- Reinsurance Services
Benefits of Reinsurance - Capacity
Allows the first carrier to write larger amount of insurance on individuals or within select product lines than would normally be possible.
Benefits of Reinsurance - Capacity - Retention Limit
A company can vary its retention limit by selected criteria such as age (keeping a lower retention on old ages), underwriting classifications (keeping a lower retention for higher ratings classes or specific underwriting impairments, or plan type (such as a lower retention for term insurance).
Benefits of Reinsurance - Prevention of Catastrophic Loss
Using reinsurance allows a direct writing company to “spread the risk” among other insurance carriers. The more the risk is spread among various insurers, reinsurers, and retrocessionaires, the less impact any single claim will have on any single company and the more financially stable the reinsurance arrangement will be.
Reinsurance Pool
When several reinsurers share the reinsurance coverage on the same risks. A reinsurer may not feel comfortable accepting too large a percentage of the risk from one direct company and instead prefer to share the arrangements with several other reinsures.
Market Entrance
Risks associated with entering a new insurance market or introducing a new product:
- The direct writing company many not have the necessary expertise. Can benefit from the relative experience of a seasoned reinsurer.
- Until a large number of policies has been issued, the mortality of that block of business may not be as expected. “Law of Large numbers”.
- Each claims has a much higher financial impact when only a few policies are in force.
Law of Large Numbers
The law of large numbers states that the greater the number of occurrences that take place:
a. the more accurate the prediction of future results
b. the less the deviation of the actual losses from the expected losses
c. the more reliable the prediction will be.
Benefits of Reinsurance - Market Withdrawal
A direct company can arrange to reinsure or sell outright an entire block of policies to an interested reinsurer. The direct carrier can even make arrangements to transfer some or the entire admin burden to the reinsurance company.
Assumption Reinsurance
When a direct writing company permanent transfers all of its contractual obligations on the assumed risk to the reinsurer.
Benefits of Reinsurance - Reinsurance Services
A reinsurer can provide resources and knowledge that the direct carrier may not have in the area of underwriting, actuarial science, claims, product development, and policy administration.
Often valuable resources for training underwriters, conducting and publishing underwriting research, and making presentations.
Financial Reinsurance
Policy reserves are the amount of money put aside by the direct carrier to cover actual or potential liability owed to policyholders. A direct writing company can turn to financial reinsurance, seeking temporary infusion of capital from the reinsurer to fulfill it’s policy reserve requirements.
Financial Reinsurance - covers non-mortality risk such as
- Policy persistency
- Interest
- Cash Value
- Reserve Requirement (as noted above)
- Secondary guarantees
- Return of premium
Mortality Reinsurance - Types of Risk Transfer
- YRT - Excess of Retention
- YRT - Quota Share
- Coinsurance
Mortality Reinsurance - Types of Risk Transfer - YRT - Excess of Retention
The direct carrier will retain amounts up to its retention limit and then use reinsurance.
YRT - yearly renewable term.
In YRT arrangements, the ceding company pays reinsurance premiums to the reinsurer that are based on the age and gender of the insured and duration of the contract. Premiums typically increase each year as the insured ages.
Mortality Reinsurance - Types of Risk Transfer - YRT - Quota Share
A form of reinsurance in which premiums and losses are shared proportionately between the ceding company and the reinsurer. Allows for reinsurance before the company retention is exhausted.
In quota share the direct company retains a fixed % of the risk and cedes the remaining % to the reinsurer.
Usually the arrangement is a first dollar quote share where the company cedes a portion and retains a portion of every dollar of insurance coverage, up to its retention.
Mortality Reinsurance - Types of Risk Transfer - ?Coinsurance
Is a reinsurance arrangement in which the assuming company receives a proportionate share of all of the risks and cash flows of the policy.
The reinsurer shares in all the premiums and policy benefits and even sets up its own share of the reserves and supports the internal cash value of the policy.
Requires to reinsurer to set up admin to mirror the ceding company. Labor intensive but helps small companies that need a large amount of reinsurance support.
Types of Reinsurance Arrangements
- Facultative Reinsurance
- Automatic Reinsurance
- Facultative-Obligatory Reinsurance
Types of Reinsurance Arrangements - Facultative Reinsurance
Requires that the first carrier submit the underwriting evidence to the reinsurer and that the reinsurer formally approve any reinsurance request before accepting coverage. They were propose a different underwriting offer or decline the case.
Used when the total death benefit in force and applied for might exceed the limit of the reinsurer’s underwriting capacity, or where the direct carrier is seeking an alternative underwriting evaluation or wants to obtain coverage on a risk they do not wish to retain.
Types of Reinsurance Arrangements - FAC when it’s used
- The case does not qualify for automatic reinsurance under the treaty
- The first carrier cannot place the offer made by its own underwriters and seeks another underwriting offer on the case
- The first carrier does not want to keep its normal retention on the case.
Types of Reinsurance Arrangements - FAC Shopping
Sent to more than 1 reinsurer. The reinsurer with the most competitive underwriting offer(s) will be selected by the first company to get the case.
If a case is submitted FAC, automatic reinsurance will typically not be available on that life for at least several years after facultative consideration.
Types of Reinsurance Arrangements - Automatic Reinsurance
Allows direct carriers to purchase reinsurance without the added time and expense of an underwriting review by the reinsurer. The direct carrier simple notifies the reinsurer of the amount required and the reinsurer complies with the request.
Available on smaller death benefits and/or lower in force amounts.
Also termed “binding”
Automatic binding limit or “autobind limit”
The maximum amount of direct writing company is allowed to cede automatically.
Automatic reinsurance treaties are s/t a number of legal clauses such as:
- The ceding company will keep its regular published retention or otherwise will hold its full retention on the life under previously issued in force policies
- The ceding company will apply its normal underwriting guidelines.
- The total of the new amount and the amount already reinsured will not exceed the automatic binding limit.?
- The amount of insurance in force with all companies, including the amount to be replaced, plus the amount currently applied, will not exceed the jump limit.
- The application must be on a life that has not been submitted FAC to the reinsurer or any other reinsurer within a number of years agreed upon by the ceding company and the reinsurer.
Automatic reinsurance - Jumbo Limit
Defined as a limit >
1. Amount of insurance in force and applied for with all companies on a individual.
2. Amount of insurance in force and to be placed with all companies on an individual
3. Amount of insurance in force and applied for with all companies, but excluding controlled replacements, on an individual.
Created to prevent reinsurance being bound for far too much coverage on a given individual.
Automatic reinsurance - Automatic Pool
The reinsuring members of a pool are ceded automatic cases based on their % share of the pool.
Automatic reinsurance - Automatic Pool - Alphabetical split
Each pool reinsurer was assigned a letter of the alphabet and is responsible for all the cessions coming from insurers with last names beginning with their assigned letter.
Rarely used today.
Types of Reinsurance Arrangements - Facultative-Obligatory Reinsurance
Hybrid that combines characteristics of both FAC and automatic arrangements. Only limited identifying information about the risk is ceded. Used when the amount applied for exceeds the automatic limits, but avoids the time and effort of a full FAC review.
Catastrophe Reinsurance (“cat cover”)
Used to protect a company against the short-term earnings impact of incurring multiple large claims at one time. It provides coverage for losses resulting from an accident or natural disaster involving more than one insured up to specified limit.
Purchased by a direct company to cover its block of business; it is not purchased on individual policy basis.
Reinsurance Treaty
Agreement that details the obligations and responsibilities of the direct carrier and the reinsurer. Broken in to a number of provisions or sections.
Reinsurance Treaty - Provisions
Parties to the Agreement Automatic Reinsurance FAC Reinsurance Commencement of Liability Reinsured Risk Amount Reductions, Terminations and Changes Conversions, Exchanges, and Replacements Claims Errors and Omissions Dispute Resolution Arbitration Forms, Manuals, and Issue Rules
Reinsurance Treaty - Provisions - Parties to the Agreement
Insured is not a participant
Reinsurance Treaty - Provisions - Automatic Reinsurance
Conditions under which it can be employed and how the ceding company will manage it’s retention.
Reinsurance Treaty - Provisions - FAC Reinsurance
Conditions under which it can be employed, might include clause of high profile cases
Reinsurance Treaty - Provisions - Commencement of Liability
Reinsurance liability for a claim [i.e., auto - when policy is put in force, FAC - once valid offer is made and accepted by ceding company, conditional receipt or temporary insurance - obligations]
Reinsurance Treaty - Provisions - Reinsured Risk Amount
Type of coverage by the treaty (YRT reinsurance vs coinsurance and any benefits)
Reinsurance Treaty - Provisions - Reductions, Terminations and Changes
All policy increases, risk classification changes, and reinstatements will be underwritten in accordance with the customary standards and procedures employed by he ceding company. Exception is FAC cases.
Reinsurance Treaty - Provisions - Conversions, Exchanges, and Replacements
Will be underwritten by the ceding company in accordance with their g/l.
Reinsurance Treaty - Provisions - Claims
- Copies of “proofs” will be shared with the reinsurer - payment, death cert, and evidence collected in processing a contestable claim
- Contestable claim require the reinsurer to submit notification to support (or de3cline_ participation in any action by the ceding company (to pay, decline, or litigate the claim)
- For misrep or suicide, the reinsurer will refund net reinsurance premiums to the ceding company.
- With extra contractual damages, reinsurers will not participate in punitive or compensatory damages but will participate in statutory penalties.
Reinsurance Treaty - Provisions - Errors and Omissions
Mistakes made by the ceding company or the reinsurer. Not the result of negligence or a deliberate act. If the error can be corrected and the solution falls within the parameters of the reinsurance treaty it should be correct promptly.
Reinsurance Treaty - Provisions - Dispute Resolution
The procedure company will take when there is a disagreement that cannot be settled. Generally involves senior managers and company officers.
Reinsurance Treaty - Provisions - Arbitration
When dispute resolution fails. Includes who the arbitrators are, how many, and where and when they shall meet.
Decision is based on term and condition of the treaty and not a strict interpretation of the law.
Decision is final with no appeal.
Reinsurance Treaty - Provisions - Forms, Manuals, and Issue Rules
Copies of underwriting procedure, forms, guidelines, underwriting manuals, and information about special underwriting programs, such as COLI, table-reduction programs.
Reinsurance Pricing - Key Factors
Product
Market
Distribution System
Underwriting
Reinsurance Pricing - Key Factors - Product
Review of the product design, including mortality assumptions, lapse assumptions, expenses, and profit margin.
Reinsurance Pricing - Key Factors - Market
The more narrow the market and the riskier the clientele are, the poorer the mortality and the higher the reinsurance cost are. I.e., higher price for a product directed toward the elderly.
Reinsurance Pricing - Key Factors - Distribution System
Success or failure of any insurance product is significantly impacted by the distribution system. This can also differ due to senior management, agent training, and company philosophy.
Reinsurance Pricing - Key Factors - Underwriting
Knowledge and confidence in the underwriting department at the ceding company. Review includes
- all underwriting manuals and procedures
- all underwriting personnel at the direct company - their level of training, experience, and education
- Use of the reinsurer’s manuals, g/l, and training programs.
- Results of u’wing audits and compliance with internal u’wing procedures.
Reinsurance Underwriting Audits
Will review the ceding companies internal audits and do their own audits and will take into account other reinsurers audits of the ceding company.
Reinsurance Underwriting Audits - Major areas of review
- Tx of the condition receipt and any consequent temporary insurance
- Compliance w/ forms and notices.
- Adherence to published u’wing rules and practices
- Acquisition of A&A and appropriate add’l u’wing requirements.
- File documentation and use of case referrals
- Timeliness
- Clarity of communication w/ the field
- Eligibility of the case for automatic reinsurance and adherence to retention, jumbo, and autobind limit.
- Final assessment to include the use of underwriting exceptions, concessions, and “business exceptions”
Reinsurance Underwriting Audits - Exceptions
Underwriting latitude, expertise, and judgement are necessary for the situation that lie between the rules and outside the guidelines.
Reinsurance Market Place today - Increased pressure causing
- Higher reinsurance costs
- More formalized, detailed, and explicit treaty language
- Increases in underwriting and claims audits and a greater emphasis on adhering to underwriting rules and g/l.
Reinsurance Market Place today
Due to increased pressure more direct carriers and increasing their internal retention limit and relying less on reinsurance to support their block of business.
Concerns with Reinsurance moving forward
- Concern over providing excess capacity at an unsustainable price.
- The development and retention of knowledgeable staff
- Consistent and profitable risk management
- Resistance on the part of direct writers to revise treaty language, data reporting requirements, and the treatment of underwriting errors and exceptions.
- The adverse impact of STOLI (stranger owned LI) which may undercut the concept of “insurable interest” and open the possibility that life insurance may lose its tax advantage status.
Definition - Alphabetical Split
A method of allocating automatic reinsurance among several reinsurers, using the first letter of the insured’s last name.
Definition - Assumed Risk
The acceptance of a cession by a reinsurer, or a retrocession by a retrocessionaire.
Definition - Assumption Reinsurance
A reinsurance Agreement by which one company permanently transfers full responsibility for a block of policies to another company.
Definition - Automatic binding limit
The dollar amount of risk on a single or joint life to which a reinsurer is willing to obligate itself without making its own underwriting assessment.
Definition - Automatic reinsurance
A form of reinsurance in which the ceding company is obligated to cede, and the reinsurer is obligated to assume, risk that meet specific criteria based on the provisions of the reinsurance treaty and the ceding company’s underwriting g/l.
Definition - Catastrophe Coverage
A form of reinsurance that provide coverage for losses resulting from an accident or natural disaster involving more than one insured. These losses typically must exceed a specified amount and number of insureds and/or locations.
Definition - Ceded Risk
The risk transferred to a reinsurer by a direct writing company or to a retrocessionaire by a reinsurer.
Definition - Ceding Company
The company that transfers its risk to a reinsurer
Definition - Cession
The document that describes the risk transferred
Definition - Coinsurance
A method of reinsurance under which the assuming company receives a proportionate share of all of the risks and cash flows of the policy. The reinsurer receives its share of the premiums and benefits, and sets up its share of the reserves.
Definition - Excess of Retention
A type of reinsurance in which a ceding company establishes a dollar amount retention limit and a reinsurer agrees to assume amounts over this limit, up to the reinsurer’s automatic binding limit.
Definition - Facultative-obligatory Reinsurance
A form of life insurance that is a hybrid between facultative and automatic. The risk to be ceded is submitted to the reinsurer, which has limited rights to decline individuals risks.
Definition - Facultative Reinsurance
Reinsurance in which the risk is offered by a direct writer to a reinsurer for underwriting approval. The reinsurer has the option to accept, rate or decline the offering.
Definition - Facultative Shopping
The act of submitting an underwriting case to several reinsurers in order to obtain the most competitive offer.
Definition - Financial Reinsurance
Specialized reinsurance transacted primarily to achieve financial goals, such as capital management, tax planning or the financing of policy reserves.
Definition - First-Dollar Reinsurance
A form of reinsurance wherein the first company will retain a fixed % of every dollar of insurance coverage issued and cede the balance to the reinsurer. Once the company retention limit is reached, the treaty can stipulate that all additional coverage can be automatically ceded to the reinsurer within the constraints of the autobind and jumbo limits.
Definition - Jumbo Limit
A limit place on the amount of coverage that can be in force and applied for on an individual life for automatic reinsurance purposes. If such insurance exceeds the limit, the risk must be submitted for FAC review.
Definition - Quota Share Reinsurance
A form of reinsurance in which premiums and losses are shared proportionately between the ceding company and the reinsurer. Under quota share, the same % applied to all reinsured policies in a given class of business.
Definition - Reinsurance
The transfer of part of the hazards or risk that a direct reinsurer assumes by way of insurance contract or legal provision on behalf of an insurer to a second insurance carrier, the reinsurer, who has o direct contractual relationship with the insured.
Definition - Reinsurance pool
A method of allocating reinsurance among several reinsurers. Using this method, each reinsurer received a specified percentage of each risk ceded to the pool.
Definition - Reserves
Liabilities for amounts an insurance company is obligated to pay in accordance with an insurance policy or annuity contract
Definition - Retention Limit
A specified maximum amount of insurance that a life insurer is willing to carry at its own risk on any one life without transferring some of the risk to another insurance company.
Definition - Retrocession
The risk ceded by a reinsurer
Definition - Retrocessionaire
A reinsurer that contractually accepts from another reinsurer a portion of the ceding company’s underlying reinsurance risk.
Definition - Treaty
The written contract defining the reinsurance agreement. The treat contains provisions defining the terms of the agreement including specific risk definition, data on limits and retention, and provisions for premium payment and duration.
Definition - Yearly Renewable Term (YRT)
A form of life reinsurance under which the risks, but not the permanent plan reserves, are transferred to the reinsurer for a premium that varies each year with the amount at risk and the ages of the insured.
