Reinsurance

Question 1

Reasons for reinsuring accident and health products (3)

Answer 1

1. To transfer risk (primary reason)
2. To enable and insurer to offer products in a specific market in which it lacks expertise. This allows the insurer to provide a broad range of products
3. To share the financial load. This is sometimes done for products that require large amounts of capital, such as individual LTC

Question 2

Proportional reinsurance methods (4)

Answer 2

1. Coinsurance – the reinsurer accepts the ceding company’s reinsurance premium and pays its share of benefits. The reinsurer pays a ceding allowance to cover a portion of the ceding company’s commission and expenses. Approaches for establishing risk sharing are:
   a. Fixed or excess share – the ceding company retains a fixed, level amount of risk (non proportional)
   b. Quota share – the ceding company retains a fixed % of each risk
2. Modified coinsurance – works just like coinsurance, except the assets backing the reserves are held by the ceding company
3. Funds withheld coinsurance
4. Risk premium reinsurance

Question 3

Non-proportional reinsurance methods (5)

Answer 3

1. Extended wait (aka extended elimination period or extended deductible) – reinsurance benefits begin only after the claims have reached a specified duration or amount
2. Excess reinsurance or stop loss reinsurance – provides coverage for claims in excess of a defined level
   a. Individual excess or specific stop loss – provides payment if the total benefits on a single individual exceed a specified attachment point or deductible
   b. Aggregate stop loss – provides a benefit if total retained claims on the entire group or portfolio exceed a specified attachment point. For medical, the attachment point is typically defined as a % (like 125%) of expected claims
3. Specified benefits or carve out benefits – for medical insurance, certain benefits may be carved out, such as premature births, organ transplants, and trauma. DI policies occasionally carve out accidental benefits
4. Claim takeover reinsurance and runoff blocks – the reinsurer assumes the risk on future runoff of a known block of claims
5. Catastrophe covers – provides coverage in the event of a catastrophe

Question 4

Decisions to make when setting retention limits for disability income (2)

Answer 4

1. The method of determining the retention – the insurer may retain a max amount per month or it may set a limit on the total benefit paid for the entire benefit period
2. The amount of the max claim – the insurer might set limits for DI that would produce present values of benefits approximately the same as the max retention for life insurance

Question 5

Purchasers of medical reinsurance (4)

Answer 5

1. Traditional insurers offering both first dollar insurance and excess of loss coverage
2. Employers providing self-insured benefits to employees
3. HMOs providing services
4. Certain providers that offer prepaid benefit plans

Question 6

Approaches for defining coverage periods for health reinsurance (2)

Answer 6

1. Losses occurring during – claims are covered only if they occur during the agreement year, regardless of the effective date of the risks accepted by the insurer. Is used most commonly for excess arrangements
2. Risk attaching – provides that the reinsurance period for each underlying risk from the insurer coincides with the insurer’s policy year. Is commonly used for proportional reinsurance

Question 7

Primary approaches for reinsurance of major medical policies (5)

Answer 7

1. Quote share coinsurance
2. Specific stop loss or excess
3. Aggregate stop loss or excess – reinsurance isn’t usually for 100% of excess. Ceding company required to keep a portion of claims to ensure appropriate claims handling
4. Combined specific and aggregate stop loss or excess
   a. Ceding companies often purchase specific and aggregate stop loss as single package
   b. Cost of each is affected by the other. For example, a lower specific attachment point will result in lower aggregate reinsurance claims
5. Carve out coverages

Question 8

Uses of reinsurance for medical coverages other than major medical (7)

Answer 8

1. Fixed benefits medical and surgical products – reinsurance is rarely purchased for claims protection, but quota share coinsurance may be purchased to support growth
2. Specific or dread disease products – reinsurance is rarely used since most insurers retain all the risk on these policies
3. Accident and AD&D coverages – except for very large coverages, reinsurance is rarely used. Some reinsurers offer coverage for accidents on a portfolio basis, similar to catastrophe reinsurance
4. Medicare supplement – reinsurance is attractive for an insurer that no longer wants to retain the risk or manage the product. Quota share coinsurance is sometimes used b/c this product is relatively capital intensive. Fronting is also used.
5. Critical illness – coinsurance has been used, with the reinsurers providing expertise and product design advice
6. Dental and vision coverages – many group insurance plans offer these coverages and then use coinsurance to transfer the risk to reinsurers that specialize in these coverages
7. Other uses of reinsurance include captive reinsurers for employee benefits, stop loss for providers, securitizations of health insurance, and capital relief provided by a portfolio reinsurance agreement