Chapter 9 - Fundamentals of Life Reinsurance

Question 1

The transfer of risk provides 2 basic benefits (policy holder to life insurance company)

Answer 1

1. The death benefit offsets any financial loss incurred by the beneficiary due to the death of the insured.
2. 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.

Question 2

Purpose of reinsurance

Answer 2

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.

Question 3

Reinsurance and Claims

Answer 3

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.

Question 4

Ceding Company

Answer 4

Is the company that transfers its risk to a reinsurer.

Question 5

Cession

Answer 5

Is the document or electronic transmittal that describes the risk transferred, usually on an individual policy level.

Question 6

Reinsurance Treaty

Answer 6

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.

Question 7

Retention Limit

Answer 7

IS the specified maximum amount of insurance that a life insurer is willing to carry at it’s own risk on any one life.

Question 8

Retrocessionaire or “retro”

Answer 8

Is a reinsurer that contractually accepts risk from another reinsurer.

Question 9

Retrocession

Answer 9

The risk cede by a reinsurer to the retrocessionaire.

Question 10

Benefits of Reinsurance - 5 Broad Categories

Answer 10

1. Capacity
2. Prevention of Catastrophic Loss
3. Market Entrance
4. Market Withdrawal
5. Reinsurance Services

Question 11

Benefits of Reinsurance - Capacity

Answer 11

Allows the first carrier to write larger amount of insurance on individuals or within select product lines than would normally be possible.

Question 12

Benefits of Reinsurance - Capacity - Retention Limit

Answer 12

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).

Question 13

Benefits of Reinsurance - Prevention of Catastrophic Loss

Answer 13

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.

Question 14

Reinsurance Pool

Answer 14

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.

Question 15

Market Entrance

Answer 15

Risks associated with entering a new insurance market or introducing a new product:

1. The direct writing company many not have the necessary expertise. Can benefit from the relative experience of a seasoned reinsurer.
2. 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”.
3. Each claims has a much higher financial impact when only a few policies are in force.

Question 16

Law of Large Numbers

Answer 16

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.

Question 17

Benefits of Reinsurance - Market Withdrawal

Answer 17

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.

Question 18

Assumption Reinsurance

Answer 18

When a direct writing company permanent transfers all of its contractual obligations on the assumed risk to the reinsurer.

Question 19

Benefits of Reinsurance - Reinsurance Services

Answer 19

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.

Question 20

Financial Reinsurance

Answer 20

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.

Question 21

Financial Reinsurance - covers non-mortality risk such as

Answer 21

1. Policy persistency
2. Interest
3. Cash Value
4. Reserve Requirement (as noted above)
5. Secondary guarantees
6. Return of premium

Question 22

Mortality Reinsurance - Types of Risk Transfer

Answer 22

1. YRT - Excess of Retention
2. YRT - Quota Share
3. Coinsurance

Question 23

Mortality Reinsurance - Types of Risk Transfer - YRT - Excess of Retention

Answer 23

The direct carrier will retain amounts up to its retention limit and then use reinsurance.

Question 24

YRT - yearly renewable term.

Answer 24

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.

Question 25

Mortality Reinsurance - Types of Risk Transfer - YRT - Quota Share

Answer 25

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.

Question 26

Mortality Reinsurance - Types of Risk Transfer - ?Coinsurance

Answer 26

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.

Question 27

Types of Reinsurance Arrangements

Answer 27

1. Facultative Reinsurance 2. Automatic Reinsurance 3. Facultative-Obligatory Reinsurance

Question 28

Types of Reinsurance Arrangements - Facultative Reinsurance

Answer 28

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.

Question 29

Types of Reinsurance Arrangements - FAC when it's used

Answer 29

1. The case does not qualify for automatic reinsurance under the treaty 2. The first carrier cannot place the offer made by its own underwriters and seeks another underwriting offer on the case 3. The first carrier does not want to keep its normal retention on the case.

Question 30

Types of Reinsurance Arrangements - FAC Shopping

Answer 30

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.

Question 31

Types of Reinsurance Arrangements - Automatic Reinsurance

Answer 31

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"

Question 32

Automatic binding limit or "autobind limit"

Answer 32

The maximum amount of direct writing company is allowed to cede automatically.

Question 33

Automatic reinsurance treaties are s/t a number of legal clauses such as:

Answer 33

1. 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 2. The ceding company will apply its normal underwriting guidelines. 3. The total of the new amount and the amount already reinsured will not exceed the automatic binding limit.? 4. 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. 5. 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.

Question 34

Automatic reinsurance - Jumbo Limit

Answer 34

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.

Question 35

Automatic reinsurance - Automatic Pool

Answer 35

The reinsuring members of a pool are ceded automatic cases based on their % share of the pool.

Question 36

Automatic reinsurance - Automatic Pool - Alphabetical split

Answer 36

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.

Question 37

Types of Reinsurance Arrangements - Facultative-Obligatory Reinsurance

Answer 37

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.

Question 38

Catastrophe Reinsurance ("cat cover")

Answer 38

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.

Question 39

Reinsurance Treaty

Answer 39

Agreement that details the obligations and responsibilities of the direct carrier and the reinsurer. Broken in to a number of provisions or sections.

Question 40

Reinsurance Treaty - Provisions

Answer 40

``` 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 ```

Question 41

Reinsurance Treaty - Provisions - Parties to the Agreement

Answer 41

Insured is not a participant

Question 42

Reinsurance Treaty - Provisions - Automatic Reinsurance

Answer 42

Conditions under which it can be employed and how the ceding company will manage it's retention.

Question 43

Reinsurance Treaty - Provisions - FAC Reinsurance

Answer 43

Conditions under which it can be employed, might include clause of high profile cases

Question 44

Reinsurance Treaty - Provisions - Commencement of Liability

Answer 44

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]

Question 45

Reinsurance Treaty - Provisions - Reinsured Risk Amount

Answer 45

Type of coverage by the treaty (YRT reinsurance vs coinsurance and any benefits)

Question 46

Reinsurance Treaty - Provisions - Reductions, Terminations and Changes

Answer 46

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.

Question 47

Reinsurance Treaty - Provisions - Conversions, Exchanges, and Replacements

Answer 47

Will be underwritten by the ceding company in accordance with their g/l.

Question 48

Reinsurance Treaty - Provisions - Claims

Answer 48

1. Copies of "proofs" will be shared with the reinsurer - payment, death cert, and evidence collected in processing a contestable claim 2. 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) 3. For misrep or suicide, the reinsurer will refund net reinsurance premiums to the ceding company. 4. With extra contractual damages, reinsurers will not participate in punitive or compensatory damages but will participate in statutory penalties.

Question 49

Reinsurance Treaty - Provisions - Errors and Omissions

Answer 49

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.

Question 50

Reinsurance Treaty - Provisions - Dispute Resolution

Answer 50

The procedure company will take when there is a disagreement that cannot be settled. Generally involves senior managers and company officers.

Question 51

Reinsurance Treaty - Provisions - Arbitration

Answer 51

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.

Question 52

Reinsurance Treaty - Provisions - Forms, Manuals, and Issue Rules

Answer 52

Copies of underwriting procedure, forms, guidelines, underwriting manuals, and information about special underwriting programs, such as COLI, table-reduction programs.

Question 53

Reinsurance Pricing - Key Factors

Answer 53

Product Market Distribution System Underwriting

Question 54

Reinsurance Pricing - Key Factors - Product

Answer 54

Review of the product design, including mortality assumptions, lapse assumptions, expenses, and profit margin.

Question 55

Reinsurance Pricing - Key Factors - Market

Answer 55

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.

Question 56

Reinsurance Pricing - Key Factors - Distribution System

Answer 56

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.

Question 57

Reinsurance Pricing - Key Factors - Underwriting

Answer 57

Knowledge and confidence in the underwriting department at the ceding company. Review includes 1. all underwriting manuals and procedures 2. all underwriting personnel at the direct company - their level of training, experience, and education 3. Use of the reinsurer's manuals, g/l, and training programs. 4. Results of u'wing audits and compliance with internal u'wing procedures.

Question 58

Reinsurance Underwriting Audits

Answer 58

Will review the ceding companies internal audits and do their own audits and will take into account other reinsurers audits of the ceding company.

Question 59

Reinsurance Underwriting Audits - Major areas of review

Answer 59

1. Tx of the condition receipt and any consequent temporary insurance 2. Compliance w/ forms and notices. 3. Adherence to published u'wing rules and practices 4. Acquisition of A&A and appropriate add'l u'wing requirements. 5. File documentation and use of case referrals 6. Timeliness 7. Clarity of communication w/ the field 8. Eligibility of the case for automatic reinsurance and adherence to retention, jumbo, and autobind limit. 9. Final assessment to include the use of underwriting exceptions, concessions, and "business exceptions"

Question 60

Reinsurance Underwriting Audits - Exceptions

Answer 60

Underwriting latitude, expertise, and judgement are necessary for the situation that lie between the rules and outside the guidelines.

Question 61

Reinsurance Market Place today - Increased pressure causing

Answer 61

1. Higher reinsurance costs 2. More formalized, detailed, and explicit treaty language 3. Increases in underwriting and claims audits and a greater emphasis on adhering to underwriting rules and g/l.

Question 62

Reinsurance Market Place today

Answer 62

Due to increased pressure more direct carriers and increasing their internal retention limit and relying less on reinsurance to support their block of business.

Question 63

Concerns with Reinsurance moving forward

Answer 63

1. Concern over providing excess capacity at an unsustainable price. 2. The development and retention of knowledgeable staff 3. Consistent and profitable risk management 4. Resistance on the part of direct writers to revise treaty language, data reporting requirements, and the treatment of underwriting errors and exceptions. 5. 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.

Question 64

Definition - Alphabetical Split

Answer 64

A method of allocating automatic reinsurance among several reinsurers, using the first letter of the insured's last name.

Question 65

Definition - Assumed Risk

Answer 65

The acceptance of a cession by a reinsurer, or a retrocession by a retrocessionaire.

Question 66

Definition - Assumption Reinsurance

Answer 66

A reinsurance Agreement by which one company permanently transfers full responsibility for a block of policies to another company.

Question 67

Definition - Automatic binding limit

Answer 67

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.

Question 68

Definition - Automatic reinsurance

Answer 68

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.

Question 69

Definition - Catastrophe Coverage

Answer 69

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.

Question 70

Definition - Ceded Risk

Answer 70

The risk transferred to a reinsurer by a direct writing company or to a retrocessionaire by a reinsurer.

Question 71

Definition - Ceding Company

Answer 71

The company that transfers its risk to a reinsurer

Question 72

Definition - Cession

Answer 72

The document that describes the risk transferred

Question 73

Definition - Coinsurance

Answer 73

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.

Question 74

Definition - Excess of Retention

Answer 74

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.

Question 75

Definition - Facultative-obligatory Reinsurance

Answer 75

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.

Question 76

Definition - Facultative Reinsurance

Answer 76

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.

Question 77

Definition - Facultative Shopping

Answer 77

The act of submitting an underwriting case to several reinsurers in order to obtain the most competitive offer.

Question 78

Definition - Financial Reinsurance

Answer 78

Specialized reinsurance transacted primarily to achieve financial goals, such as capital management, tax planning or the financing of policy reserves.

Question 79

Definition - First-Dollar Reinsurance

Answer 79

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.

Question 80

Definition - Jumbo Limit

Answer 80

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.

Question 81

Definition - Quota Share Reinsurance

Answer 81

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.

Question 82

Definition - Reinsurance

Answer 82

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.

Question 83

Definition - Reinsurance pool

Answer 83

A method of allocating reinsurance among several reinsurers. Using this method, each reinsurer received a specified percentage of each risk ceded to the pool.

Question 84

Definition - Reserves

Answer 84

Liabilities for amounts an insurance company is obligated to pay in accordance with an insurance policy or annuity contract

Question 85

Definition - Retention Limit

Answer 85

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.

Question 86

Definition - Retrocession

Answer 86

The risk ceded by a reinsurer

Question 87

Definition - Retrocessionaire

Answer 87

A reinsurer that contractually accepts from another reinsurer a portion of the ceding company's underlying reinsurance risk.

Question 88

Definition - Treaty

Answer 88

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.

Question 89

Definition - Yearly Renewable Term (YRT)

Answer 89

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.