Intro to Reinsurance Prepared by TAI Orland Park, Illinois

Intro to Reinsurance Why Reinsurance Types of Reinsurance Reinsurance Plans Risk Characteristics Reinsurance Treaty Reinsurance Calculations Reinsurance Reporting

Reinsurance defined Reinsurance is a risk transfer from one insurance company to another For life insurance, risk is mortality risk For health insurance, risk is morbidity risk

Why Reinsurance Product considerations Make use of underwriting expertise Increase capacity Enter new markets

Why Reinsurance Financial considerations Spread the risk Ease surplus strain

Types of Reinsurance Automatic Facultative Reinsurer automatically accepts risk provided it meets specific criteria based on ceding company’s underwriting and issue requirements Facultative Reinsurer has option to accept or decline risk

Forms of Reinsurance Excess First Dollar Reinsurance begins with excess of retention First Dollar Reinsurance begins with first dollar of coverage

Reinsurance Plans Yearly Renewable Term (YRT) Coinsurance (Coins) Modified Coinsurance (ModCo)

Reinsurance Plans Yearly Renewable Term (YRT) Risk premium reinsurance (RPR) Annual renewable term (ART) Risks transferred to reinsurer for premium, which varies each year with amount at risk and ages of insureds No reserves transferred to reinsurer

Reinsurance Plans Coinsurance Proportional reinsurance Insurer and reinsurer share obligations of coverage (death benefit, non-forfeiture values, reserves) Reinsurance premium percent of premium insured pays (less policy fee)

Reinsurance Plans Mod Co The same as coinsurance except that no reserves are transferred to reinsurer.

Reinsurance Risk Characteristics Age Sex Smoking Class Insurance Amount Insurance Plan Underwriting Considerations (height, weight, family history, occupation, etc.)

Reinsurance Rules Reinsurance Treaty

Reinsurance Terms Treaty Retention Cession

Reinsurance Terms Treaty “Gentlemen’s Agreement” Legal contract between writing (ceding) company and assuming (reinsuring) company Describes terms and conditions of reinsurance agreement

Reinsurance Terms Retention Dollar amount or percentage of each risk retained by ceding company under reinsurance agreement Maximum amount of coverage per life an insurer will keep at its own risk (Corporate Retention)

Reinsurance Terms Cession Record showing reinsurance information Reinsurance effective date Insured’s name, sex, date of birth, age Reinsurance plan (YRT, Co) Ceded amount, reinsurance NAR Reinsurance premium, allowance, net premium

Reinsurance Treaty Includes Contract related provisions (parties to agreement, termination of agreement, arbitration, errors and omission, insolvency) Reinsurance related provisions (see next slide)

Reinsurance Treaty Reinsurance related provisions Plan of reinsurance Amounts of reinsurance and related limits Reinsurance premiums Expense allowances, premium taxes Claims Continuations Reinstatements Recapture Other

Reinsurance Treaty Does Not Include Instructions for administration Guidelines for handling exception cases Specifications for system design

Reinsurance Calculations NAR Premium Allowances

Reinsurance Calculations NAR – Net Amount at Risk Methods Ceded amount Ceded amount less % cash value Changes Remain level Proportional

Reinsurance Calculations Premium Coinsurance Coins % times direct premium less policy fee YRT NAR times rate (rate based on issue age, sex, smoking class, duration, mortality rating)

Reinsurance Calculations Allowances Generally a % of premium Could also be $ per 1000

Reinsurance Reporting CO POLICY RD PLAN ISS-DATE TREATY TAI 1000001 01 UL10 08/15/94 AAQU1YA1 TAI 1000001 02 T10 08/15/94 AAQT1YA1 TAI 1000006 01 UL10 08/20/94 AAQU1YA1 TAI 1000011 01 SUL 08/21/94 BBQSLYB2 TAI 1000018 02 T10 08/23/94 AAQT1YA1 TAI 1000027 01 SUL 09/02/94 BBQSLYB2

Reinsurance Reporting Frequency – monthly, quarterly, annual Medium – paper, electronic Billing New business Renewals Inforce Transactions