Reinsurance

1. Reinsurance Team 4: Alayne Becker, Nick Chernick, Yu Fan, Sam Houseworth, Spike Knickel, Justin Newlen, Beth Sanger, Yifan Yang

2. Reinsurance • What is it? • Reinsurance is insurance for insurance companies • It allows insurance companies to pass some or all insurance risks to another company • Parties involved • The “ceding company” is the company that is passing the risk to the other company • The “reinsurer” is the company accepting the risk from the ceding company

3. Net Amount At Risk (NAR) • Equal to the death benefit minus the reserve. • Death benefit: amount of money the company pays out when someone dies • Reserve: funds created for the purpose of paying anticipated claims under insurance policies • Example: If the death benefit on an insurance policy is $50,000 and the insurance company holds a reserve of $15,000 then the NAR would be $35,000.

4. Retention Limit • Maximum amount willing to be lost by a company when an insured dies • Applies for total net risk of all policies on one insured • Doesn’t just apply to death benefits, but also can be used with disability, critical illness, accidental death and waiver of premium benefits

5. Reinsurance Treaty • What is it? • It is the contract between the two insurance companies that lay out how the reinsurance will work • It defines which business is to be reinsured, what premiums must be paid, what benefits the reinsurer must pay, and how to handle some common problems that may occur. • Two primary approaches to define which policies are to reinsured • Automatic reinsurance • The treaty defines which products or classes of business are to be automatically reinsured • Facultative reinsurance • The treaty defines which policies can be selectively reinsured, one policy at a time

6. Automatic Reinsurance • The ceding company cannot choose which policy to be reinsured, and the reinsurer must reinsure all the policies that meet the treaty. • Usually 2 Different Types: • Excess - Only reinsure the portion of the net amount at risk that is over the company’s retention limit. • First Dollar - Also called the First dollar quota share. It is the opposite of “Excess”. Reinsure a percentage of the risk from the very first dollar of death benefit.

7. Excess vs. First Dollar

8. Facultative Reinsurance • 3 steps • Send underwriting information to reinsurers for review • Reinsurers review the information and decides whether or not to reinsure the risk and at what price • The company reviews all offers. Usually "first in, best offer"  chosen.

9. Recapture • The company takes back some of the risk • In less developed markets, often treaties give the company an annual right to recapture • Restricts use of reinsurance; viewed as a one-year agreement • In more developed markets, very restrictive recapture provisions • Typical Examples • Not allowed or only after a certain number of years • Not allowed unless the company kept its full retention at issue • Amount limited to the increase in the company's retention limit since issue • Valuable option

10. Expense Allowance • Paid by reinsurer to reimburse company for expenses on the business insured. • Reinsurers often asked to compete on expense allowances instead of reinsurance premium rates. • Usually expressed as percentages of reinsurance premiums.

11. Yearly Renewable Term • Premium and death benefit • Yearly - premiums are paid once a year and rates might change • Renewable - Ongoing contract • Term - Only mortality risk is reinsured • YRT Premium Rates 100% of mortality or 80% of mortality and some expense allowance 0 1st year rate or lower percentage renewal years

12. Coinsurance • Simplest and Purest Form of Reinsurance • Risk is Shared from Ceding Company to Reinsurer • Mortality, Investment, and Persistency are Transferred to Reinsurer • Two Variations • Modified Coinsurance • Ceding Company Pays Interest for "Protection" from Reinsurer • Coinsurance With Funds Withheld • Reinsurer Withholds Assets of Ceding Company, Held in a Trust