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8/13/2019 Rtc Module 5
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ReinsuranceTypes and Coverage
Module 5
Reinsurance Types and Coverage
Introduction
There are multiple methods for ceding business to a reinsurer. These include YearlyRenewable Term (YRT), Coinsurance, Modified Coinsurance, Partially Modified
Coinsurance, Funds Withheld and Coinsurance Funds Withheld. Reinsuranceagreements can provide coverage for new business written, in force policies, or a
combination thereof.
Objective
After this training you should be able to understand: Methods of reinsurance New business versus in force coverage
Content
There are multiple methods for ceding business to a reinsurer. Primary methods include
Yearly Renewable Term (YRT), Coinsurance, and Modified Co-insurance. Lessfrequently seen methods which are generally related to financial reinsurance transactions
include Partially Modified Coinsurance, Funds Withheld and Coinsurance with FundsWithheld.
Primary Methods:
Yearly Renewable Term (YRT) Reinsurance
A form of life reinsurance usually covering only mortality risk under which the ceding
insurer buys coverage for the net amount at risk on the reinsured portion of the policy for aspecified premium that may vary each year with the amount at risk, the duration of the
policy, and the ages of the insured(s). The ceding insurer retains responsibility forestablishing reserves and the payment of all surrenders, dividends, commissions, and
expenses. Despite its name, YRT reinsurance contracts typically obligate the reinsurer tocontinue coverage throughout the life of the policy.
YRT Agreements can be based on
a quota share of all policies issued up to its maximum limit of retention per lifefor the insureds issue age and rating or
on an excess of retention basis
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Treaty provisions will generally indicate the following which is useful for theadministration of the business:
How the Reinsured Net Amount at Risk will be calculated
How changes in cash/account/terminal reserve value will be allocated
Coinsurance
A method of reinsurance under which the reinsurer receives a proportionate share of thepremiums, sets up a proportionate share of the reserves and pays its proportionate share of
the benefits of the reinsured policy. The reinsurer pays the ceding commission andexpense allowance to the ceding company to represent the reinsurers share of the
acquisition and maintenance expenses.
Treaty provisions will generally indicate the following which is useful for theadministration of the business:
How the Reinsured Net Amount at Risk will be calculated
The specific manner and timing in which Cash/Account/Terminal Reserve Value
will be measured for the Policy Net Amount at Risk particularly for variable planswhere such amounts may change more frequently.
Modified Coinsurance (Modco)
Indemnity life reinsurance that differs from coinsurance only in that the assets supporting
the reserves are transferred back to the ceding company while the risk remains with thereinsurer. The ceding company is required to pay interest to replace that which would have
been earned by the reinsurer if it had held the assets corresponding to the reserves in itsown investment portfolio. Used to retain control of investments or to reduce potential
credit risk.
Secondary Methods:
Partially Modified Coinsurance (Part-Co)
This reinsurance method is a combination of coinsurance and modified coinsurance. In
most situations, a portion of the initial reserves equal to the initial allowance are held on amod-co basis, while remaining reserves are held on a coinsurance basis, eliminating any
initial cash transfer. Also known as Co/Mod-Co.
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Funds Withheld
Assets that would normally be paid over to a reinsurer but are withheld by the cedingcompany to permit statutory credit for non-admitted reinsurance, to reduce potential credit
risk, or to retain control over investments.
Coinsurance Funds Withheld
A form of modified coinsurance where the initial allowance which is normally paid to theceding company is withheld by the reinsurer to reduce the reinsurers exposure to the
credit risk of the ceding company.
Example of Treaty Language for Reinsurance Basis for Canada
BASIS OF REINSURANCE
Reinsurance Basis: < select: >YRT, or
Coinsurance, or
Other < specify >
Example of Treaty language for Reinsurance Basis for the US
This is a [specify basis of reinsurance (e.g., YRT, coinsurance or modifiedcoinsurance)]agreement for indemnity reinsurance (the Agreement) solely between [insertCeding Company name] of [insert Ceding Company domicile (e.g., state, province or territory)] (theCeding Company) and [insert Reinsurer name] of [insert Reinsurer domicile] (the Reinsurer).The Ceding Company and the Reinsurer may be referred to individually as a Party or collectivelyas the Parties. The performance of the obligations of each Party under this Agreement shall be
rendered solely to the other Party. The acceptance of risks under this Agreement shall create noright or legal relationship between the Reinsurer and the insured, owner or beneficiary of anyinsurance policy or other contract of the Ceding Company.
New Business vs. In force Policy Coverage
Reinsurance agreements can provide coverage for new business written or in force policies(or a combination thereof)
Example of Treaty language for New Business vs. In Force Policy Coverage in the US
Policies and Risks Reinsured for the 19XX underwriting year:
1. In force Policies and Risks Reinsured
On the Effective Date of this Agreement, the amount of reinsurance under this
Agreement will be 100% of the Ceding Companys net liability on those in force policies
assumed and issued by the Ceding Company known as the XYZ POOL. Net liability
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shall mean the Ceding Companys liability on policies reinsured hereunder, less
amounts recoverable from other reinsurance.
2. New Policies and Risks Reinsured
After the Effective Date of this Agreement, the amount of reinsurance under this
Agreement will be 100% of the Ceding Companys net liability on policies, assumed andissued by the Ceding Company known as the XYZ POOL under the terms of the
agreements between the Ceding Company and the XYZ POOL. Net liability shall
mean the Ceding Companys liability on policies reinsured hereunder, less amounts
recoverable from other reinsurance.
Discussion:
Below is a summary of the differences between various options for the basis of
reinsurance.
Basis ofReinsurance
Type of Risk Reinsured Definition of Basis ofReinsurance
YRT Mortality Risk is transferred to
the Reinsurer
A form of life reinsurance
usually covering onlymortality risk under which the
ceding insurer buys coveragefor the net amount at risk on
the reinsured portion of thepolicy for a specified premium
that may vary each year withthe amount at risk, the
duration of the policy, and theages of the insured(s). Despite
its name, YRT reinsurancecontracts typically obligate the
reinsurer to continue coveragethroughout the life of the
policy.
Coinsurance Mortality Risk and Reserves
are transferred to the Reinsurer
A method of reinsurance under
which the reinsurer receives aproportionate share of thepremiums, sets up a
proportionate share of thereserves and pays its
proportionate share of thebenefits of the reinsured
policy. The reinsurer pays the
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ceding commission and
expense allowance to theceding company to represent
the reinsurers share of theacquisition and maintenance
expenses.
Modified Coinsurance Mortality Risk transferred tothe Reinsurer and Reserves are
Retained by the CedingCompany
Indemnity life reinsurance thatdiffers from coinsurance only
in that the assets supportingthe reserves are transferred
back to the ceding companywhile the risk remains with the
reinsurer. The ceding companyis required to pay interest to
replace that which would have
been earned by the reinsurer ifit had held the assetscorresponding to the reserves
in its own investmentportfolio. Used to retain
control of investments or toreduce potential credit risk.
Partially Modified
Coinsurance
Initial reserves equal to the
Initial Allowance transferredon a modified coinsurance
basis; Remaining reserves areheld on a coinsurance basis.
This reinsurance method is a
combination of coinsuranceand modified coinsurance. In
most situations, a portion ofthe initial reserves equal to the
initial allowance are held on amod-co basis, while remaining
reserves are held on acoinsurance basis, eliminating
any initial cash transfer. Alsoknown as Co/Mod-Co.
Funds Withheld Ceding company holds assetsfor investments.
Assets that would normally bepaid over to a reinsurer but are
withheld by the ceding
company to permit statutorycredit for non-admittedreinsurance, to reduce
potential credit risk, or toretain control over
investments.
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Coinsurance Funds
Withheld
Reinsurer holds assets related
to the initial allowance
A form of modified
coinsurance where the initialallowance which is normally
paid to the ceding company iswithheld by the reinsurer to
reduce the reinsurersexposure to the credit risk of
the ceding company.
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Questions:
1. Indemnity life reinsurance that differs from coinsurance only in that the assetssupporting the reserves are transferred back to the ceding company while the riskremains with the reinsurer. The ceding company is required to pay interest to
replace that which would have been earned by the reinsurer if it had held theassets corresponding to the reserves in its own investment portfolio. Used to
retain control of investments or to reduce potential credit risk.
(1)YRT(2)Coinsurance(3)Modified Coinsurance(4)Funds Withheld
2. Which of the following is a primary method of ceding reinsurance to a reinsurer?
a. Funds Withheldb. Partially Modified Coinsurancec. Coinsurance
3. A form of life reinsurance usually covering only mortality risk under which theceding insurer buys coverage for the net amount at risk on the reinsured portion ofthe policy for a specified premium that may vary each year with the amount at
risk, the duration of the policy, and the ages of the insured(s).
a. Funds Withheldb. Partially Modified Coinsurance
c. Coinsuranced. YRT
NOTESJohn E. Tiller, Jr., FSA, MAAA and Denise Fagerberg Tiller, FSA, Life, Health, &
Annuity Reinsurance, 3rd
ed. (Winsted, CT, ACTEX Publications, Inc., 2005)
American Council of Life Insurers, Life Reinsurance Treaty Sourcebook, 2nd
Printing,2008
Canadian Life and Health Insurance Association, Inc., CLHIA Reinsurance Treaty
Reference Document, 6thPrinting, 2009