Reinsurance is a topic few consumers–and not that many more agents–come across. It does however play a serious role in the underwriting process, and that role has a lot more to do with every day operations than most people realize.
Most agents understand reinsurance as a means for a company to insure against the possibility of paying a claim on a policy it has written. And this is a very good rudimentary understanding of the topic. There is, however, a lot more to reinsurance and understanding this can help both agents and consumers when it comes to selecting a life insurer, and in navigating a tricky underwriting situation.
Many people look at insurance as a process of shifting risk from one entity to another. For example, when you buy term life insurance, you are temporarily shifting the risk of lost potential income from you and your family, to an insurance company that issues your policy. Reinsurance is a way for an insurer to further shift risk from itself to another party–either entirely or partially.
However, simply transferring the risk, for the pure sake of not undertaking the entire risk, is not the only reason an insurance company may participate in reinsurance. For example, some life insurers may decide to reinsure some new business to lessen the drain that business has on surplus.
Reinsurance Options at the Primary Insurer's Disposal
The primary insurer is the insurance company to which one submits a life insurance application. There are two basic and broad options the primary insurer has when it comes to reinsurance.
- Automatic Reinsurance (sometimes referred to as autobind authority)
- Facultative Reinsurance
Automatic reinsurance is the ability of the insurance company to automatically shift some portion of a policies guarantees onto a reinsurer. The primary insurer and the reinsurer enter into an agreement that gives the primary insurer authority to make approval offers on the behalf of the reinsurer given certain circumstances and providing the primary insurer practices underwriting within certain guidelines.
Facultative reinsurance is an agreement with the primary insurer to send a case to the reinsurer for consideration. Under facultative agreements, the reinsurer is under no obligation to accept the risk. A practice that is growing in popularity among some insurers is to skip facultative reinsurance unless specifically asked.
The logic behind this is that the underwriting department at the primary insurer knows the risk appetite at the reinsurer(s) well enough to know when they'd be likely to accept a risk and when they'd be likely to deny it. Still, there may be some prudence in specifically requesting facultative reinsurance–or at least discovering if an effort was made–when a case is declined by an insurance company.
Types of Reinsurance
There are two major types of reinsurance and they are further broken out into various forms. The two main categories are
- Proportional Reinsurance
- Non-Proportional Reinsurance
Proportional reinsurance typically takes either the form of a stand alone additional policy that would indemnify the loss incurred by the primary insurer, and coinsurance meaning the primary insurer and reinsurer divide responsibilities between them to back all of the benefits of the policy. This includes the reinsurer's need to build part of the a cash value life insurance policy's reserve and pay dividend or interest earned by the policy. In the event of a loss (claim) both companies would then share, in the preset proportion, in indemnifying the beneficiary to the policy.
Non-proportional reinsurance is a much more common and a much more developed practice in the Proper and Casualty insurance businesses. It's mostly concerned with the practice of preventing macro-like losses from larger/systemic type risks of loss (i.e. a health crisis that results in a large number of deaths that a primary company may have insured).
Mechanically reinsurance is merely a mechanism that allows insurers to more prudently mitigate the risks they face each day by being in the business of absorbing risks for families and businesses. The practical ramifications of having such an option on the table are subtle, but important to note.
The total market for reinsurance is not a large one with respect to number of companies. The reinsurance companies are large, and they work with several primary companies. Due to the sheer size of the primary insurer market (this time speaking of number of companies) reinsurers have made efforts to standardize underwriting practices.
This standardization has resulted in underwriting handbooks published and updates by reinsurers. And it also means that most primary companies follow the handbook. What this means is, there isn't always a lot of variation across carriers when it comes to what they are willing or allowed to accept when it comes to certain health risks.
This should instigate a very obvious questions: if everyone uses the same handbook, why would some companies underwrite differently?
And some companies certainly underwrite with a degree of variation vs. other companies. But these variations have more to do with how preferred best offers are offered, and less to do with how cases get rated or declined. In other words, a carrier may be willing to issue someone with a total cholesterol of 230 preferred best, but their guidelines for what maximum to get a standard offer, will be much more uniform across companies.
The reason behind this is the degree to which a company will use reinsurance. For example, a carrier with lenient preferred best guidelines may do this because they rarely reinsure that business (they have more liberty to do what they want if they have no plans to reinsure the risk). This is why the variation in underwriting practices becomes less varied as health conditions get more severe.
It's also one of the major reasons behind declines with one carrier resulting in a higher probability of a decline with certain other carriers.
What about the Well Known Impaired Risk Carriers?
There are some carriers that have a reputation for being un-phased by certain health conditions. If you want to know who, contact us and we'll give you the details. This again, if a function of less reinsurance use or planned use. Some carriers are large enough, or specialized enough to have a higher degree of liberty regarding how they approach certain risks.
A few of the U.S. life insurers are large enough to have their own underwriting handbook and sometimes act as reinsurers themselves. For this reason, they have an ability and willingness to more aggressively underwriting certain risks that are on the “impaired” bubble.
How do I know if a Policy is Reinsured
Often times you won't know. Some carriers will make that information available to the agent, and sometimes there are basic underwriting practices that will give you a good indication (i.e. some carriers reinsure all business once it hits a certain size in death benefit).
In some circumstances underwriting will make an offer and defer better possible offers to reinsurance. In these circumstances, the company will make the agent aware of an offer at a certain risk class and give the client an option to make use of facultative reinsurance for a possible better offer. But, if the reinsurer decides not to make and offer, or places the applicant in a lower risk class, that will be the final offer. In these circumstances, one would pretty clearly know if a case has been reinsured.
Reinsurance doesn't effect the policy in terms of performance or mechanics, simply whose bank account it comes from when it comes time to pay a claim or interest/dividends. Based on this, it's really not super to know if your policy has been sent to reinsurance.