The life reinsurance industry, once dominated by excess of retention agreements, is now ruled by quota share contracts–a new world order based on innovative risk sharing paradigms, yet anchored in traditional practice.
The key to successful risk sharing, both then and now, is partnership. In the historical world of excess reinsurance, in which the reinsurer steps in when a loss exceeds a ceding company’s retention level, “partnership” was defined by percentages. The ceding company was expected to participate in each risk to at least the same degree that the reinsurer did. In most agreements, the ceding company was participating in at least 50% of the risk. This sharing of risk would serve as the basis for “partnership.”
As with virtually everything, much has changed over time. In the world of excess reinsurance, both the client company and reinsurers were primarily driven by underwriting profit that was generated through risk retention and management.
Partnership meant that reinsurers provided underwriting support for the difficult and very large cases. It meant claims support on the most difficult contestable claims. It meant administrative processes that evolved from individual cession cards to processes that were much less detailed and more focused on getting the job done. It meant mortality assessments that were appropriate for both first dollar business as well as excess business.
In the meantime, many things were going on that affected the insurance industry. One of the biggest changes was the demutualization of many insurance companies.
Wall Street took on a renewed perspective of earnings volatility for both new stock companies and old. After all, there are significantly more insurance stocks for investors to choose from today relative to five or 10 years ago.
The second major transformation was the need to create mortality assumptions and underwriting processes for new products. Preferred products and the required underwriting processes produced significantly better mortality experience. Clearly, this discontinuity in mortality expectations was understood and accepted within the industry at different rates. It is fair to say the reinsurance community incorporated the effect of mortality improvements sooner than the direct writing community.
As a result of the development of these new products, use of quota share reinsurance grew. Quota share establishes a percentage in which premiums and losses are shared by a direct writer and a reinsurer. The market is driving the development of new products and new products are driving quota share reinsurance.
Quota share arrangements reflecting mortality improvements are encouraging direct writers to buy more of it.