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.
Combining these and other catalysts of change, its no wonder that quota share reinsurance is the ceding agreement of choice today. In the past, reinsurers eagerly accepted the risk with which they felt comfortable. Ultimately, however, weve moved away from a reinsurance process where the ceding company kept “at least 50% of the risk” to a situation where 90% quota share is quite common.
Even with industry-wide change, a thread of commonality remains–partnership. But the manner in which that partnership takes place is changing. One cant assume that just because the client company has an equal part of the risk, they are “engaged” in the risk sharing process. And no longer can the ceding company view the partnership with its reinsurer as it once did.
Partnership today means developing a business relationship in a new, different, and more supportive way. It means making sure that both entities are maximizing that part of the value chain that makes them successful.
For the direct writer, it may well mean the ability to meet their clients needs with a full range of products. The direct writer may also spend their energy on expense management. A direct companys goal may well be as the gatekeeper to the customer and manager of distribution and administration expenses.
Partnership to the carrier means letting the reinsurer focus on the core competencies that they provide–to manage the mortality so that the underlying product can be competitive and profitable.
And to do that, reinsurers need quality information to understand trends and to manage the deal. We need to be involved early on in product, process or system changes. In short, we need to be the clients partner.
While quota share reinsurance that is being used in this new partnership does not make the reinsurer or direct writer more profitable, it may result in more units of reinsurance, and, thus, lead to larger total premiums. And for direct writers, it can diminish volatility and result in greater profits.
Partnership doesnt necessarily mean two entities sharing all pieces of the puzzle 50-50. Partnership means working with each other to understand how the other becomes and stays successful. And then, more importantly, for each other to manage the entire arrangement so that both entities are equally successful.
For everything that changes, some things stay the same. Successful companies are always prepared for change, understand their customer and understand their partners. Looking out for the success of your customers and partners ultimately leads to your own success.
is a vice president and chief actuary with the reinsurance life operations of Lincoln Re in Fort Wayne, Ind.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 3, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.