So there you are, thinking about that big sale you’ll be closing soon or what estate planning techniques will best suit your newest prospect. If you’re like most agents, the last thing on your mind is reinsurance.
But interviews with a broad spectrum of experts in the life insurance industry suggest there are several good reasons why producers should give reinsurance substantially more thought than they usually do.
At M Group, a major producer group in Portland, Ore., Randy O’Connor, chief financial officer, can offer producers some good reasons why they need to care about reinsurance.
M Group reinsures business and, in turn, reinsures or retrocedes some of that business. The firm reinsures very large cases: several policies of approximately $20 million and a couple that are over $200 million, he says.
One good reason to care about reinsurance, according to O’Connor, is the impact a reinsurance contract can have on the cost of insurance that a producer’s client will pay.
O’Connor says M Group negotiates treaties so that if mortality improves, the treaty reflects that improvement. “Our retros have to lower mortality rates to reflect improvement,” he says. But “typically, direct writers lock into rates.”
Some treaties, he explains, do not have provisions that allow them to benefit from mortality improvements. On new business, direct writers lock into lower mortality rates, O’Connor adds. But for some older business, there has been no decrease in reinsurance rates in 20 years, he adds.
O’Connor asks whether on such business the cost of insurance is being determined by actual mortality or by the rates being charged by reinsurers.
How does a direct writer get a reinsurer to reflect current mortality in older blocks of business? “We just ask for it,” is O’Connor’s reply.
And how do a direct writer’s producers get a direct writer to move on this issue? Producers need to care enough to talk with direct writers, O’Connor says. “Then things will change,” he adds. “Producers need to take more control over their reinsurance destiny.”
One good reason to take charge, O’Connor says, can be summed up in three words: class action attorneys. If policies do not reflect current mortality pricing and class action attorneys “get a hold of it, things will change quickly,” he says.
Another reason to be more aware of reinsurance, he continues, is the use of offshore reinsurers.
While O’Connor is careful to point out that many offshore reinsurers carefully manage their capital, he stresses the need for proper due diligence.
“If you are shipping mortality off to another country,” that is another risk to manage, he says.
Reinsurance is becoming more important to insurers and producers alike as cession rates have increased substantially, according to Chris Stroup, president and CEO of Swiss Re Life & Health, North America, located in Stamford, Conn.
Cession rates have grown from an estimated 15% in 1993 to approximately 59% in 2000 (see NU, April 23).
Business ceded through reinsurance is particularly important in the level term market, according to Stroup, because it has allowed direct writers to compete on price. It also allows carriers to relieve any capital strain resulting from the Valuation of Life Insurance Policies model regulation, commonly called Guideline Triple-X. (See related story on page 8.)
Stroup says reinsurance is used for variable annuities with guaranteed minimum death benefits because it removes the volatility that the mortality risk introduces to a direct writer’s balance sheet and income streams.
Denis Loring, an executive vice president and director with RGA/Swiss Financial Group in West Palm Beach, Fla., says reinsurance allows the producer to write large cases because the capacity is there.
An expert reinsurer in substandard business, he continues, may handle many heart bypass cases a year compared with a relatively few cases that a direct writer would see.
Reinsurers are more involved than they used to be in the development of products that producers sell, Loring adds. For example, he says they were part of the development of secondary guarantees created for Triple-X products.
Other products that reinsurers may play an important role in developing in the future are long-term care and critical illness products, says Jim Sweeney, executive vice president with Munich American Reassurance Company in Atlanta.
Sweeney says Munich American is working with a subsidiary, Life Plans Inc., Waltham, Mass., on a long-term care area that he generally described as centering on nursing home care.
An international reinsurer will be able to bring experience to the critical illness product as that product evolves, Sweeney adds.
When asked what reinsurance does for Joe or Jane Agent, Sweeney responds, “It pretty much keeps the whole machinery greased. It keeps things fresh and new.”
Without reinsurance, “there would be a lot fewer insurance companies and a lot fewer types of insurance products available. It would be a very limited insurance industry,” says Jon Lee, vice president of marketing with Hannover Life Re of America in Orlando, Fla.
Without the reinsurer, underwriting would be a lot stricter, he adds.
Lee predicts that in the senior market, there will be further development of new products such as annuities with LTC and home health care components. Reinsurers will be there, Lee adds. Those portions of the product, he says, might be reinsured. Direct writers could reinsure up to 100% of the risk, says Lee.
M Group’s O’Connor says that some property-casualty reinsurers are diversifying into life reinsurance and are mixing property-casualty and life capital. And while there is nothing wrong with that as long as the capital is well managed, he says, it does raise the prospect of greater volatility.
There are two sides to the volatility issue, interviews suggest. First, it is important to determine how mixing capital of a more volatile property-casualty business will impact life business that it reinsures. But the other aspect to consider is that that same reinsurance can go a long way toward reducing the volatility of an insurer’s stock price.
Rating agencies pay close attention to a company’s ability to control volatility and the rating assigned a direct writer can play a role in what a producer offers a client.
“One of the things that we are very concerned about is the way companies mitigate risk,” says Mark Puccia, managing director with Standard & Poor’s Corp. in New York. “Reinsurance is a core part of our evaluation. It mitigates risk.”
In general, volatility in life insurers’ products is lower than in the property-casualty industry, he adds.
In addition to managing volatility, reinsurance is being used by companies to better manage their capital, Puccia adds. If business is ceded to offshore reinsurers, ceding companies can take advantage of tax efficiencies and lower capital requirements, he says. Consequently, a commission can be ceded to the primary company and the embedded value monetized or turned into capital, Puccia adds.
As more insurers become stock companies and shareholders’ interests become more important, stable earnings also become more important, says Donna Claire of Claire Thinking, an actuarial firm in Port Salonga, Long Island, N.Y. “Reinsurance helps smooth potential volatility in earnings. If there are a few big claims, then earnings can really tank.”
Reduced volatility enables a company to sell more product through a producer, says David Sandberg, second vice president and corporate actuary with Allianz Life Insurance Company of North America in Minneapolis. Not only can more business be written, but it makes it possible to write larger cases, he adds.
By keeping down volatility of earnings, explains Dean Abbott, a divisional actuary with Allianz Life, and for that block of business ceded, direct writers do not have to build in a margin for volatility.
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.