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.