Reinsurance News Newsletter July 2007 - Society of Actuaries · 2012-01-19 · REINSURANCE NEWS...

M unich American's annual survey, which is conductedon behalf of the Society of Actuaries, ReinsuranceSection, covers Canadian and U.S. ordinary and

group life reinsurance new business production and in force. Theordinary numbers are further subdivided into:

1) Recurring reinsurance:1 conventional reinsurance coveringan insurance policy with an issue date in the year in which itwas reinsured,

2) Portfolio reinsurance: reinsurance covering an insurance policy with an issue date in a year prior to the year in whichit was reinsured, or financial reinsurance, and,

3) Retrocession reinsurance: reinsurance not directly written bythe ceding company.

Complete survey results can be found at Munich American’s Website: www.marclife.com (look under Publications).

Life Reinsurance ProductionU.S. life reinsurers reported another drop in new business production in 2006. Compared to 2005, life production in 2006decreased 10.2 percent overall. Decreases were recorded in recur-ring and retrocession while portfolio and group did record an

LIFE REINSURANCE DATAFROM THE MUNICH AMERICAN SURVEYby David M. Bruggeman

CONTENTS

continued on page 2

July 2007, Issue No. 60 newsletter for members of the reinsurance section

Reinsurance News

1 Included in the definition of recurring category is business assumedfrom the direct side of companies that also have a reinsurance division.Business assumed from the reinsurance division would fall under theretrocession category.

R E I N S U R A N C E S E C T I O N“A KNOWLEDGE COMMUNITY FOR THE SOCIETY OF ACTUARIES”

1 LIFE REINSURANCE DATA FROM THE MUNICH AMERICAN SURVEYDavid M. Bruggeman

8 THE FIVE MOST IMPORTANT FINDINGS FROM THE 2007 FLASPÖHLER SURVEYRick Flaspohler

11 LETTER TO THE EDITORRonnie Klein

12 PRESIDENTIAL ADDRESSEdward L. Robbins

13 CHAIRPERSON’S CORNER: WHAT IS YOUR VIEW?Graham Mackay

14 REVIEW REINSURANCE SECTION PRIORITIES AND PROGRAMSMark Troutman

17 RE-FOCUS 2007 RECAP: NEW INDUSTRY EVENTATTRACTS SENIOR REINSURANCE LEADERSMel Young and Craig Baldwin

18 RE-FOCUS SESSION SUMMARIES

26 LIFE SETTLEMENTS: WHO BENEFITS?Bradley M. Smith

29 ACTUARIAL FOUNDATION GOLF RECAPEileen C. Streu

30 REINSURANCE TREATY PROVISIONS FOR MEDICAL EXCESS BUSINESS Mark Troutman

31 EXCESS REINSURANCE TREATY CONSIDERATIONSDan Wolak

REINSURANCE NEWSNEWSLETTER OF THE REINSURANCE SECTION

Number 60 • July 2007

This newsletter is free to section members. Current-year issues are availablefrom the Publications Orders Department. Back issues of section newslettershave been placed in the Society library, and are on the SOA Web site,www.soa.org. Photocopies of back issues may be requested for a nominal fee.

Expressions of opinion stated herein are, unless expressly stated to thecontrary, not the opinion or position of the Society of Actuaries, its sections,committees or the employers of the authors.

The Society assumes no responsibility for statements made or opinions expressedin the articles, criticisms and discussions contained in this publication.

Newsletter EditorRichard Jennings, FLMI, ACSph: 416.852.4861 • [email protected]

OfficersChairpersonGraham W.G. Mackay, FSAVice-ChairpersonGaetano Geretto, FSASecretary/TreasurerMary Ellen Luning, FSABoard PartnerJim Glickman, FSA

Council MembersCraig M. Baldwin, FSAJ.J. Lane Carroll, FSALawrence S. Carson, FSARobert A. Diefenbacher, FSATim Ruark, FSAMark R. Troutman, FSA

Program RepresentativeCraig M. Baldwin, FSA (Fall)Patrick Stafford, FSA (Spring)

SOA StaffMeg Weber, Director, Section Servicesph: 847.706.3585 • f: 847.273.8585 • [email protected]

Angie Godlewska, Graphic Designerph: 847.706.3548 • f: 847.273.8548 • [email protected]

Mike Boot, Staff Partnerph: 847.706.3536 • f: 847.273.85365 • [email protected]

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Society of Actuaries475 N. Martingale Road, Suite 600 • Schaumburg, IL 60173ph: 847.706.3500 • f: 847.706.3599 • Web: www.soa.org

Copyright © 2007Society of Actuaries • All rights reserved Printed in the United States of America

2 REINSURANCE NEWS JULY 2007

increase. In Canada, increases in recurring and group out-weighed the decreases in portfolio and retrocession and a6.4 percent overall increase was reported—this same pat-tern was seen in Canada in 2005.

Life reinsurance production results for 2005 and 2006 areshown in the table, “Life Reinsurance New BusinessProduction” on page 3.

U.S. Recurring: Going Down ... Again!It was another down year for U.S. recurring business. Intotal, $724.2 billion was reported in 2006 compared to$844.5 billion in 2005. This marks the fourth straight yearand the fifth time in the last six years that recurring produc-tion has decreased. Further, for the second straight year, thedecrease was in the double-digits. The 14.2 percent drop in2006 follows the 18.6 percent decrease reported in 2005—which is one of the largest recurring decreases ever record-ed by the survey.

The chart “Annual Percentage Change in U.S. RecurringNew Business” on page 3 shows the annual percentagechange in U.S. recurring new business since 1996. The late1990s were a time of competitive reinsurance pricing andthe direct writers were induced to reinsure more of theirbusiness. During this time, 80/20 and 90/10 first dollarquota share (FDQS) arrangements became the norm. In1999, there was the term “fire sale” as direct writers pre-pared for Regulation XXX. The increase in term saleshelped fuel the increase in reinsurance production.

The life reinsurance market received another booster shotin 2000 when Reg. XXX became effective and reinsurancecompanies stepped in to provide the surplus relief neededby the direct writers to fund the new reserve requirements.This was primarily accomplished via 80/20 or 90/10FDQS coinsurance arrangements. But after a few years,many of the larger term writers began exploring other solu-tions to finance their reserve strain and some were able tofind solutions that were either more cost efficient thanwhat the reinsurers were offering, or provided a better fitfor their needs. With their reserve issues solved, the directwriters’ need for low retention coinsurance, and reinsur-ance in general, lessened and some direct companies beganmoving away from FDQS coinsurance arrangements toexcess YRT arrangements or retaining a larger FDQS

Life Reinsurance … from page 1

REINSURANCE NEWS JULY 2007 3

continued on page 4


percentage. In hindsight, the U.S. life reinsurancemarket in the early 2000s could be compared to an elevator at the top floor—nowhere else to go but down.

The decreases experienced over the last few years arealso a result of the life reinsurance market experienc-ing the full effect of repricing efforts and the gener-al hardening of reinsurance prices. Direct writershave reacted to the repricing and firmer prices byretaining more of their business—either by shiftingfrom FDQS to excess basis, raising their overallretention limit, or increasing their FDQS retainedpercentage. While it appears that reinsurance pric-ing may be beginning to soften up a bit, it isunknown what level it will need to reach beforedirect writers will start to consider lowering theirretention. In fact, the recent Flaspöhler surveyrevealed that only 2 percent of the direct writerspolled were contemplating a change to a smaller

retention, however 38 percent were contemplating achange to a larger retention.

The 2006 U.S. recurring numbers by companyappear in the table, “U.S. Ordinary RecurringReinsurance” below. The market remains very con-centrated with the top five companies making up 77percent of the market share. Breaking the compa-nies into three different groups based on productionlevel reveals some interesting observations:

1) Group One: These five reinsurers: RGA,Transamerica, Swiss, MARC and Generali werethe top recurring new business writers in 2006.As mentioned above, these companies account-ed for 77 percent of the market in 2006. RGAwas the top producer with $165 billion inrecurring new business—this represents a 9.6percent decrease in production from 2005.Transamerica continues to steadily increase



their new business writings and took over thenumber two position with $146 billion. SwissRe’s $102 billion, a 5 percent increase from2005, put them in the third position, whileMARC’s $81 billion allowed them to maintainthe fourth position—despite this being a 23percent decrease in production from 2005.Generali reached the top five for the first timeby writing $63 billion—a modest 2.5 percentincrease over 2005. Collectively, these five com-panies experienced a 3 percent decrease inrecurring production—well below the totalmarket’s drop of 14 percent.

2) Group Two: The second group is made up offive companies who all experienced decreases intheir recurring new business writings. Headingthis group is Scottish Re, who reported a 57 per-cent decrease in production. Canada Life fol-lowed next with a 42 percent new business drop.General Re (7.2 percent decrease), SCOR (44percent decrease), and Revios (12 percentdecrease) round out the second group. Together,these five companies accounted for an 18.4 per-cent market share in 2006. However, these samefive companies also recorded a collective 45 per-cent decrease in production. Interestingly, over90 percent of the difference between 2005 and2006 total new business production can befound in this group. One final observation thatillustrates how concentrated the reinsurancemarket remains is that the top seven reinsurers(the five companies from group one and the toptwo from group two) represent almost 90 per-cent of the 2006 market share.

3) Group Three: The third group includes six rein-surers whose total 2006 market share was 4.4percent. The good news for this group is that,collectively, they recorded a 29 percent increasein recurring new business.

In looking at these three groups it is easy to see thatthe middle group was hit hardest in 2006. The topfive new business producers (Group One) reported

only a small decrease while the lower six producers(Group Three) reported a sizable increase.

Canada Recurring Business:UP, UP, UP!(Please note that in order to eliminate the impactthat the exchange rate has on Canadian results, theCanadian survey results presented are now beingreported in Canadian dollars. This differs from pastsurveys where the Canadian business was reportedin U.S. dollars.)

In Canada, recurring new business increased by 9.6percent. A total of C$141 billion was written in2006 versus C$129 billion in 2005. Recent estimatesof individual life sales in Canada had direct salesincreasing 8 percent in 2006. Assuming these num-bers hold, the percentage reinsured rate (cession rate)in Canada should have grown again in 2006, albeitjust slightly. If you think the U.S. market is concen-trated, take a look at its northern neighbor wherejust three companies accounted for over 95 percentof the Canadian market share in 2006. Munich ReCanada led the Canadian market with C$53 billionof recurring new business writings. Compared to2005, this represented a 6.5 percent decrease. RGARe (Canada) was the second leading recurring writerin Canada with C$43 billion—an almost 20 percentincrease from 2005. Finally, Swiss Re’s productionjumped 24 percent in 2006. They wrote C$37.4 bil-lion in recurring new business.

Totals for Canadian recurring ordinary reinsuranceassumed in 2005 and 2006 are as shown in the table“Canada Ordinary Recurring Reinsurance” on page 6.

Portfolio and RetrocessionBusinessThanks to Wilton Re, U.S. portfolio experienced a68 percent increase in 2006. Wilton’s acquisition ofthe Chase block and several blocks from New Yorkcompanies led them to single-handedly capture thevast majority (80 percent) of the total portfolio newbusiness in 2006. Outside of Wilton Re, the U.S.

continued on page 6


market saw minimal portfolio activity. With thedecrease in U.S. recurring business, it was not sur-prising to see U.S. retrocession production also fallin 2006. But what is noteworthy is that the percent-age drop for portfolio (19.8 percent) was higherthan the recurring drop (14.2 percent).

In Canada, both portfolio and retrocession businessfell considerably in 2006. Portfolio business fell90.4 percent and retrocession business dropped53.6 percent. The drop in retrocession business mayseem in contrast to the increase in recurring, butmuch of the retrocession growth in recent years hasbeen due to taking on in force blocks and not nec-essarily new business. The in force activity apparent-ly cooled off in 2006. Similarly, the same could besaid about in force business coming from Canadiandirect writers as portfolio business was close to nil.

Comparison with Direct MarketBased on preliminary estimates from the AmericanCouncil of Life Insurers (ACLI), U.S. ordinary lifeinsurance purchases increased 0.8 percent in 2006.Assuming this estimate holds true, this would meanthat the percent reinsured rate in the United Statesis now at 40 percent—the lowest level in 10 yearsand further confirmation that direct writers are

retaining more now than they have in the lastdecade. Looking ahead, LIMRA has forecastedmodest increases in life sales (3-5 percent) over thenext few years. While this is good news for directwriters and reinsurers alike, reinsurers will be chal-lenged to find ways to persuade the direct writers toreinsure more of their business.

The graph on page 7, “U.S. Ordinary IndividualLife Insurance Sales,” compares ordinary life newbusiness totals with the recurring life reinsurancetotals for the United States.

ConclusionThe full impact of the reinsurance repricing effortsthat began a couple of years ago, the general harden-ing of the reinsurance market and the direct writer’sability to find alternate XXX reserve financing solu-tions, were a triple whammy for the U.S. reinsur-ance industry in 2006. With decreases reported infive of the last six years, it would seem that the daysof 50-60 percent cession rates are now just a distantmemory. It may likely take either: (1) a return tocompetitive reinsurance pricing from the perspec-tive of the direct writers—as seen in the 1990s, or(2) a major change in the insurance industry (i.e.,Reg. ‘XXX’), to return to the “glory days” experi-


enced in the past. While the life reinsurance markethas matured and may not experience the explosivegrowth it had in the past, there are a few positivefactors for U.S. reinsurers. First, recent surveys indicate that insurer/reinsurer relationships areimproving. Second, ordinary life sales are expectedto increase over the next few years. Third, life reinsurance prices appear to have loosened up a bitlately. These factors should help stabilize the U.S.reinsurance market in 2007 and beyond.Meanwhile in Canada, all is well as the reinsurancemarket continues to enjoy increases in productionand percent reinsured.

Finally, we would like to thank all of the partici-pants for their continued support with the survey—without their help, there would be no survey!

Disclaimer:Munich American Reassurance Company preparedthe survey on behalf of the Society of ActuariesReinsurance Section as a service to section mem-bers. The contributing companies provide the num-bers in response to the survey. These numbers arenot audited and Munich American, the Society ofActuaries and the Reinsurance Section take noresponsibility for the accuracy of the figures. Z


David M. Bruggeman,FSA, MAAA, is assistantvice president and actuary with MunichAmerican ReassuranceCo., Atlanta, Ga.He can be reached [email protected].


Editor’s Note: The Flaspöhler Research Group has beenconducting the biennial survey of life company atti-tudes about reinsurance and reinsurers since 1993. Theresults of these surveys are used by major life reinsurersto develop marketing and service strategies. The follow-ing article is based on input received from reinsurancebuyers in these surveys—especially the 2007 surveycompleted in late 2006.

“Everything is lovely and the goose is hanging high.”

W hen my five brothers and sisters and Iwere growing up, and heard my grand-father softly but repeatedly singing that

line, we were certain of just two things: one, thateverything was not lovely and two, (thankfully forthe goose!) that there was not one anywhere in sight.

Immediately upon hearing this song, everyonestopped whatever they were doing and seriouslyexamined whether any action on their part was the“inspiration” for my grandfather’s sudden serenade.

Those of you who favor nurture in the “nature ver-sus nurture” debate will not be surprised to hear thatwhen I first saw the 2005 survey results showing adramatic drop in scores for cedant satisfaction withreinsurers, I suddenly found myself humming mygrandfather’s warning song.

Something big was happening. Cedant satisfactionwith reinsurers, which has been in a steady declinesince 1995, suddenly and dramatically droppedfrom 46 percent in 2003 to just 15 percent in 2005.Here at Flaspöhler Research, we have been conduct-ing surveys for 25 years and have never seen a dropin a satisfaction rating by 31 percentage points. Not even close.

The 2007 survey has now been published. Manythings have changed in the past 24 months, but notall the changes are equal in importance. What follows are what we believe are the five most impor-tant results from the 2007 Flaspöhler Survey(Life/Direct Writer).

(Can’t Get No) SatisfactionThe proportion of direct writers indicating that theyare “Very Satisfied” with the reinsurers they use hasleveled off at 17.4 percent. This figure is not statis-tically different from the 14.9 percent “VerySatisfied” that was reported in the 2005 survey.

The good news is that we can now say, with a highdegree of statistical certainty, that the proportion ofdirect writers who are very satisfied with the reinsur-ers they use is no smaller than the proportion thatwas very satisfied in 2005.

Trust me; this is a very good result, especially fromour viewpoint of the last 20 years, during which timewe saw relationships between reinsurers and directwriters go from being the very best of any industryin which we have worked to become the very worstof any industry that we have worked with.

The bleeding appears to have stopped.

Hope Springs EternalPerhaps the most positive finding from the 2007study is that the proportion of direct writers whobelieve that relationships with reinsurers are improv-ing climbed from just 5.8 percent in 2005 to 29.2percent in 2007—an increase of almost 23 percent-age points.

THE FIVE MOST IMPORTANT FINDINGSFROM THE 2007 FLASPÖHLER SURVEYby Rick Flaspöhler

continued on page 10

Simultaneously, the proportion of direct writerswho believe that relationships with reinsurers aredeclining dropped from 60.8 percent in 2005 to just18.9 percent in the most recent study.

Those direct writers that indicated relationships areimproving, attribute the improvement to “bettercommunications” (36.8 percent), “better service,support and responsiveness” (27 percent), and “bet-ter mutual understanding of problems facing eachother” (20.2 percent).

In spite of the dramatic improvement, there remainsa significant and vocal proportion (18.9 percent) ofdirect companies who believe that relationships con-tinue to decline. As one respondent noted:

“Reinsurers are using claims’ reviews as (an) excuse toget off the risk on automatic business. Reinsurers areunable to provide capacity and are blaming it on (the)retros—who don’t care. (They are forcing) intrusiveand time-consuming audits (and) changes in treatylanguage that favor the reinsurer at the ceding com-pany’s expense”.

The Distance BetweenKnowledge and UnderstandingCan Be Infinite

Almost one-half (44.3 percent) of direct writers nowbelieve that reinsurers truly understand the chal-lenges faced by direct writers.

What is remarkable about this figure (and, conse-quently, causes this finding to be number three onour most important list,) is that we also asked rein-surers (in a separate but simultaneous survey) to tellus if they felt that they truly understood the issuesfacing reinsurers. Eighty-five percent of reinsurersresponded that they do, today, truly understand theissues facing direct writers.

What is inescapable is that many more reinsurersbelieve that they understand the key challengesfaced by direct writers than are recognized by directwriters as truly understanding those challenges.

Since we did not ask this question in the 2005 sur-vey, it is impossible to know what degree of changethis represents, but based on the leveling out ofcedant satisfaction scores and the increase in theproportion of direct writers who believe that rela-tionships are improving, we can surmise that thisnumber is an improvement over what we mighthave measured 24 months earlier.

Here are the greatest challenges as identified bydirect writers today:

New Capacity in the Market?We do not know if there is a causal relationshippresent, but over the past 10 years we have certain-ly seen a correlation between the decrease in directwriter satisfaction with reinsurers at the same timethat the number of reinsurers writing business inNorth America decreased.


Rick Flaspöhler is president of FlaspöhlerResearch Grouplocated in Kansas City,MO. He can bereached at [email protected].

New interest in the life reinsurance market may behelping to change satisfactions levels. Today, over 50percent of survey respondents indicate that theycontinue to strongly consider Swiss Re, RGA Re,Munich American Re, Generali USA Life Re,Transamerica Re and Gen Re for all or some of theirlife reinsurance needs.

Direct companies in the most recent survey indicat-ed they have added new reinsurers to the list of thosereinsurers that they strongly consider, includingOptimum Re, Hannover Life Re and Wilton Re.

Add in other consistent players including CanadaLife Re and SCOR Global Life and the result is that there are now more choices for direct writersthan in 2005.

As further evidence of the capacity that is interestedin the life reinsurance market, we can report that 11different reinsurers were committed enough to theNorth American life reinsurance market that theysubscribed to the Flaspöhler survey results for 2007.

Primary Product Pricing(Please, No Hate Mail!)The final of the five most important results from the2007 Flaspöhler Survey is not based on a single sur-vey question. In fact, any good actuary might sug-gest that what follows is not a “finding” at all, butinstead is unfounded conjecture based on little morethan a strong feeling, a fine scotch and a good cigar.

And if you say that after examination of the follow-ing argument, then you are at least 66.66 percentaccurate! The result that I am referring to is thatmore people seem willing to discuss the subject ofprimary product pricing (than ever before?).

Here’s the thing. While at the AHOU meeting inLas Vegas, I attended a presentation by a well-known industry figure who, if I remember correct-ly, indicated that the average annual income of a lifeinsurance agent is about $25,000.

The results of the 2007 direct writer survey showthat the most common responses to the question,“What do reinsurers not fully understand about thechallenges you face today?” are:

1. Competition/Pricing (38.4 percent)2. Sales & Growth (22.4 percent)3. Staying Profitable (18.2 percent)4. Distribution (16 percent)

Finally, when I receive the weekly, uninvited callfrom a life agent telling me he can save me moneyon a life policy, I am over the edge.

Life insurance is already one of the most under-priced products that exists.

If the price of the primary product were to beincreased, wouldn’t more quality agents earn adecent living? Wouldn’t better sales people be attract-ed to the industry? Wouldn’t direct writers be moreprofitable? Wouldn’t reinsurers be easier to get alongwith? (OK, but three out of four is still pretty good!).

And, perhaps most importantly, if the price of theproduct were increased, wouldn’t those agents inca-pable of doing justice to an exceptionally goodproduct on the basis of something other than pricemove on to other professions, no longer holdingdirect writers hostage to the “lowest possible price”mentality that is so prevalent in the industry today?

Now that the dust is beginning to settle and reinsur-ers and direct writers are again working together,isn’t it inescapable that something has to be done tobegin to move away from the “lowest price” model?

Then again, maybe it’s just the cigar talking. Z

The Five Most Important Findings from … from page 9


LETTER TO THE EDITOR


Dear Editor:

I just received the February issue of ReinsuranceNews and I have a quick comment on the lead arti-cle. While I know Stambler well and LeBlanc a lit-tle, and I know them to be quite good at what theydo, I did not know they had purchased advertisingspace in the Reinsurance Section newsletter.

Stambler and LeBlanc tell only one side of the story(theirs) and mention only one monoline (theirs).They do not mention that the expenses increasebecause the issuer has to pay for two actuarial con-sultants, two sets of legal fees, and other expensessuch as travel to visit the client. In addition, there isno mention that by not wrapping, the issuer canattract a different set of investors. Finally, when Iassisted in the development of the first mortalitybond, the issuing spread exactly equaled the cost ofwrapping plus the ‘AAA’ spread at 135 bps.

In short, there is a real value to wrapping transac-tions and the best deals probably have somewrapped and some unwrapped paper—this articledid not describe the benefits of not wrapping.Therefore it becomes more of an advertising piece than an unbiased educational article. We cando better.

Sincerely,

Ronnie Klein, FSA, MAAAVice President, Life ReinsuranceAmerican International Group

Response from DimitryStambler

Dear Ronnie,

Thank you for your comments on the article. I agree with you, we should have been more carefuland not mentioned the names of any monolines in the article.

As far as advantages versus disadvantages of awrapped deal, that was intentional. We wanted toexplain and give readers as much detail as possibleabout the process of wrapping a bond from a mono-line perspective. The challenges faced by all partiesinvolved were mentioned briefly in the article.

Of course, there are alternative methods of dealingwith ‘XXX’ and ‘AXXX’ reserve redundancy, someof which were utilized in the past (e.g., coinsurance)and others being currently contemplated in theindustry (e.g., long-term Letter of Credit; privatefunded solutions; etc.). Our article merely focusedon securitization and specifically wrapped issues.

Dimitry Stambler is director, Structured SolutionsGroup with Citigroup Global Markets Inc. in NewYork. He can be reached at [email protected].

Response from Richard Leblanc

The aim of the article was to provide insight intowhy the majority of issuers have found it advanta-geous to have their life insurance linked securitieswrapped by a financial guarantor, and to demystifythe underwriting approach followed by the financialguaranty industry. As the reader highlights, therecertainly are alternative risk transfer and financingstrategies available and, while not within the scopeof the recent article, a comparative analysis couldmake for an interesting follow-up article.

It should be noted that the article talks in generalterms about the role of financial guarantors in thesetransactions, and at no point attempts to “advertise”one particular provider over others. The section ofthe article entitled “Choosing a Financial Guarantor”clearly highlights the key competitive factors thatare typically considered.

Richard Leblanc is first vice president with AmbacAssurance Corporation in New York, NY. He can bereached at [email protected]. Z

Bylaws Changes and Effective Governance

Fellow Members:This August, in conjunction with the annual elec-tion of directors and officers, the SOA Board willseek approval of the voting Fellows for changes tothe governing documents of the Society. Specificallythis action will replace the dated SOA Constitutionand bylaws with a new set of bylaws that align withcurrent and best practices in not-for-profit associa-tion management and promote and institutionalizeeffective governance.

You can expect to see regular communications aboutthese changes through the summer and will have an opportunity to vote on them using the electron-ic (or paper, if you have requested) procedure that is used to elect officers and directors. Voting will

begin on Aug. 9 and end at 5:00 p.m., Central time,on Sept. 10.

The proposed bylaws are available for your reviewonline at www.soa.org/bylawsvote, and your ques-tions are welcomed at [email protected]. We willreply to all questions, and common ones will bepublished, with answers, in future communicationson this subject.

On behalf of your Board of Governors, I thank youin advance for taking the time to review the pro-posed changes and for voting on this importantmatter later this year.

Sincerely,

Edward L. Robbins, FSA, MAAAPresident


PRESIDENTIAL ADDRESS


Graham Mackay, FSA,FCIA, MAAA, is director with NavigantConsulting, Inc. inChicago, Ill. He is alsochairperson of theReinsurance SectionCouncil. He can bereached at [email protected].

T hink about it. Few people go through lifewithout developing a view on an issue thatthey frequently come across.

Having a view, like any principle, will drive many ofyour actions related to that activity. I want to usethis column to talk about some of the changes thatare underway within our market and the role of the Reinsurance Section Council. I’ll start by shar-ing some of my views. Later on, I will ask you toshare yours.

The role of reinsurance is changing: We are goingthrough another shift in the drivers behind the useof commercial reinsurance. The ERM discipline isgiving companies the tools to better define their tol-erance to all risks. Reinsurance remains an impor-tant tool available to a company to shift risks andmanage capital. The use of reinsurance, however,may not always involve the commercial market; forexample, insurers are becoming less dependent onreinsurers for capital and are going directly to thecapital markets. There are few mysteries left.

Employment opportunities will continue to existfor those that have upgraded their skills: Thinkabout it. The use of reinsurance is flourishingdespite the consolidation in the reinsurance sectorand despite the contraction in reinsurance cessionrates. It is true that opportunities are contractingwithin the traditional reinsurance company com-munity, but demand continues to grow with retailcompanies and their independent advisors. Jobs areplentiful if you have the right skills.

The Reinsurance Section Council can support the evolution of this discipline through researchand education, delivered in a manner that enhan-ces each member’s personal value: Reinsurance is a blend of art and science that requires continuouslearning from actuaries at all stages in their career.Don’t stop. If you have thought of a new trick, so has someone else; be able to execute and be ableto reinvent.

Well, that’s it—some of my views on shifts withinour industry and the role that the ReinsuranceSection Council plays within it. Now I want to hear from you. There are many ways to do this:write a letter to the editor; write an article on an issue that you are close to; roll up your sleevesand get involved in shaping and executing yourcouncil’s activities.

And vote. We have a Reinsurance Section Councilelection coming up and we are fortunate to have a very strong field of candidates, but offer only three open seats. Think about the future of our section and vote for the candidates that you believewill best serve you for the next three years. I amlooking forward to hearing from you and to havingyour voices heard. Z

WHAT IS YOUR VIEW?by Graham Mackay

CHAIRPERSON’S CORNER

REVIEW REINSURANCE SECTIONPRIORITIES AND PROGRAMSby Mark Troutman

“Seek first to understand, then to be understood.”

T his is the first principle of Steven Covey’sSeven Habits of Highly Effective People.Everything begins with being a good listen-

er. The Reinsurance Section Council took this toheart at the Society of Actuaries’ Annual MeetingReinsurance Section hot breakfast. Part of the session involved breaking into small groups to solic-it input on how the Reinsurance Section can bestmeet the needs of its members. We’ve taken that feedback and reviewed our programs and prior-ities for 2007.

Graham Mackay, Reinsurance Section chairman,provided feedback to all those who provided input at the hot breakfast. The purpose of this arti-cle is to share that feedback with the entireReinsurance Section.

First, let’s step back and outline the main benefits ofbeing a member of the Reinsurance Section. Thesebenefits include:

• Promoting and influencing the reinsuranceindustry

• Networking with peers• Speaking and publishing opportunities• Access to new marketplace information• Basic and continuing education materials

and seminars• Research • Institutional archive

All that for $20? Not bad!

Although Reinsurance Section members are general-ly satisfied with the benefits that they are receiving inthese areas, there is always room for improvement.

The Reinsurance Section Council is divided into avariety of committees. The following summarizesyour feedback and our plan of action by the com-mittee structure responsible for delivering content.

Research Committee—The number one requestwas for additional information for reinsurancetreaty language issues. This could involve a speci-men treaty template or simply a discussion of thepros and cons of various provisions from the view-point of the cedant and reinsurer.

Another area of high interest was a request for moredata on what ceding companies are doing currently,such as: ceding more or less business; how they aredealing with concentration of risk; the type of coin-surance that they are using (YRT/coinsurance); andthe results of their pricing assumptions. There is alsoa strong interest in capital management techniques.

Lastly, members are always interested in variousresearch projects dealing with topics such as pre-ferred and substandard mortality, older ages, highface amounts, securitization, lapses, RegulationXXX, principles-based reserving, and accountingand regulatory issues.

Marketing and Membership Value Committee—Though the chart on page 15 outlines the break-down of the Reinsurance Section members byemployment type, it doesn’t really provide muchinsight into the split called “Insurance Organi-zation.” Most Reinsurance Section members areactuaries working for reinsurance companies. The chart chronicles the segmentation of the Reinsurance Section membership by theemployment type they identified in the Society ofActuaries database.

Members providing feedback indicated a strongdesire for more interaction with other professionals.These include a wide variety of product fea-


OUR GOAL IS TO CREATE A LARGERREINSURANCE SECTION WITH MOREDIVERSITY. THIS WILL BENEFIT ALLMEMBERS OF THE SECTION.

ture focuses (e.g., life, annuity, health, property casu-alty); industries, (e.g., insurance companies, reinsur-ers, investment banks and rating agencies); and pro-fessions (e.g., actuaries, underwriters, lawyers,accountants, risk managers and administrators).

Our goal is to create a larger Reinsurance Sectionwith more diversity. This will benefit all members ofthe section. There is strength in numbers and diver-sity. Please forward this document to others whomight increase the membership and diversity of theReinsurance Section. New member contact infor-mation is at the end of this article.

Communications and Publications Committee—People are satisfied with our hard copy ReinsuranceSection newsletter and electronic version, Re-News.They like the content and frequency. They wouldalways like more information on regulatory andaccounting developments. Some even want Re-Newsmore frequently.

Basic and Continuing Education Committee—Members are satisfied with the reinsurance contentat the various Society of Actuaries meetings through-

out the year. They are interested in understandingthe syllabus material dealing with reinsurance andother materials educating other non-reinsuranceprofessionals, such as rating agencies. The commit-tee helps educate regulators and other non-actuariesregarding reinsurance practices, and plans to reviewthe syllabus for appropriateness, and report back tomembers on what is there so they can use it as aresource material. Once again, an emphasis on rein-surance treaty language issues was highlighted.

The Reinsurance Section Council is responding tothese member requests in the following ways:

1. Major new reinsurance conference—The inaugural ReFocus 2007 reinsurance confer-ence was designed to provide a major focus onthe reinsurance industry for all professions anddisciplines to increase networking, and to provide basic and continuing education. Formore information, please see the other articlesin this newsletter for a summary of the ReFocusconference.



2. The council has started a project to look at lifereinsurance treaty wording. The initial aim is tostart with an older ACLI document and updateand strengthen it for new practices and ideas.The objective is to provide a discussion tool,not an industry standard prototype. The A&Htreaty project is completed. Some of that workis included in this newsletter and the rest will beincluded in the following newsletter.

3. The Basic and Continuing EducationCommittee, in addition to sponsoring theReFocus conference, provides a consistentschedule for webcasts and also supports reinsur-ance content at other non-SOA meetings, such as those presented by the ACLI, AHOUand LIMRA.

4. The Communications and PublicationsCommittee will continue to publish the printversion of the Reinsurance Section newsletter,at least twice annually, with a third issue in2007, and the electronic Re-News for moretime-sensitive topics.

5. The Basic and Continuing EducationCommittee also provides reinsurance bootcamps for newcomers to the reinsurance industry and those who interact with the rein-surance industry, such as regulators and ratingagencies. Contact the Basic and ContinuingEducation Committee for more information onthese programs.

As you know, we are a volunteer group and yourcontributions of time and talent make a huge differ-ence to our ability to deliver this content to theReinsurance Section members. Over the last fewmonths, the Reinsurance Section Council hasreviewed its goals and priorities based on prior surveys and feedback at the Annual Meeting. Ifyou’d like to work on a particular initiative, pleasefeel free to contact me or any member of theReinsurance Section Council. We would love tohave you on our team. Our most recent call for vol-unteers produced several new volunteers. We aregoing to put them to work serving the members ofthe Reinsurance Section.

In summary, the Reinsurance Section Council aimsto meet the challenges of a constantly changingenvironment head-on through activities centered onbasic and continuing education, communicationsand publications and research to maximize the valueto the membership. Z

To become a new Reinsurance Section member,please go to the following link: http://www.soa.org/professional-interests/files/pdf/SOAMembershipForm.pdf or contactact anyone on the ReinsuranceSection Council.

ReView Reinsurance Section … from page 15


Mark Troutman, FSA,MAAA, is team leader,marketing and membership value teamand president, SummitReinsurance Services,Inc. He can be reachedat [email protected].


Editor’s note: This article originally appeared in theNational Underwriter and is reprinted with theirkind permission.

F our of the U.S. life industry’s leading lifereinsurers recently spoke at one of the lifereinsurance industry’s newest events,

ReFocus 2007. Presenting at the conference were:Paul Rutledge, president and CEO of TransamericaReinsurance; W. Weldon Wilson, CEO, Swiss ReLife & Health America, Inc.; Greig Woodring, pres-ident and CEO, RGA Reinsurance Co.; and DavidHolland, president and CEO, Munich AmericanReassurance Co. Their topics addressed risk man-agement, capital markets convergence, principles-based reserving and the challenges to growing areinsurer in today’s global markets.

In addition, on the second day of the conferenceanother general session featured insightful presenta-tions on securitizations by: John Johns, chairmanand CEO, Protective Life; international expansionissues by Fred Sievert; president, New York Life; theopportunities for growth via domestic market byEdward Zore, president and CEO, NorthwesternMutual; the opportunities of growth through merg-ers and acquisitions by Dennis Glass, COO,Lincoln Financial Group; and finally the challengesfor small carriers in today’s market by GaryEisenbarth, president and CEO, Mutual Trust.

The conference included five general sessions and 13 breakout sessions on topics including finan-cial reinsurance, long-term care, middle marketopportunities, international business and principles-based reserves.

During the opening reception of the conference,ACLI President Frank Keating introduced the first“Legends of the Industry” inductees. Inducteesincluded Stan Tulin, retired vice chairman of AXAFinancial; Ozzie Scofield, retired chairman andCEO of Scottish Re; Peter Mullin, chairman ofMullin TBG; Art Ryan, chairman and CEO,Prudential; and Ron Dolan, former chairman ofFirst Colony.

Co-sponsored by the Society of Actuaries and theAmerican Council of Life Insurers, the inauguralevent was held March 4-7 in Las Vegas. CraigBaldwin and Mel Young co-chaired the event.

“Our attendance of 270 was better than expected.We received compliments on the presentation’s top-ics and quality. And we raised $30,000 for theActuarial Foundation, so I call our first event an all-around success,” Baldwin said. “Reinsurancerequires a big picture perspective to serve its market.ReFocus provides a forum for senior life reinsuranceand insurance leaders to discuss emerging U.S. andglobal issues confronting the industry.”

The planning committee for the conference hasalready begun looking toward next year and beyond,Baldwin said. “In the long term, we see this as aninternational forum and plan to invite our col-leagues from South America, Asia, Europe andother international markets to join us both as atten-dees and presenters.” Z

RE-FOCUS 2007 RECAP: NEW INDUSTRY EVENT ATTRACTS SENIORREINSURANCE LEADERSby Mel Young and Craig Baldwin

Craig Baldwin is vicepresident withTransamericaReinsurance inCharlotte, NC. He canbe reached [email protected].

Mel Young is executivevice president andvice chairman for RGAReinsurance Companylocated in Norwalk,Conn. He can bereached at [email protected].

Global Demographics and itsImpact on Product Placement—India, China and the U.K. Moderator:Ronnie Klein, vice president, life reinsurance, AIG

Speakers: William Hogan, vice president and actuary, MetLifeEd Martin, vice president, Swiss Re Life & Health AmericaMike Molesworth, managing director, Gen Re Life Australia

Ronnie Klein began the session with some interest-ing facts about India, China and the UnitedKingdom versus the United States. China and Indiahave huge populations, low median ages, low GrossNational Products (GNP) but large growth in realGNP, compared to the United States. The UnitedKingdom is a more mature market with the highestlife expectancy, but lowest GNP real growth rate.

Mike Molesworth then discussed the market premi-um growth for India, China and the UnitedKingdom, concluding that China is the key toworld growth in insurance sales for the near future.In addition, Mike showed demographic trends inthese countries along with the major writers ofinsurance—both foreign and domestic. Finally,Mike described the differing distribution channelsand the keys to success in these countries.

Bill Hogan explained the product life cycle and howproducts are developed to specifically meet theseneeds in each country. Building on the demograph-ics already discussed, Bill showed how the ageingpopulation of the United Kingdom and the one-child policy in China causes companies todevelop differing products by country. Finally, Billdescribed pricing and expected returns for theseproducts by country.

Ed Martin discussed the need for reinsurance in theemerging markets of India and China as well as forthe mature market of the United Kingdom. The

United Kingdom recently changed regulations giv-ing reinsurers an advantage with respect to capitalrequired. The days of direct companies reinsuring alarge percentage of their business to leverage thelower capital requirements are now over, causingreinsurers to rethink their business model. Reinsurerservices are in great demand in China and India forunderwriting support and product expertise as wellas risk mitigation.

A lively discussion pursued after the formal presen-tations, where the presenters were challenged onother countries besides those covered by the sessiondescriptions. Since each presenter had actual foreignexperience, all questions were expertly addressed.

Principles-Based Reserving(PBR) and its Potential Impacton Direct Writers andReinsurersModerator:James D. Atkins, chief actuary–life insurance, Genworth Financial

Speakers:Tim Tongson, senior v.p. and chief actuary, Swiss Re Life & Health AmericaJames D. Atkins, chief actuary–life insurance, Genworth FinancialElinor Friedman, principal, Tillinghast Towers Perrin

This session related how the impact of the currentproposed PBR standards will affect the businessrelationships between direct writers, reinsurers andthird party consultants (advising organizations andregulators about PBR). Panelists represented theperspectives of a direct writer, a reinsurer and a thirdparty advisor. The interactive discussion covered thefollowing PBR issues:

• Market Impact—will PBR increase or decreasethe demand for reinsurance? Some reinsurancetoday is driven by the need for XXX relief. Thisdemand would likely decrease. As with the


RE-FOCUS SESSION SUMMARIES


Illustration Regulation, reinsurance pricescould be a substitute for a ceding company’sassumptions at least on the portion reinsured.Big companies could easily use their own expe-rience. whereas small companies might lackcredible experience. In order to maintain com-petitiveness, small companies might be forcedto increase their use of reinsurance. Reinsurersmay shift marketing efforts to smaller/mediumsize companies. To control mortality andexpenses, reinsurers could impose tighterunderwriting and process standards on thesecompanies. As a result, small/medium companies may become even more homoge-nous and “average.”

• New Product Services—PBR will allow rein-surers to reinvent themselves in alignment withnew opportunities. Reinsurers will aggregateblocks of business and use innovative tax/capi-tal market structures to bring improved effi-ciencies to their financial statements. Reinsurerswill use financial retrocession to improve over-all economics, transferring portions of pooledrisks and related reserves to select companieshaving excess capital. Relative to the past, datarequirements will increase, whether for reinsur-ance or for capital market securitizations.Reinsurers will charge for administrative servic-es and successfully compete with consultants.

• Cost of Compliance—PBR impact on compa-nies’ actuarial departments will be profound.Actuarial departments will need to be reorgan-ized. Many companies do not have enoughmodeling expertise in their valuation areas tosupport the new PBR framework. This may beeven truer for reinsurers. Reinsurance compa-nies will need more in-depth product knowl-edge. There will be an increase in software andhardware requirements and greater strain onresources to perform year-end work.

• Financial Reporting Issues—PBR will impactreserve credit, experience data and interactionwith regulators. Will the ceding company beable to take reserve credit if the reinsurer’s

reserve calculation is dissimilar to the cedingcompany’s reserve calculation? Under the cur-rent proposal, the reinsurance reserve credit isdefined as the “notional gross reserve” for theceding company less the reported reserve. Thereserve would be calculated based on the cedingcompany’s assumptions/experience. The reservefor the reinsurance assumed would be based onthe reinsurer’s assumptions/experience or atleast adjusted for the reinsurer’s experience.These results may well differ and could be aproblem in states requiring mirror reserving.Reinsurers will need more data to do their val-uations. While they are at it, they might as wellget an automatic feed of all the underwritingdata on a seriatim basis. Very quickly they willamass enough experience to revamp the wayunderwriting is done. PBR will allow regulatorsto gain a better understanding of what compa-nies are doing. This will be driven by highercosts and use of company’s resources.

• Other Issues/Potential Impacts—Reinsurercredit-worthiness will be less uniform and moreimportant. Reinsurers with more aggressivemortality assumptions will calculate lowerreserves and enjoy a pricing advantage overmore conservative companies. Higher reinsurerratings might actually justify higher reinsurancepricing. But hasn’t this always been the case—both for direct writers and reinsurers? Will PBRamplify the advantage or will the peer reviewrequirements tend to reduce this effect? Theimpact of the proposed PBR structure on taxreserve calculations is unclear. Will the struc-ture introduce new tax advantages/disadvan-tages? Better communications within the pric-ing and valuation area of direct writers andreinsurers will be required. Most companiesprice on a statutory basis. Under the proposedPBR framework, early agreement on valuationassumptions and margins will be required toensure new products being developed meetcompany profitability targets.


ReFocus Session Summaries … from page 19


Convergence of Capital Marketsand ReinsuranceModerator:Graham Mackay, director, Navigant Consulting

Speakers: Chris Stroup, chairman and chief executive officer, Wilton ReChris Brockwell, senior vice president, Swiss Re Capital Markets

Of interest is the displacement of conventional rein-surance solutions in the term life insurance marketby capital market solutions delivered directly toretail companies. This trend is examined from aninvestment banker’s and a reinsurer’s perspective.The presenters’ slides and supplemental informationserve as valuable reference materials for insuranceprofessionals interested in this topic.

Reinsurer’s perspective: Insurance companies mustunderstand their capital structure and develop astrategy that allows them to most efficiently managetheir business. Reinsurance should be considered as a valuable tool to the insurers as it serves to trans-fer reserve and capital strain to the reinsurer, eliminating the need for the insurer to consideralternate financing structures offered by the capitalmarkets. There is, however, a full recognition thatthe reinsurance buying practices are shifting withinsurers preparing to deal more directly with the capital markets for the financing of reservesredundancies. The reinsurance marketplace willtrend toward aggregation of smaller blocks and mor-tality-basis risk.

Investment Banker’s perspective: Alternate capitalsources will continue to be driven through financingstructures. A XXX financing structure was present-ed as background with comments provided onAXXX and Embedded Value securitizations.Additional insights were shared on the impact offinancial guarantors, extreme mortality and the con-siderations of rating agencies. In the future, themarket will become more comfortable with life

securitizations, economic terms and execution con-straints will ease, and insurers will receive credit intheir capital models for solutions that reduce risks toextreme mortality events.

Challenges of Asset-IntensiveReinsuranceModerator:Larry Carson, vice president and actuary, RGA Re

Speakers: Don Lyons, second vice president, Sammons Financial GroupSteve Zonca, senior vice president and chief actuary, RGA ReHarrison G. Starrett, General RE-New England Asset Management

Don Lyons, Harry Starrett, and Steve Zonca andLarry Carson spoke about the nuts and bolts ofasset-intensive reinsurance. After comparing andcontrasting this type of reinsurance with more “tra-ditional” reinsurance, the panelists walked throughall the steps involved in an asset-intensive reinsur-ance transaction, from marketing and initial steps tonegotiations and ongoing management.

Financial Reinsurance in thePost-Spitzer WorldModerator: David Addison, vice president and marketing actuary, RGA Re

Speakers: Jeff Burt, vice president marketing, Hannover Life ReMary Ellen Luning, consulting actuary, Ernst & YoungJeff Poulin, executive vice president, London Life ReBill Pargeans, assistant vice president, A.M. Best

Jeff Poulin, Jeff Burt, Mary Ellen Lunning, and BillPargeans, spoke at a panel discussion on “FinancialReinsurance in the Post-Spitzer World”, moderatedby David Addison. After brief (some more so thanothers) presentations by the panelists, David led aspirited discussion touching on accounting treat-ment of transactions, the role of investment banks,the reaction of ratings agencies and other relatedtopics. There were a number of vocal opinions heardfrom the floor—thanks to Jimmy Atkins, AlexCowley, Dianne Wallace and others, and the discus-sion could easily have continued for much longer.Based on the very positive feedback, many of theparticipants will be taking part in a similar forum,intended to take the discussions further, at theAnnual Meeting.

The Impact of Emerging MedicalAdvancements on the Future ofthe Life, Health and AnnuityInsurance/Reinsurance IndustryModerator:Mark Troutman, president, Summit-Re

Panelist:Dr. Phil Smalley, vice president and medical director, RGA Re InternationalDieter Gaubatz, vice president, Swiss ReRoss Morton,RGA Re

The presentation on emerging medical trends wasbuilt on the perception of three experienced insur-ance executives from three diverse backgrounds—actuarial, medical and reinsurance risk manage-ment. They explored the various and complex worldof medical leaps in diagnosis and treatment, therealities of statistical trends in longevity and mortal-ity complimented by the nuances of pricingassumptions, and the actual implementation ofchange in the risk selector’s role where expense man-agement and staff shortages override assumptions.

The session was very much a three-dimensional reallook at what is happening in medicine and riskselection by the disciplines most involved.

The Reinsurer Role in Long-Term Care InsuranceModerator: Jim Glickman, president and CEO, LifeCare Assurance

Speakers: Dan Cathcart, senior consultant, Towers PerrinTim Hale, assistant vice president, Munich American ReBarry Eagle, vice president, Marketing, GenRe LifeHealth

Dan Cathcart, Barry Eagle, Tim Hale and JimGlickman provided the audience with a wide rang-ing overview of the long term care insurance mar-ketplace and the reinsurer’s role in that marketplace.Dan started with a presentation on the actuarialaspects of long term care insurance together withsome cautions on the highly volatile results that cancome from some rather small changes between actu-al and assumed assumptions. He also provided a bitof product history and discussed the opportunitiesversus the risks.

Barry Eagle then followed that discussion with anoverview of the risks and mistakes that have beenmade during the early years of this line of business,by both reinsurers and direct writers from market-ing, underwriting and claims perspectives. He alsodiscussed some of the legal problems that haveoccurred and focused the audience on key issues toinclude in any agreement.

Tim Hale then discussed the challenge for both thedirect writers and the reinsurers of trying to create asuccessful program. He also focused on the recentchanges that have made the outlook for long-termcare insurance programs look much brighter,





especially the general knowledge in the industry thathas created a much higher price level, changes in therisk-based capital formula that have greatly reducedsome of the capital requirements and, perhaps mostimportantly, the recent federal legislation that likelywill make long-term care insurance more attractiveto the consumer. Finally, he compared various rein-surance approaches to the market and discussed therelative advantages and disadvantages of them.

Jim Glickman completed this session with a casestudy of one reinsurer’s approach to this market andwhat they did to create a successful program. Hedescribed the factors that led to the particularapproach used, why it was expected to succeed andhow it differed from the traditional approach thatwas generally less successful.

At the end of the presentation, a lively question andanswer period ensued.

U.S. Medical Market UpdateModerator: Mark Troutman, president, Summit Re

Speakers: Dan Wolak, senior vice president, GenRe LifeHealth Dr. Richard Migliori, executive vice president, United Health CorporationDan Lebish, president and chief executive officer, HM LifeInsurance Company Robert Trainer, president, Munich Re America HealthCareJeff Argotsinger, medical expense group leader, Swiss Re

A distinguished group of panelists from five differ-ent carriers provided their perspectives on the statusof the U.S. medical market.

Dr. Richard Migliori—Dr. Migliori is executivevice president for business initiatives and clinical

affairs for United Health Corporation. He indicatedthat centers of excellence, episodes of care andemployee empowerment are the keys to fixing thebroken health care system. He placed the blame formany of the health care costs as a variance in clini-cal judgment and disparity in surgical activity.Centers of excellence minimize these discrepanciesfrom appropriate standards of care.

Core requirements for competitive health care models include:

• An ability to stratify clinical performance onthe basis of quality.

• An ability to establish a competitive “global”price for the entire episode of care.

• An ability to demonstrate comparative priceand quality data to the patient in need.

• For the patient—access to America’s best clinicians.

• For the physician and hospital—promotion ona national scale.

• For the payor—protection against unmi-tigated trend.

Dan Lebish—Dan chronicled the “have and havenot” aspect of our system where the employees who have health care basically have little accounta-bility for their expenditures and those who have little or no health care have no ability to pay forthese expensive services.

Insurance and reinsurance carriers can improve thehealth care system and capitalize on opportunitiesby providing the following:• Products that provide health risk solutions for

employers, employees, carriers and providers.• Self-funding and/or supplemental health prod-

ucts can be packaged together to provide con-sultative solutions and limit employer exposure.

• New and creative approaches to alternativefunding and risk sharing that align risk incen-tives among all parties.

Jeff Argotsinger—Jeff chronicled the elements of agood strategy for addressing the catastrophic med-

ical market or any business plan. A good strategy isclearly understood by everyone at every level in theorganization. A good strategy addresses:

• industry structure.• desired customer value proposition.• competitive landscape.• business capabilities.

Bob Trainer—Bob shared a few slides on healthcare costs that demonstrated that catastrophic claimfrequency and severity are increasing. He chronicledthe rise in claims above $1 million, organ transplantfrequency, prescription office visit frequency andfrequency of multiple births and premature births,all of which are leading to increased insurance andreinsurance costs.

Dan Wolak—Dan focused on the future of healthreinsurance by referencing material in two books:Reinsuring Health by Katherine Swartz andRedefining Healthcare by Michael Porter andElizabeth Olmsted Teisberg. The Porter andTeisberg book suggested that health care could befixed by following principles that include:

1. Focusing on value, not just cost.2. Result-based competition.3. Competition in medical delivery based on the

full cycle of care rather than discrete services.4. High quality care should be less costly (centers

of excellence again).5. Widely distributing data on results and (trans-

parent) pricing.

Porter and Teisberg did not suggest that any of thecurrent players would be eliminated from the mar-ket, but their principles would be of greater benefitto some, but not others.

In looking at the future of health care reinsurance,Mr. Wolak concluded that fundamental shifts in themarketplace have occurred in each of the past threedecades. The current fundamental shift is the con-solidation of health insurers into national players.As we move into the next decade, the use of infor-mation by health care plans and users will lead to

another fundamental shift. The fundamental shiftthat we may be beginning now is a move to trans-parent pricing, which is the key for the smaller andregional health insurance players to remain viable.With such a movement to a transparent pricing sys-tem, the difference in prices charged between healthplans may narrow significantly or be eliminated.

The Paradigm Shift in Health Plan Direction

Source: Redefining Healthcare by Porter & Teisberg



Old Paradigm New Paradigm

Choice

Restrict patientchoice throughin-network features

Promote choiceby providing patient andprovider infor-mation toimprove health

Providermanagement

Micromanageprovider process

Reward providers basedon results

Cost

Minimize costper treatmentthrough neworkfees and out-of-network limits

Maximize thevalue of careacross the carecontinuum

Administra-tion

Complex paperwork andadministrativerequirements

Minimizepaperwork andadministration

Competitionamonghealth plans

Compete oncosts and network feestructures

Compete onmember healthresults



Enterprise Risk Managementand the Role of ReinsuranceFacilitator: Steve Minsky, chief executive officer, LogicManager

Moderator: Michael Shumrak, senior vice president, Scor Global Life Re U.S.

Speakers: Michael L. Greer, senior vice president & chief pricing officer, Wilton ReEnna Pietrantoni, manager risk management & audit, Hannover Re

Steve Minsky kicked off this session by presenting avery interesting introduction of the RIMS RiskMaturity Model (RMM). This is a framework Stevehas developed in cooperation with RIMS to helpfinancial services companies map and prioritizetheir current enterprise risk situation. Steve illustrat-ed how RMM works by providing a number ofsummarized real life case studies.

Moving from the general ERM framework to anactual life reinsurance case study, Enna Pietrantonitook us through an ERM process she led atHannover. Enna emphasized how buy-in and con-tinued support from senior management was key inproviding the drive, direction and prioritization fortheir ERM to be successful.

Mike Greer wrapped the session up with an excel-lent presentation focused on his view of an enter-prise-wide financial risk management frameworkone could use to decompose risks within and acrossproduct silos.

Michael Shumrak, senior vice president, SCORGlobal Life Re US, moderated the panel.

Disability ReinsuranceMarketplace—Capacity vs.DemandModerator:Tom Penn-David, vice president, Munich American Re

Speakers: Tom Penn-David, vice president, Munich American ReBob Greving, executive vice president, chief financial officer & chiefactuary, UnumProvidentDavid Mitchell, vice president business development, DRMSAndronico Castillo, vice president & actuary, Munich American Re

The disability session was well attended and focusedon the very specific needs for reinsurance of groupand individual disability products. Bob Grevingpresented the view from a large direct carrier whosecompany faces a range of market challenges andwho is looking for very substantial and specializedreinsurance support to meet his needs. Greg Dulacdiscussed the turnkey LTD market and how thelandscape has changed from the MGU pools of the ‘90s to the current, very focused providers ofservices for smaller disability players. Andy Castillodiscussed the very challenging individual disabilitymarket, the list of those no longer in the disabilitydirect or reinsurance market and the changes that the market has made in response. All three pre-sentations made the point that capacity is availablein one form or another, but that expertise is criticalto longevity.

Regulatory Environment WorldChangesModerator: Monica Hainer, president and chief executive officer, London Life Re

Speakers: Robert Stein, chairman global financial services, Ernst and YoungStan Tulin, vice chairman & chief financial officer, AXA FinancialDan McCarthy, consulting actuary, Milliman Inc.

“The Future as We See It” was a presentation bythree of our industry leaders. Bob Stein provided avision of the market in which we work—dominatedby consolidation, an explosion of overseas backoffices with sales and strategy remaining in theUnited States. There continued growth of secondarymarkets, is with banks pushing into the high networth market, while on the regulatory front we can

hope to see convergence of the U.S. regulators withthe rest of the world and the adoption of OFC.

Dan McCarthy made his comments on a muchmore personal level. He presented statistical data toshow that in the mid-90s the average wage earnerspent 3 percent of his (and yes it was generally his!)income on insurance. Today this has dropped to 1.5percent. From the agent’s perspective, the incomegenerated by these sales is insufficient to make a liv-ing. So where does that leave the industry?

Stan Tulin, who proclaimed himself the least opti-mistic of the group, talked about dramaticallyincreasing sales above age 70, increasing replace-ment activity and the wonderful world ofSTOLI/BOLI. Put it all together and real sales aredown in a marketplace where the under-50s havereal need. This leads to the question of the socialvalue of our products and a poses challenge to all todevelop creative solutions to the issues we face. Z


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Editor’s Note: This article is based on comments madeby Brad Smith as part of a luncheon debate at ReFocus2007 on the merits of policies sold in anticipation ofbeing “life settled” a couple of years after issue. A num-ber of those in attendance suggested that Mr. Smith puthis thoughts in writing and this article is the result.

A life settlement is a transaction involving anumber of parties. Specifically, it involvesthe owner of a life insurance policy selling

his or her ownership rights, including the right toname the beneficiary of the policy, to a third partyinvestor. The investor typically has no insurableinterest in the individual whose life is insured by thepolicy. That is, there is no economic or emotionalbenefit in the continued life of the insured by theacquiring owner.

Some life settlements involve the sale of policiespurchased many years ago that are no longer needed by the original owner. Such a sale mayenable the owner to extract value in excess of whathe or she would receive if the policy were surren-dered for its cash value. Such transactions are notparticularly controversial.

However, some potential insureds are currentlyapplying for life policies in anticipation of sellingthose policies to a third party investor shortly

after the incontestable period of the policy hasexpired (typically two years). Such transactions havecreated significant controversy and are the subject ofthis article.

Rendering a judgment of any transaction is a matterof perspective. So let’s examine the participants insuch a transaction and determine their view, bothfrom a short-term and long-term perspective.

OriginatorsTypically, the originator of a life settlement poolputs together a number of policies that are offeredto investors for purchase. For their efforts, theyreceive an origination fee. They are paid up-front,regardless of whether a particular investment worksout. Thus, the existence of the life settlement mar-ket is positive from the originator’s standpoint, atleast in the short run. As will be explained later,their long-term view may be altered if they face legalaction brought by investors who are unhappy withthe returns that are actually realized.

Life Insurance Agents/BrokersLife settlements provide an easy source of potentialsales for a life insurance agent/broker. In the short-term, many agents view the existence of this marketas a positive development. In the long run, the exis-tence of these “easy” sales may actually erode anagent/broker’s ability to sell life insurance to thosewho truly need it. In my view, any additional legis-lation that is enacted as a reaction to the life settle-ment market might diminish the value of insuranceto the general public and, thus, would hurt thosewho sell life insurance as a profession.

PolicyholdersIn the short run, policyholders who purchase insur-ance on their own lives and subsequently sell thepolicies in a life settlement transaction are rewardedfinancially. In all likelihood, they view the existenceof this market positively. Nonetheless, how mightthey feel a few years removed from the purchase andsubsequent sale of such a policy knowing that astranger or group of strangers would benefit finan-cially from their death? How will they feel knowingthese investors are being hurt financially due to their

LIFE SETTLEMENTS: WHO BENEFITS?by Bradley M. Smith

continued life? For most people, that is not a verycomfortable position to be in.

Likewise, future generations of life insurance buyerscould be hurt by actions taken by life insurancecompanies or by the enactment of legislation thatlimits the value of a life insurance policy to the con-sumer. Companies may tighten their underwritingprocedures or raise the premiums charged for theirpolicies due to the existence of the life settlementmarket. More onerous ownership provisions limit-ing the transfer of a policy from one owner toanother could be incorporated into the provisionsof a life insurance policy. Companies may becomemore aggressive in their examination of claims forfraud in the policy application process, even afterthe incontestable period. If life insurance policiesbecome tradable securities in the open market,Congress may decide to reconsider or eliminate thetax-free buildup of the cash value within a life insur-ance policy. Any or all of these eventualities wouldmake a life insurance policy less attractive to thefuture generation of life insurance applicants.

Life Insurance CompaniesIn the short run, the generation of additional salesthat are presumably profitable would be viewedpositively by life insurance companies. However,policies sold for redemption in the life settlementmarket may result in higher than expected claims orartificially low ultimate lapse rates. That, in turn,may result in significant losses for the issuing lifeinsurance company. Similarly, any changes enactedby Congress limiting the tax-free buildup of thecash value within a life insurance policy wouldseverely damage the value offered by a product.

InvestorsInvolved as I have been in the pricing of life insur-ance policies for nearly 30 years, it is difficult for meto believe that investors in policies that are designedto be “life settled” a couple of years after issuancewill be happy with their returns. It is quite possible,if not probable, that many investors will experiencenegative returns. Let me explain.

A typical life insurance policy is priced to havesomewhere between a 50 to 60 percent loss ratio.That is, on a present value basis, policyholder ben-efits will consume 50 to 60 percent of the premiumspaid over the life of the policy. Two years after issueof the policy this may increase, but not significant-ly. Since life settlement investors pay the premiumsdue after they purchase the policies, policyholderlapse becomes nonexistent.

This may cause the loss ratio of the policy toincrease as much as 20 percent, depending upon thelapse assumption utilized in the original pricing ofthe product. Thus, the loss ratio may increase to 70to 80 percent. While this may cause the policy tobecome unprofitable for the life insurance compa-ny, it is not enough to make the investor’s returnpositive. The investment only becomes positiveonce the death claims paid exceed the premiumspaid. Thus the loss ratio must approach 140 to 160percent if there is to be a positive return producedfor the investor, taking into account the originationexpense of putting the block of policies togetherincluding paying the original policyholder some-thing for applying for the insurance.

Clearly, no life insurance company would willinglysell a policy with a 140 to 160 percent anticipatedloss ratio. Such a block of business would create sig-nificant losses for any company that did so. Thus,the underlying premise of life settlement blocks thatconsist of policies sold a couple of years earlier inanticipation of being life-settled, must be that life



IF LIFE INSURANCE POLICIES BECOME TRADABLE SECURITIES IN THE OPEN MARKET, CONGRESS MAY DECIDE TO RECONSIDER OR ELIMINATE THE TAX-FREE BUILDUP OF THE CASH VALUE WITHIN A LIFEINSURANCE POLICY.

Brad Smith is consultingactuary with Milliman,Inc., in Dallas, Texas. The opinions expressedin his article are hisalone. He can bereached at [email protected].

Life Settlements … from page 27


insurance companies routinely make significanterrors in their pricing or underwriting processes. Inorder to be profitable to an investor, such errorswould have to be of a magnitude to increase expect-ed losses paid on such policies by approximately 100percent. I do not believe that such errors exist withmuch frequency. If they did, companies wouldeventually recognize this and alter either theirunderwriting or pricing processes accordingly.

Another problem concerns the volatility of suchblocks of business. The number of policies in somelife settlement blocks is typically not large enough toavoid random statistical fluctuations that can causethe returns on these investments to be quite uneven.A small block of policies that includes a few largeindividual policies can result in significantly fluctu-ating returns.

Consequently, I believe that this market will becomeless and less attractive, as investors become disap-pointed with their returns.

SocietySome originators of these vehicles attempt to “arbi-trage” the limitations placed upon the underwritingpractices of life insurance companies by laws cur-rently on the books. Laws enacted by legislaturesreflect the mores of society. Thus, limitations areplaced upon insurance companies with respect todifferentiation of premiums by race and sexual pref-erence. As the science surrounding the predictivevalue of genetics becomes clearer, it is foreseeable,due to privacy concerns, that limitations on the useof genetic testing will be placed upon insurancecompanies. However, such limitations do not existfor the originators of life settlement blocks. Thiscreates the existence of asymmetric informationwithin the transaction, a condition that has not

been allowed in other transactions (i.e., insider trad-ing). Is it really in the best interest of society to allowthe use of such knowledge after the issuance of a lifeinsurance policy to “arbitrage” the limitationsplaced upon the insurance company by society? Issociety well served in such a circumstance?Legislators must maintain a level playing fieldbetween the participants in such a transaction, whilereflecting the mores of the society they serve.

ConclusionIn the long run, assuming that life insurance com-panies maintain fundamental pricing and under-writing practices, I believe the practice of sellingpolicies with the intent of taking them to the lifesettlement market a couple of years later, will dryup. Financial needs analysis for the older ageinsureds targeted by this market must become a crit-ical component of the underwriting process. Tableshaving programs utilized in the underwritingprocess must be consistent with the mortalityassumptions used in the pricing process. Lapse sup-port of the pricing of these products must be exam-ined by the companies. Business produced by agentand agent groups should be reviewed for focus inthis market and corrective action taken when iden-tified. Companies must reconsider their participa-tion in “trial app” programs in which brokers puttogether detailed underwriting packages and sendthem to multiple companies, looking for one com-pany to make a mistake. Companies willing to par-ticipate in these programs expose themselves to issu-ing policies in anticipation of being life-settledshortly thereafter.

The existence of this market has the potential togive all involved, including the life insurance indus-try, a black eye, causing legislatures to take precipi-tous action affecting the value offered by life insur-ance policies to the consumer. Consequently, lifeinsurance companies must begin the process of edu-cating legislators about the dynamics of such trans-actions and the need to maintain a level playingfield among all participants before draconian meas-ures are enacted. Failure to take each of these stepscould have dire consequences for the life insuranceindustry and the products it sells..Z

CONSEQUENTLY, I BELIEVE THAT THISMARKET WILL BECOME LESS AND LESSATTRACTIVE, AS INVESTORS BECOMEDISAPPOINTED WITH THEIR RETURNS.


Editor’s Note: One of the objectives of the ReFocus2007 conference was to raise funds for TheActuarial Foundation, who wrote the attached let-ter as thanks for the more than $35,000 raised bythe conference, conference sponsors and delegates.

A s The Actuarial Foundation continuesto further its mission “to develop, fundand execute education and research

programs that serve the public by harnessing thetalents of actuaries,” we wish to thank the ACLI,SOA and the Reinsurance Section of the SOAfor creating the Insurance Legends’ Golf Classic,an event established to underscore the impor-tance of developing industry leaders for tomor-row by honoring industry leaders of today.

The 2007 Legends are: Stanley B. Tulin, vicechairman emeritus of AXA Financial; Oscar R.Scofield, retired chairman and CEO of ScottishRe; Arthur F. Ryan, chairman and CEO ofPrudential Financial; Peter W. Mullin, chairmanof MullinTBG and Ronald V. Dolan (1942-2005), retired chairman of First Colony LifeInsurance Co.

The Actuarial Foundation’s youth educationinitiatives to enhance the mathematics educa-tion of today’s students are the cornerstone of our mission. The Insurance Legends’ GolfClassic raised over $35,000 in support of our youth education programs through theefforts of the 2007 ReFocus ProgramCommittee and the generous support of manycorporate sponsors.

A special note of thanks to the Banner Sponsorof the Golf Classic – Heidrick & Struggles.

On behalf of the Foundation’s Board ofTrustees, staff, and the schools and studentsacross the country our programs benefit, thank you. Z

Eileen C. Streu, CAEExecutive Director, The Actuarial Foundation

ACTUARIAL FOUNDATION GOLF RECAPby Eileen C. Streu

T he Reinsurance Section Council is pleased to announce the availability of insurancepolicy or reinsurance treaty discussion

documents for various catastrophic medical excesslines of business.

The SOA Reinsurance Section Web site http://www.soa.org/professional-interests/reinsurance/paper s -pre sentat ions-re search-and-re source s /reinsurance-treaty.aspx now includes four articlesproviding discussion of specific insurance policies ofreinsurance treaty provisions for the following linesof catastrophic medical excess business:

• HMO ExcessMark Troutman, [email protected]

• Provider Excess Greg Demars, [email protected]

• Employer Stop Loss Mark Troutman, [email protected]

• Carrier Medical Excess Dan Wolak, [email protected]

These documents are written in a conversationaltone, rather than a simple listing of legal terms.They are designed to provide a basic understandingof specific coverage issues associated with each prod-uct line. These documents are not legal agreementsand are not intended to create an industry standardinsurance policy or reinsurance treaty.

Those involved as reinsurance purchasers and sellerscan benefit from a discussion of these items andexamples of coverage. They can serve as a trainingand education tool for staff and also for senior managers not generally involved in daily activities of insurance or reinsurance. They can serve as achecklist for those of us who work on these linesday-to-day.

The articles address the nuances of each coverage.

For example:

Employer Stop Loss—this is an insurance policyprovided to a self-funded employer with an ERISAplan document. This is one of the rare coverageswhere there is an aggregate (125 percent) stop losscomponent of protection as well as one for largeindividual claims.

HMO Excess—coverage focuses on provider agreements for contracted facilities and provideragreements. Coverage is often for hospital inpatientcoverage only with some limited step-down facilitycoverage (hospice, home health, skilled nursing). A treaty typically has an average daily maximum ora per diem limit on reimbursements by the reinsur-er. Continuation of benefits/insolvency coverage isoften required by various state regulations.

Provider Excess—this policy also emphasizes riskassumed by providers and their managed care con-tracts. It’s important to match the insurance cover-age to the grid of responsibilities for capitationaccepted by the providers as evidenced by a “divi-sion of financial responsibilities matrix.”

Carrier Medical Excess—coverage is comprehensivefor all services with few, if any, inside limits.

We hope you find these documents useful.Comments should be provided to the authors of thedocuments as these are works of the individualsrather than the opinions of the Society of Actuariesor the Reinsurance Section Council. Z


REINSURANCE TREATY PROVISIONS FOR MEDICAL EXCESS BUSINESS by Mark Troutman

Mark Troutman, FSA,MAAA, is team leader,marketing and membership value teamand president, SummitReinsurance Services,Inc. He can be reachedat [email protected].

Editor’s Note: Mark Troutman spearheaded this effortas the designated health member of the ReinsuranceSection Council. His term expires this year.Individuals interested in joining the Council with ahealth background should take note. At least one seaton the Council is reserved for a Health candidate.

Special thanks to Mark Troutman of SummitReinsurance Services, Inc.; Greg DeMars of HCCLife and Dan Wolak of Gen Re Life and Health fortheir significant involvement on this project.


T he most important consideration in the reinsurance purchasing decision is determin-ing the risk objectives of the organization.

This article addresses the issues when purchasingmedical excess reinsurance on a medical portfolio.The proper risk analysis performed by the carrier, orin conjunction with its reinsurer, will address thefollowing considerations:

• What is predictable risk versus unpredictable risk?• Is coverage purchased just for the rare cata-

strophic claim or for more frequent types oflarge claims?

• What is the appropriate reinsurance deductiblefor the health carrier and how is it stated?

• How is the maximum reinsurance benefit stated?• Is coverage purchased for losses occurring dur-

ing a 12-month calendar period or for policies/risks that attach during a 12-month period?

• How do any special deductibles impact thereinsurance layer?

• Does the carrier want risk fully transferred on anon-participating basis or does the carrier wantto retain a portion of the risk through a partic-ipating or other type of basis?

• Are lower deductibles desired for certain typesof claims (such as premature infant claims)?

• How are costs for claims management shared?• How is the reinsurer involved with claim

disputes with the carrier’s policyholders?

Medical excess normally covers all claim chargesfrom an individual that exceed an annual excessdeductible. The reinsurer’s liability mirrors the claimliability of the carrier. In other words, the liability ofthe reinsurer shall begin and end with the liability ofthe company. This contrasts with HMO excess rein-surance which may not cover all claims on an indi-vidual; just those that fall within the limits of cover-age as stated in the reinsurance treaty. As a result, thereinsurer will be very interested in how the carrierand its third party administrators manage largeclaims and the networks that they utilize. A poorlymanaged claim can result in a large claim liability forthe reinsurer. The following discusses the considera-tions in designing a reinsurance agreement.

Reinsurance DesignConsiderations1. Predictable risk versus unpredictable risk.

Predictable risk arises from claims that can beexpected to occur each year within a range ofdeviation. Unpredictable risk, which usually isnot fully considered, refers to claims that mayarise once every five, 10 or more years.Examples of unpredictable risk include a med-ical claim that exceeds $2 million or more dur-ing a year; catastrophic claims from a multiplepremature birth; a jumbo claim from a proce-dure that borders on being experimental, but isdeemed as covered under a program; claimsfrom a catastrophic event, or claims arisingfrom extra-contractual damages.

2. Working layer coverage versus catastrophic cover-age. A working layer is defined as an excessdeductible level for which the carrier, with rela-tive certainty, will have at least several claimsexceed that deductible each year. Claims in aworking layer can have some volatility, but thevolatility as a percent of premium is usually ina smaller range. By purchasing reinsurance at aworking layer, the carrier has more predictableexperience for a product than just purchasingcoverage for claims at a catastrophic level.However, the downside is that the carrier ispaying more in reinsurance premiums and pos-sibly dollar margins to the reinsurer for thislower deductible layer.

A catastrophic coverage layer is one where thecarrier expects, at most, to have just a few excessclaims a year, and in some years will have noclaims that exceed the deductible. The cost ofsuch coverage is much less than at a workinglayer, and the reinsurance recovery receivedwhen a claim exceeds that high layer is reducedby the high deductible. Therefore, the cost tothe carrier is less than when purchasing reinsur-ance for a catastrophic level, but it is importantto note that the potential recovery is less as well.

EXCESS REINSURANCE TREATY CONSIDERATIONSby Dan Wolak



3. Reinsurance deductible. A reinsurance excessdeductible is established based on a review ofcarrier goals and risk tolerance. The setting ofthe deductible is a blend of quantitative riskfeatures and qualitative risk tolerance. In manycases, a lower reinsurance deductible may bedesired from a subjective risk tolerance level,though quantitatively a higher level could bepurchased. Defining the deductible is alsoimportant when purchasing excess medicalreinsurance to cover claims arising from anemployer stop loss program. One approach is topurchase an excess deductible that includesclaims paid both by the plan up to the specificdeductible and the carrier above the specificdeductible. The other option is to include only claims paid by the carrier in excess of thespecific deductible.

4. Reinsurance maximum. The maximum benefitreinsured can be different than that coveredunder the medical plan. Frequently, the medicalplan provides a lifetime benefit. The reinsur-ance treaty will provide a maximum benefitthat is the lesser of an annual maximum or theinsured’s available lifetime maximum.

5. Loss occurring or risk attaching. The deductiblecan be determined on a calendar-year basis forlosses occurring during a period or for risks thatattach during a calendar year. The decisiondepends on the type of risks covered. Forinsured medical, where an incurred date foreach claim is clearly established, the medicalexcess coverage can be on a 12-month lossoccurring period, such as a calendar year. A riskattaching coverage period is used frequently forgroup coverage. During the 12-month agree-ment period for the reinsurance, each underly-ing group is covered beginning on their nextanniversary date or the effective date for a 12-month period.

6. Impact of special deductibles. Special deductiblesarise in several ways:

a. For employer stop loss, a higher specificdeductible may be set on an individual as away to underwrite known or projectedclaims in lieu of higher premiums. Thispractice is called lasering. The excess med-ical treaty should define how the excessmedical reinsurance deductible is impactedby lasering. One such approach is to havethe reinsurance deductible increase by thesame dollar amount that the laser exceedsthe employer group’s specific deductible.

b. Another option under an employer stoploss policy is offering an aggregating specif-ic deductible. An aggregating specificdeductible requires the employer’s plan tonot only pay claims up to the specificdeductible on each person, but also to self-insure claims in excess of the specificdeductible until the aggregating specificdeductible is met. Following is an exampleof such a situation:

i. Carrier sells stop loss policy with a$200,000 specific deductible;

ii. Stop loss policy has aggregating specif-ic of $500,000;

iii. Carrier purchases excess medical rein-surance for claims of more than$500,000 (on a first dollar basis);

iv. If one person has a $650,000 claim, theself-insured plan is responsible for thefirst $200,000 as part of the specificdeductible. In addition, $450,000 ofclaims in excess of the deductible satis-fy a portion of the $500,000 aggregat-ing specific deductible. In such a case,assuming no other claims from thatemployer group, neither the stop losscarrier nor the reinsurer would have aclaim liability.

v. If this example was changed so that oneperson has a $650,000 claim and twopeople each have $300,000 in claims,the stop loss carrier would have a$150,000 claim. The reimbursementunder the excess medical reinsurance

Excess Reinsurance Treaty … from page 31

could be handled one of several ways.

The reinsurance could be designed to:• Pay the $150,000 since this is the

amount in excess of the $500,000deductible and is not in excess of thecarrier’s liability;

• Have no claim liability for this par-ticular example;

• Pay a percent of claims determined bydividing the excess claim liability($150,000) by the amount of claimsexceeding the $200,000 deductible(i.e., $150,000 divided by $650,000).

7. Risk transfer options. A carrier can decidewhether a non-participating or a participatingarrangement is desired.

a. A non-participating arrangement is desiredwhen the carrier wants to lockin the costand not have future earnings positively ornegatively impacted by the excess reinsur-ance experience. With a non-participatingarrangement, the carrier does not realizepositive experience results in a year directly;rather the impact of any positive resultswould be potentially recognized in currentand future renewal premiums. From anaccounting perspective, a non-participatingarrangement is easier since future experi-ence refunds need not be accounted for orprojected. For a participating arrangement,there is a risk of prematurely accounting for a refund, which increases reported earn-ings in a quarter. Subsequently, this releases the accrued refund asset when a large claimis reported, thereby creating a charge to earnings.

b. A participating arrangement is selected by acarrier that desires to reduce its costs whenexperience is favorable. Participation canarise in several forms:

• Profit commission: A traditional way isthat a percent of the experience gain ispaid back to the carrier, after providing

for the reinsurer’s risk margin andexpenses;

• Swing rate: In such a case, the carrierpays a “minimum premium rate” untilclaims exceed a defined percent of thatrate. At this point, the premium rateswings up proportionately to claims,but does not exceed a ceiling “maxi-mum rate.” A swing rate allows the car-rier to have reinsurance costs that areproportional to normal claims fluctua-tions, but also locksin the cost in caseof an unusually high claim level;

• Aggregating specific deductible:Another common way for a carrier tohave a participating arrangement is tohave a second deductible—that beingan aggregating specific deductible—forclaims in excess of the deductible. Thereinsurance does not begin to pay untilexcess claims exceed this seconddeductible. The coverage frequently isnon-participating once claims exceedthe aggregating specific deductible andbecome the liability of the reinsurer.

8. Lower deductibles for defined conditions. In somecases, a lower excess deductible is offered by thereinsurer or requested by the carrier for certainconditions; e.g., an organ transplant where anetwork is established with preferred pricing.Another example may be a benefit that has alower maximum limit.

9. Claim management expenses. Many times onlarge medical claims, a third party auditor orvendor will be utilized to review the hospital


DEFINING THE DEDUCTIBLE IS ALSOIMPORTANT WHEN PURCHASINGEXCESS MEDICAL REINSURANCE TOCOVER CLAIMS ARISING FROM ANEMPLOYER STOP LOSS PROGRAM.


Excess Reinsurance Treaty … from page 33


charges and to further negotiate a reduction in charges. The manner in which these expenses are shared needs to be defined in thereinsurance agreement. Following are severalapproaches:

a. Claims management expenses are sharedproportionately based on the amount of thebilled claims;

b. Claims management expenses are coveredin the same manner as any other claimscost. Therefore, if the final amount ofclaims exceeds the excess layer, the reinsur-er pays all of the claims managementexpenses. If the final claims amount isreduced to below the excess deductible, the carrier pays the claims managementexpenses in combination with the underly-ing claims up to, but not exceeding, theexcess deductible.

10. Contested claims. The carrier should notify thereinsurer of its intention to contest or compro-mise a claim that might exceed the excessdeductible. If the reinsurer chooses not to par-ticipate in a contested claim, the reinsurer shallpay its full amount of reinsurance liability onsuch claim and shall thereby be relieved of allfuture liability with respect to such contestedclaim. If the reinsurer joins the carrier in a con-test or a compromise, the reinsurer shall partic-ipate in the same proportion that the amount atrisk reinsured with the reinsurer bears to thetotal amount at risk to the carrier on the claim,and shall share in the reduction in liability inthe same proportion.

Carrier Decision ProcessIn selecting excess deductible and reinsurance

options, the reinsurance decision maker may con-sider the following:

• Frequency and severity of claims at variousdeductible levels. What has been the carrier’srecent experience with excess claims?

• Risk profile of carrier’s membership.• Risk tolerance and budget considerations.

How will management respond to a claimreported in a quarter that is in excess of$500,000? $1 million? $2 million or more?

• Carrier size and coverage type. Is the standardinsured maximum benefit $1 million or is it $5 million?

• Underwriting margin and results. If the pro-gram is marginally profitable, one large claimmay result in a loss for the year. If the programis very profitable, the carrier may want to retainrisk rather than pay potential reinsurance mar-gins to a reinsurer.

• Carrier’s financial strength and parental support.• Capital requirement of product. Excess prod-

ucts such as employer stop loss require morecapital than first dollar products.

• Relative size of medical block within a compa-ny compared to other insurance products.

• Reinsurer’s expertise and market knowledge.

Renewal ProcessMost agreements are one year in duration and mustbe amended each year as part of the renewal activi-ty. Unlike underlying carrier policies, the reinsur-ance treaty does not provide for a 30-day notice ofrate change. To change rates, the treaty must bechanged by mutually agreeing to amend the currentterms. To change the treaty, notice must be provid-ed 90 days in advance by either party. One way toprovide a shorter notice of rate change and to allowfor proper time to evaluate experience is for the rein-surer each year to send to the carrier a preliminarynotice of termination more than 90 days prior tothe treaty anniversary. The reinsurer will then prepare renewal terms and normally present to thecarrier 30 to 45 days prior to anniversary. If the offer is accepted, the reinsurer will send a treatyamendment to the carrier that reflects the renewalterms and rates. Z

Dan Wolak is seniorvice president, GroupDivision with Gen Re.He can be reached [email protected].

THE CARRIER SHOULD NOTIFY THE REINSURER OF ITS INTENTION TO CONTEST OR COMPROMISE A CLAIM THAT MIGHT EXCEED THE EXCESS DEDUCTIBLE.

475 N. Martingale RoadSuite 600Schaumburg, Illinois 60173Web: www.soa.org

Reinsurance News Newsletter July 2007 - Society of Actuaries · 2012-01-19 · REINSURANCE NEWS...

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Transcript of Reinsurance News Newsletter July 2007 - Society of Actuaries · 2012-01-19 · REINSURANCE NEWS...