Transcript Canadian Institute of Actuaries L’Institut canadien des

PD5
Welcome to the Grey Area Life Reinsurance Treaty
Challenges
Bob Diefenbacher, FSA, MAAA
Manulife Reinsurance
Kevin Hwee, FSA
London Life
2008 General Meeting
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The facts and circumstances described in this
presentation are for illustrative purposes only.
Any similarity to actual events is
unintentional and purely coincidental. The
views and opinions expressed in this
presentation are those of the presenters only
and do not represent those of the presenter’s
employers or their affiliates.
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• 5 Case Studies
• All Case Studies Intentionally Have Some
Ambiguity and Facts Left Out
• There Is No Unanimity in the Industry On
These Questions
Your Participation is Required
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Many of the case studies in this presentation have
evolved from prior presentations involved others:
Barry Dixon – Manulife Reinsurance
Shaun Downey – John Hancock
Keith Ryan – Lincoln Financial
Connie Walker – Swiss Re
Rasa Wilkinson – Manulife Reinsurance
Case #1: Reinsurance Treaty
Smith Life Insurance Company Has A First Dollar Quota
Share Arrangement Covering Its UL Product.
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• Smith Life Retains 20%, Cedes 80% equally to 4
Reinsurers, including Jones Re.
• Smith’s Maximum Retention Limit is $2,000,000.
• The Automatic Pool Binding Limit is $28,000,000
Case #1: Applicant
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56 Year Old Male, NS Applies to Smith Life for a
$2,000,000 UL Policy
APS Showed Rising PSA Levels
• Biopsy Performed was Benign. 6 core samples confirmed
Benign Prostatic Hypertrophy
• Follow-up visit – PSA Levels Even Higher, thought to be
result of trauma from biopsy
• Current blood profile showed PSA = 11%
Case #1: Applicant
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Smith Life’s Underwriting Manual says PSA < 15% is a
Decline
Underwriter talked to Medical Director, who in turn talked
to applicant’s urologist
Urologist felt prostate history was benign
Result:
Smith Life Underwriter issued case Standard
Case #1: Claim
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Insured Died 18 Months After Issue
Claim Papers Reveal
• Follow-up visit to doctor after policy issued.
• Repeat biopsy showed high-grade malignancy
• Immediate surgery – total prostatectomy.
• Died shortly thereafter of pulmonary embolus
Case #1: Questions
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Is Jones Re Contractually Obligated to Pay This Claim?
How Should This Case Be Handled?
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Case #1: Variations
What If The Insured Died of A Heart Attack Before the
Discovery of Cancer?
What If The Underwriter Simply Made an Error, and
Missed the Reference to the PSA in the APS?
What if Smith’s Underwriting Manual Defines PSA <
15% as Table D, Not a Decline?
Case #2: The Policy and Treaties
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•
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$10 million term policy issued by Life Co on July 1,
2008, and reinsured with ABC Re automatically
• ABC Re’s reinsurance treaty indicates that
conversions are automatically covered, point-inscale
ABC Re also reinsures Life Co’s whole life plan
July 1, 2010 – Life Co changed reinsurers for its whole
life plan. The whole life product is now reinsured with
DEF Re for new business.
Case #2: The Conversion
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•
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Term policy converts to whole life on July 1,
2012
The new converted-to policy is erroneously
reported to DEF Re
Life Co did pay point-in-scale rates
In its reporting to DEF Re, Life Co lists the
issue date of the policy as “July 1, 2008”
The insured dies on August 15, 2015.
At this point, the reporting error is discovered
by DEF Re
Case #2: Questions
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Who is liable for this risk – ABC, DEF, or
neither?
How would this be handled in practice?
Would you answer change if the insured died 1
year after conversion?
Would your answer change if Life Co then
discovered a systems bug led them to cede
1,000 policies in error to DEF?
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Case #3 – Facultative Submission
• ABC Life has an automatic pool. ABC retains $2
million and can automatically bind its 4 pool reinsurers
for $5 million each. ($20 million total)
• ABC Life submits a case facultatively looking for $10
million of capacity. ABC already kept its full retention
of $2 million for this life on a prior policy. Within 24
hours, ABC receives the following facultative quotes
from its pool reinsurers:
• DEF Re offers $10 million at standard rates
• GHI Re offers $6 million at standard rates
• JKL Re and MNO Re think that the life should be
declined.
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Case #3 – Mistakes Were Made
• ABC Life’s underwriter, confident that he has secured
capacity, issues the policy at standard rates.
• ABC Life does not communicate its acceptance to
either DEF Re or GHI Re.
• The case is incorrectly coded “automatic” in ABC
Life’s reinsurance administration system. $2.5 million
is reported to each of the 4 reinsurers.
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Case #3 – Mistakes Discovered
• The life dies 4.5 years later
• ABC Life recognizes its reporting error while
processing the claim.
• ABC Life then submits a $5MM claim to each of DEF
Re and GHI Re, along with back premiums for the
extra face amount.
• ABC Life seeks a refund of premiums from JKL Re
and MNO Re
Case #3 - Questions
Recap:
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Reinsurer
DEF Re
GHI Re
JKL Re
MNO Re
Autobind
5.0
5.0
5.0
5.0
Fac Offer
10.0
6.0
-
Reported
2.5
2.5
2.5
2.5
Claim
5.0
5.0
-
• What Amounts Are Each DEF Re and GHI Re
contractually obligated to pay?
• How Should DEF Re and GHI Re respond to this claim
submission?
• Would your answer change if ABC had formally accepted
the offers?
• What if GHI Re Offered 2 Million?
Case #4: The Original Application
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•
John Doe applies for $15 million of term insurance with
XYZ Co on January 15, 2009
All of XYZ CO’s insurance products are reinsured with
the same pool of four reinsurers (each having a 25%
share)
–
–
•
•
Their pool has a $10 million autobind limit
There are different lead reinsurers for each product
For its term product, the lead reinsurer is ABC Re
XYZ Co submits facultatively to ABC Re who declines
the risk
Case #4: The New Application
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The autobind limits for all products’ pools were
increased to $20 million on July 1, 2009.
John Doe applies for $15 million of UL insurance on
September 10, 2009
For its UL product, the lead reinsurer is DEF Re
The XYZ Co underwriter calls her DEF Re contact and
they come to an agreement whereby the case can be
automatically bound at standard rates
John Doe dies on November 6, 2013
ABC Re denies liability on the grounds that “once fac,
always fac” was not followed for this case.
Case #4: Questions
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Is ABC Re justified in its denial of the claim?
Would your answer change if XYZ’s auto bind limit
had not been increased?
Would your answer change if the only reason XYZ
submitted the original policy fac was because it was
over the autobind –i.e. it was a “clean case”?
Would your answer change if, instead of denying the
original policy, ABC Re offered a rating of 200%,
which John Doe declined?
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Case #5: The Policy
• Male aged 65, has 5 million in force and buys 15 million
universal life policy from Best Life Ins Co.
• The policy includes a death benefit rider for automatic
increases of 5% per annum
• Best Life Ins Co has a reinsurance treaty with Super Re
that has an autobind of 20 million and a jumbo of 30
million
• The illustration shows the Net Amount at Risk at 25
million by age 92
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Case #5: The Claim
• The insured dies in year 13; death benefit is 28MM,
account value is 7MM and Net Amount at Risk is 21MM
• Best Life discovers that their admin system did not pick
up the increases and reported only 15MM death benefit
from policy inception
• Best Life seeks to collect 21MM from Super Re
Case #5: Questions
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Autobind
Limit
15
Jumbo
Limit
30
Prior In
Force
5
Death
NAAR on
Benefit at Illustration
Issue
at 92
15
25
Benefit
Paid at
Death
28
• Was the policy correctly ceded to Super Re?
• What amount should Super Re pay?
– 0
– 15
– 20
– 21
NAAR at
Death
21
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Case #5: Variations
• Would your answer change if….
– The maximum net amount at risk shown on the
illustration was less than 20 million?
– What if the increases were driven by the mechanics of
the policy (e.g. PUA’s, corridors) rather than in part
due a pre-programmed rider?
– Best Life had been properly reporting the increases at
all points in time?
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Case #6 – Reinsurance Treaty
• Alpha Life Has a Reinsurance Pool With Two Pool
Members In it: Beta Re and Gamma Re
• Requirements for Automatic Capacity in Treaty With Beta
Re Include Language Explicitly Stating That Underwriting
Must Adhere to Published Underwriting Requirements and
Its Underwriting Manual In Order To Automatically Cede
Risk to Beta Re
• Gamma Re’s Treaty is Silent Regarding Underwriting
Requirements
• Pool Has a $20MM Autobind
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Case #6 – The Policy
• Insured Age 63 Applies for $20MM
• Alpha’s Underwriter Cannot Get a Treadmill Per
Underwriting Requirements, But Thinks He Has Enough
Other Info To Conclude Case is OK to Issue Standard
• Communicates Decision to Issue Standard to Agent and
Starts Processing
• Then, Realizes Language in Beta Re Treaty, So Submits
Case Facultatively to Beta Re
• In the Meantime Policy Is Issued
• Beta Re Replies, Offers $10MM, But Rates Table D
• Alpha Accepts the Offer, and Eats the Difference Between
Table D and Standard on Beta’s $10MM
Case #6 – Questions
• Gamma Re Is Not Contacted, And Is Ceded $10MM Risk
Standard
• Insured Dies 2.5 Years Later
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• Is Gamma Re Contractually Obligated to Pay?
• What Seems Fair?
• What If Alpha Life Called Beta Re To Get Approval, But
Did Not Formally Submit Case?
• What If Gamma Re Knew Beta Re Had Different
Language?
Case #7 - Recapture
• Ritz Life Has A Treaty With Carlton Re, Where They Cede
Amounts in Excess of Their $1,000,000 Retention,
$10,000,000 Autobind.
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• Treaty Covers 1,000 Lives With Issue Years 1993-98
• Recapture For Increases in Retention is Allowed After 10
Years
• Ritz Life Increases Its Retention to $2,000,000 in January,
2008
• Ritz Life Notifies Carlton Re of Intent to Recapture in
Accordance With Treaty
• Ritz Life Recaptures 800 Policies in 2008
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Case #7 – Systems Problem
• In 2013, Ritz Life Moves to a New Reinsurance
Administration System
• The Old System Was Only Capable of Checking Retention
“Per Policy” While the New System Aggregates “Per Life”
• Ritz Life “Un-recaptures” 100 Lives Under Carlton Re’s
treaty, paying back premiums to 2008 and reporting back
claims.
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Case #7 - Questions
• Is Carlton Re Contractually Obligated to Re-assume These
Lives and Pay Claims?
• Does It Matter Whether Ritz Life Knew of the Inadequacy
of Its Old System
• What Would Happen In Practice?
Case #7 - Alternatives
Alternative #1
• What if Ritz Life Had Recaptured All 1,000 Policies in
2008?
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Alternative #2
• What If, Instead of a Systems Problem, Ritz Life Simply
Had a Clerical Error, and Discovered 1 Policy, with a
$10,000,000 face, in 2013?
Case #7 - Alternatives
Alternative #3
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• Instead of Recapturing 800 Eligible Policies, Ritz Life
Recaptures 500 in 2008
• In 2013, They Realize They Should Have Recaptured
Another 300
• Ritz Life Then Recaptures 300 Effective in 2008, Requests
Back Premiums Less Back Claims
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Thank You!