Bob Diefenbacher, FSA, MAAA

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PD5 Welcome to the Grey Area - Life Reinsurance
Treaty Challenges
Kevin Hwee, FSA London Life

• Bob Diefenbacher, FSA, MAAA
• Manulife Reinsurance

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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
  presenters 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

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Case 1 Reinsurance Treaty

• Smith Life Insurance Company Has A First Dollar
  Quota Share Arrangement Covering Its UL Product.
• Smith Life Retains 20, Cedes 80 equally to 4
  Reinsurers, including Jones Re.
• Smiths Maximum Retention Limit is 2,000,000.
• The Automatic Pool Binding Limit is 28,000,000

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Case 1 Applicant

• 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

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Case 1 Applicant
Smith Lifes Underwriting Manual says PSA lt 15
is a Decline Underwriter talked to Medical
Director, who in turn talked to applicants
urologist Urologist felt prostate history was
benign Result Smith Life Underwriter issued
case Standard
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Case 1 Claim

• 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

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Case 1 Questions
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 Smiths Underwriting
Manual Defines PSA lt 15 as Table D, Not a
Decline?
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Case 2 The Policy and Treaties

• 10 million term policy issued by Life Co on July
  1, 2008, and reinsured with ABC Re automatically
• ABC Res reinsurance treaty indicates that
  conversions are automatically covered,
  point-in-scale
• ABC Re also reinsures Life Cos 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.

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Case 2 The Conversion

• 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

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Case 2 Questions

• 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 Lifes 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
  Lifes 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

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Case 3 - Questions
Recap

• 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?

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Case 4 The Original Application

• John Doe applies for 15 million of term
  insurance with XYZ Co on January 15, 2009
• All of XYZ COs 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

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Case 4 The New Application

• 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.

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Case 4 Questions

• Is ABC Re justified in its denial of the claim?
• Would your answer change if XYZs 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

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Case 5 Questions

• Was the policy correctly ceded to Super Re?
• What amount should Super Re pay?
• 0
• 15
• 20
• 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. PUAs, 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 Res 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
• Alphas 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 Betas 10MM

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Case 6 Questions

• Gamma Re Is Not Contacted, And Is Ceded 10MM
  Risk Standard
• Insured Dies 2.5 Years Later
• 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?

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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.
• 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
  Res 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?

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Case 7 - Alternatives

• Alternative 1
• What if Ritz Life Had Recaptured All 1,000
  Policies in 2008?
• 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?

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Case 7 - Alternatives

• Alternative 3
• 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!