Greg Horak Highlighted in Broker World Magazine
Halloween is the quintessential celebration of all that is spooky and scary but even with the holiday being over, financial professionals may still have year-round fears about reinsurance. Submitting a life insurance application large enough that it must enter the reinsurance marketplace shouldn’t bring up those same fears that ghosts and goblins do. At one point I believed that the biggest fear an advisor had was the conversation with their high-net-worth clients about life insurance being an integral tool in their estate plan. But after 25 years in the industry, I’ve learned that their greatest fear is the feeling of helplessness and ignorance when the word reinsurance is uttered. The good news is, unlike the zombies and ghosts of Halloween, those reinsurance fears can be put to rest for good by the end of this article.
So, what exactly is reinsurance?
Reinsurance is simply an arrangement in which one insurance company, known as the “reinsurer,” provides coverage to another insurance company, known as the “ceding insurer.” The primary purpose of reinsurance is to help the ceding insurer manage and mitigate risks associated with the policies it has underwritten. By ceding a portion of its risk exposure to a reinsurer, the ceding insurer can protect its financial stability and reduce its exposure to catastrophic losses.
There are also a few terms that must be clarified in order to understand the underwriting process when reinsurance comes into play.
Internal Retention Limit
This is the amount of death benefit that an insurer can issue on an individual without ceding any of the death benefit to a reinsurer. In the event that the insured passes away, the insurer is solely responsible for the death claim if the insurer retained the entire death benefit.
Even if the amount applied for is over the insurer’s retention limit and they must cede part of the death benefit to a reinsurer, this process is usually transparent to the broker and to the proposed insured. This is due to auto-bind agreements between the ceding insurer and the reinsurer. For example, if the auto-bind limit between a ceding insurer and a reinsurer is $20 million, then as long as the total amount being applied for is within this $20 million limit, the ceding insurer can approve the policy without the reinsurer reviewing the file. However, if the amount being applied for is over $20 million, then the entire file must be sent to the reinsurer for review, and the reinsurer must agree with the ceding insurer’s underwriting opinion before a policy can be issued.
The jumbo limit is the amount of coverage inforce and applied for with all carriers on an individual’s life. The most common jumbo limit with most carriers is $65 million. To illustrate this, if your client has $35 million inforce and wants an additional $35 million, this exceeds the jumbo limit (assuming $65 million is the jumbo limit). In this example, one of the biggest mistakes that can be made with respect to jumbo limits would be to submit formal applications with multiple life insurance companies for $35 million each, with the intent to accept the single best offer. This can cause significant problems when multiple ceding insurers contact their stable of reinsurers to reserve what they believe is $35 million of capacity but the reinsurers are receiving requests to reserve a total of $70 million, $105 million, or even $140 million of capacity.
Now that we have established the basic terminology of reinsurance, what is the best way to proceed with a case that exceeds a carrier’s auto-bind or jumbo limits?
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