What you need to know about capacity and reinsuranceArticle added by Linwood Jones on July 2, 2013
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Policyholders and producers are rarely aware these transactions occur, and the presence of reinsurance does not affect the insurance company’s ability to pay the death claim.
One of the first things insurance professionals should be aware of when considering an insurance carrier is the carrier’s capacity, also known as retention. Capacity refers to the maximum amount of coverage that a carrier can accept on a single life without
contractually involving its reinsurers. A carrier’s retention ranges from as low as $500,000 to as high as $20 million. Carrier capacity typically falls within the $1 million to $5 million range. Capacity also varies on older applicants; after a certain age (often 70), capacity may be reduced, and above a particular age (80 to 90+), carriers do not have retention at all and must work with their reinsurers in order to issue a policy. Further, carriers often have a lower capacity or retention on rated individuals or individuals who represent a substandard risk (e.g. table D or table H).
Reinsurance is, in simplest terms, insurance for insurance companies. Insurance companies use reinsurance to cede a percentage of their financial risk to other insurance companies for diversification, to manage unexpected sizable death claims and for other reasons. Most reinsurance transactions take place behind the scenes. Policyholders and producers are rarely aware these transactions occur, and the
presence of reinsurance does not affect the insurance company’s ability to pay the death claim. With that being said, producers should be aware of circumstances where reinsurance may affect underwriting:
- when a client has or is applying for a large amount of life insurance.
- when a client is involved in aviation or has a special avocation.
- when a client is a high profile individual, such as a celebrity or a professional athlete.
- when a client is older (70+) and/or represents a substandard risk/rating.
Automatic reinsurance refers to an agreement insurance companies have with their reinsurers on applications that exceed their capacity. Agreements vary, but in general, automatic reinsurance allows individual insurance companies to offer death benefits as high as $50
million by automatically sharing the risk with their reinsurers at a specified face amount. Cases that fall within “auto limits” do not need to be sent to the reinsurers for review. Contractually, reinsurers accept the underwriting decision made by the writing company, and the risk is shared based upon the reinsurance agreement.
Automatic reinsurance agreements only pertain to coverage applied for or placed with an individual carrier — they do not include coverage in force or applied for with other carriers. Auto reinsurance capacity, as with individual carrier capacity, is generally reduced at older ages and for individuals who represent a substandard risk.
Jumbo limit is the allowable amount of insurance that can be in force and applied for at any one time. Most carriers have a jumbo limit of $65 million, though some limits are much lower. Once the amount of coverage in force and applied for exceeds the jumbo limit, carriers
are contractually obligated to involve their reinsurers. This involves sending the pending application to the reinsurance underwriters for review (facultatively). In these cases, reinsurers have the ultimate say on the underwriting decision.
Facultative reinsurance refers to applications that are not acceptable by the writing company or are not included in the
reinsurance agreement and, therefore, must be sent to the reinsurers for review. In these instances, the reinsurers are not obligated to accept the risk or even make an offer. They have the option to decline or rate the case as per their guidelines.
Examples of cases that generally require facultative review include individuals who are a higher risk due to aviation activity, a specific avocation or high-profile individuals such as professional athletes. If the risk is acceptable by the reinsurance company, the death benefit may be limited, depending on the capacity of the reinsurer. The policy is issued on the writing carrier’s paper, but the entire death benefit is the liability of
the reinsurer at claim time. Facultative reinsurance can be a very good opportunity, especially on cases that ordinarily would be declined by the writing carrier. Facultative reinsurance must be used once the amount of insurance in force and applied for exceeds the carrier’s jumbo limit.
Super pool/capacity plus
Over the past several years, many life insurance companies have put together agreements with large reinsurance companies to create a super pool, allowing a total line of insurance to exceed the jumbo limit. These super pools have the potential to be as much as $140
million. Super pools can be a good opportunity on cases where the jumbo limit has been exceeded. Super pools also allow producers to work with just one carrier versus multiple carriers when searching for capacity. Best case scenarios involve young, healthy and wealthy individuals. In order to qualify for super pool capacity, a formal application is generally required to lock in available capacity.
Being informed on your large jumbo cases may save you significant time, allowing you to provide the customer service your client deserves.
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