15 February 2013 0 Comments

What is Re-Insurance? (Continued)

accept the riskA primary insurance company that is actually issuing the policy to the consumer often cedes a portion of the risk to a re-insurance company—it could even be the entire risk.  They will likely have treaties with several re-insurance companies.  The risks will be accepted by the re-insurance companies based on underwriting that will be defined either as automatic or facultative.

With an automatic treaty, the reinsurance company has agreed to accept a predetermined portion of specified risks based upon the underwriting decision made
by the ceding company.  With this approach, the underwriter at the ceding insurance company will review all aspects of the case, set the premium, accept their predetermined portion of the risk and the re-insurance company will, sight unseen,
accept the balance of the policy at that same premium class.  So, the primary company might determine that a particular applicant with a cardiovascular history is Table 4, accepting their $1,000,000 of retention, but could possibly bind their re-insurers for another $4,000,000 in order to issue a $5,000,000 policy requested by the applicant.

Obviously, the trust factor between the re-insurer and the primary company is extremely important in this type of arrangement.  Although the re-insurer does not look at files during the underwriting process, they will occasionally perform post-underwriting audits to determine how comfortable they are with their exposure.

Facultative re-insurance treaties are when the ceding company does not determine what underwriting class is to be applied.  Instead, their underwriting department gathers all the information required to make a decision and sends it to the re-insurance company who will decide on what underwriting class is acceptable.  Facultative re-insurance is used when the amount of insurance being applied for exceeds the amount that can be handled under the carrier’s automatic treaties, or where the underwriting department at the primary company cannot produce a premium acceptable to the client and hopes that the underwriters at the re-insurance company will look upon the risk in a more favorable light.

If a client refuses to accept a policy that has been issued through the use of automatic treaties and the agent asks the company to see if re-insurance can improve on that offer, there is a caution!  If the re-insurance company reviews the entire file under a facultative agreement, they might determine that the applicant should be charged more than had been determined by the primary insurance company.  If this is the case, it is highly unlikely that the better offer that had been made under the automatic treaty can be recouped.  The lesson:  bind what you have in hand before submitting to more underwriting scrutiny.

Re-insurance is good for the consumer.  It provides a safety net for the companies that are issuing policies and it can result in more competitively priced policies.

Coming up: the strength of the unilateral contract.  You get more than you thought!

Leave a Reply