The Power of Yearly Renewable Term Reinsurance
Yearly Renewable Term (YRT) reinsurance is a dynamic life reinsurance approach where insurance companies transfer their mortality risks to a reinsurer. This is part of a process known as cession.
In a YRT reinsurance plan, the primary insurer (the ceding company) transfers its net amount at risk, which surpasses its pre-defined retention limit on a life insurance policy. This innovative reinsurance method involves annually renewable one-year term policies.
Key Highlights
- Risk Transfer: Primary insurers partner with reinsurers to offload part of their risk.
- Premium Variation: Reinsurance premiums adjust annually based on the policyholder’s age, plan, and policy duration.
- Insurance Applications: Ideal for traditional whole life insurance, universal life insurance, and more complex reinsurance scenarios.
Understanding Yearly Renewable Term Reinsurance
Reinsurance helps insurance companies mitigate financial risks related to insurance claims by distributing part of the risk to another entity. This spreads the risk involved in a life insurance policy to another institution.
The net amount at risk, which is transferred, is calculated as the difference between the face value and the ceding insurance company’s retention limit. For instance, if a policy’s death benefit is $200,000 and the retention limit is $105,000, the net amount at risk is $95,000. Should the insured pass away, the reinsurer covers the death benefit portion exceeding $105,000.
When establishing a reinsurance arrangement, the ceding company drafts a net amount at risk schedule for each policy year. Over time, premiums paid by the insured accrue to the policy’s cash value, diminishing the net amount at risk.
Practical Example
Consider a whole life insurance policy with a face value of $100,000. Initially, the entire $100,000 is at risk, but as premiums aggregate into a reserve account, they reduce this amount. By the 30th year, possibly $60,000 in cash reserves might lower the net risk to $40,000.
Based on the yearly calculated net amount at risk, reinsurers formulate reinsurance premium schedules. These premiums are renewed annually, tailored to the insured’s age, the plan, and the policy’s lifespan. If a claim occurs, the reinsurer pays the assumed portion of the net amount at risk—as specified.
Effective Utilization of YRT Reinsurance
YRT reinsurance predominantly covers traditional whole and universal life insurance. In the past, level premium term insurance resisted YRT due to better alignment of premium costs with reinsurance via coinsurance. Coinsurance also shifted rate adequacy risk to the reinsurer. Nonetheless, the advent of alternative capital solutions has boosted the popularity of YRT for term insurance.
YRT excels in scenarios requiring mortality risk transfer due to policy size or claim frequency concerns. With straightforward administration and suitable for low-reinsurance cession projections, it’s effective for reinsuring disability income, long-term care, and critical illness risks, though less optimal for annuities.
Cost and Profit Considerations
Given minimal investment, persistency, cash surrender risks, and limited surplus strain, YRT reinsurance often incurs a lower profit margin requirement than alternatives like coinsurance. Consequently, it usually presents a cost-effective reinsurance solution. Provided annual premiums are timely, reserve credit is available for the unearned net premium part covering a one-year term benefit. However, it typically doesn’t supply reserve credit for deficiency reserves.
Related Terms: reinsurer, cession, net amount at risk, retention limit, reinsurance premiums.
References
- American Council of Life Insurers. “Reinsurance”, Page 58.
- National Association of Insurance Commissioners (NAIC). “Reinsurance”.
