Reinsurance Types and Coverage Module 5 Reinsurance Types ...

Reinsurance Types and Coverage
Module 5
Reinsurance Types and Coverage
Introduction
There are multiple methods for ceding business to a reinsurer. These include Yearly
Renewable Term (YRT), Coinsurance, Modified Coinsurance, Partially Modified
Coinsurance, Funds Withheld and Coinsurance Funds Withheld. Reinsurance
agreements can provide coverage for new business written, in force policies, or a
combination thereof.
Objective
After this training you should be able to understand:
Methods of reinsurance
New business versus in force coverage
Content
There are multiple methods for ceding business to a reinsurer. Primary methods include
Yearly Renewable Term (YRT), Coinsurance, and Modified Co-insurance. Less
frequently seen methods which are generally related to financial reinsurance transactions
include Partially Modified Coinsurance, Funds Withheld and Coinsurance with Funds
Withheld.
Primary Methods:
Yearly Renewable Term (YRT) Reinsurance
A form of life reinsurance usually covering only mortality risk under which the ceding
insurer buys coverage for the net amount at risk on the reinsured portion of the policy for a
specified premium that may vary each year with the amount at risk, the duration of the
policy, and the ages of the insured(s). The ceding insurer retains responsibility for
establishing reserves and the payment of all surrenders, dividends, commissions, and
expenses. Despite its name, YRT reinsurance contracts typically obligate the reinsurer to
continue coverage throughout the life of the policy.
YRT Agreements can be based on
• a “quota share” of all policies issued up to its maximum limit of retention per life
for the insured’s issue age and rating or
• on an “excess of retention” basis

Treaty provisions will generally indicate the following which is useful for the
administration of the business:
• How the “Reinsured Net Amount at Risk” will be calculated
• How changes in cash/account/terminal reserve value will be allocated
Coinsurance
A method of reinsurance under which the reinsurer receives a proportionate share of the
premiums, sets up a proportionate share of the reserves and pays its proportionate share of
the benefits of the reinsured policy. The reinsurer pays the ceding commission and
expense allowance to the ceding company to represent the reinsurer’s share of the
acquisition and maintenance expenses.
Treaty provisions will generally indicate the following which is useful for the
administration of the business:
• How the “Reinsured Net Amount at Risk” will be calculated
• The specific manner and timing in which Cash/Account/Terminal Reserve Value
will be measured for the Policy Net Amount at Risk particularly for variable plans
where such amounts may change more frequently.
Modified Coinsurance (Modco)
Indemnity life reinsurance that differs from coinsurance only in that the assets supporting
the reserves are transferred back to the ceding company while the risk remains with the
reinsurer. The ceding company is required to pay interest to replace that which would have
been earned by the reinsurer if it had held the assets corresponding to the reserves in its
own investment portfolio. Used to retain control of investments or to reduce potential
credit risk.
Secondary Methods:
Partially Modified Coinsurance (Part-Co)
This reinsurance method is a combination of coinsurance and modified coinsurance. In
most situations, a portion of the initial reserves equal to the initial allowance are held on a
mod-co basis, while remaining reserves are held on a coinsurance basis, eliminating any
initial cash transfer. Also known as Co/Mod-Co.

Funds Withheld
Assets that would normally be paid over to a reinsurer but are withheld by the ceding
company to permit statutory credit for non-admitted reinsurance, to reduce potential credit
risk, or to retain control over investments.
Coinsurance Funds Withheld
A form of modified coinsurance where the initial allowance which is normally paid to the
ceding company is withheld by the reinsurer to reduce the reinsurer’s exposure to the
credit risk of the ceding company.
Example of Treaty Language for Reinsurance Basis for Canada
BASIS OF REINSURANCE
Reinsurance Basis: < select: >
YRT, or
Coinsurance, or
Other < specify >
Example of Treaty language for Reinsurance Basis for the US
This is a [specify basis of reinsurance (e.g., YRT, coinsurance or modified
coinsurance)] agreement for indemnity reinsurance (the “Agreement”) solely between [insert
Ceding Company name] of [insert Ceding Company domicile (e.g., state, province or territory)] (the
“Ceding Company”) and [insert Reinsurer name] of [insert Reinsurer domicile] (the “Reinsurer”).
The Ceding Company and the Reinsurer may be referred to individually as a “Party” or collectively
as the “Parties”. The performance of the obligations of each Party under this Agreement shall be
rendered solely to the other Party. The acceptance of risks under this Agreement shall create no
right or legal relationship between the Reinsurer and the insured, owner or beneficiary of any
insurance policy or other contract of the Ceding Company.
New Business vs. In force Policy Coverage
Reinsurance agreements can provide coverage for new business written or in force policies
(or a combination thereof)
Example of Treaty language for New Business vs. In Force Policy Coverage in the US
Policies and Risks Reinsured for the 19XX underwriting year:
1. In force Policies and Risks Reinsured
On the Effective Date of this Agreement, the amount of reinsurance under this
Agreement will be 100% of the Ceding Company’s net liability on those in force policies
assumed and issued by the Ceding Company known as the XYZ POOL. “Net liability”

shall mean the Ceding Company’s liability on policies reinsured hereunder, less
amounts recoverable from other reinsurance.
2. New Policies and Risks Reinsured
After the Effective Date of this Agreement, the amount of reinsurance under this
Agreement will be 100% of the Ceding Company’s net liability on policies, assumed and
issued by the Ceding Company known as the XYZ POOL under the terms of the
agreements between the Ceding Company and the XYZ POOL. “Net liability” shall
mean the Ceding Company’s liability on policies reinsured hereunder, less amounts
recoverable from other reinsurance.
Discussion:
Below is a summary of the differences between various options for the basis of
reinsurance.
Basis of
Reinsurance
Type of Risk Reinsured
Definition of Basis of
Reinsurance
YRT
Coinsurance
Mortality Risk is transferred to
the Reinsurer
Mortality Risk and Reserves
are transferred to the Reinsurer
A form of life reinsurance
usually covering only
mortality risk under which the
ceding insurer buys coverage
for the net amount at risk on
the reinsured portion of the
policy for a specified premium
that may vary each year with
the amount at risk, the
duration of the policy, and the
ages of the insured(s). Despite
its name, YRT reinsurance
contracts typically obligate the
reinsurer to continue coverage
throughout the life of the
policy.
A method of reinsurance under
which the reinsurer receives a
proportionate share of the
premiums, sets up a
proportionate share of the
reserves and pays its
proportionate share of the
benefits of the reinsured
policy. The reinsurer pays the

ceding commission and
expense allowance to the
ceding company to represent
the reinsurer’s share of the
acquisition and maintenance
expenses.
Modified Coinsurance Mortality Risk transferred to
the Reinsurer and Reserves are
Retained by the Ceding
Company
Indemnity life reinsurance that
differs from coinsurance only
in that the assets supporting
the reserves are transferred
back to the ceding company
while the risk remains with the
reinsurer. The ceding company
is required to pay interest to
replace that which would have
been earned by the reinsurer if
it had held the assets
corresponding to the reserves
in its own investment
portfolio. Used to retain
control of investments or to
reduce potential credit risk.
Partially Modified
Coinsurance
Funds Withheld
Initial reserves equal to the
Initial Allowance transferred
on a modified coinsurance
basis; Remaining reserves are
held on a coinsurance basis.
Ceding company holds assets
for investments.
This reinsurance method is a
combination of coinsurance
and modified coinsurance. In
most situations, a portion of
the initial reserves equal to the
initial allowance are held on a
mod-co basis, while remaining
reserves are held on a
coinsurance basis, eliminating
any initial cash transfer. Also
known as Co/Mod-Co.
Assets that would normally be
paid over to a reinsurer but are
withheld by the ceding
company to permit statutory
credit for non-admitted
reinsurance, to reduce
potential credit risk, or to
retain control over
investments.

Coinsurance Funds
Withheld
Reinsurer holds assets related
to the initial allowance
A form of modified
coinsurance where the initial
allowance which is normally
paid to the ceding company is
withheld by the reinsurer to
reduce the reinsurer’s
exposure to the credit risk of
the ceding company.

Questions:
1. Indemnity life reinsurance that differs from coinsurance only in that the assets
supporting the reserves are transferred back to the ceding company while the risk
remains with the reinsurer. The ceding company is required to pay interest to
replace that which would have been earned by the reinsurer if it had held the
assets corresponding to the reserves in its own investment portfolio. Used to
retain control of investments or to reduce potential credit risk.
(1) YRT
(2) Coinsurance
(3) Modified Coinsurance
(4) Funds Withheld
2. Which of the following is a primary method of ceding reinsurance to a reinsurer?
a. Funds Withheld
b. Partially Modified Coinsurance
c. Coinsurance
3. A form of life reinsurance usually covering only mortality risk under which the
ceding insurer buys coverage for the net amount at risk on the reinsured portion of
the policy for a specified premium that may vary each year with the amount at
risk, the duration of the policy, and the ages of the insured(s).
a. Funds Withheld
b. Partially Modified Coinsurance
c. Coinsurance
d. YRT
NOTES
John E. Tiller, Jr., FSA, MAAA and Denise Fagerberg Tiller, FSA, Life, Health, &
Annuity Reinsurance, 3 rd ed. (Winsted, CT, ACTEX Publications, Inc., 2005)
American Council of Life Insurers, Life Reinsurance Treaty Sourcebook, 2 nd Printing,
2008
Canadian Life and Health Insurance Association, Inc., CLHIA Reinsurance Treaty
Reference Document, 6 th Printing, 2009