strategic considerations in financial reinsurance
TRANSCRIPT
STRATEGIC CONSIDERATIONS IN FINANCIAL REINSURANCE
Amit Ayer
March 25, 2016
TRAINING AGENDA
Reasons for insurers to employ reinsurance
Summary of industry issues with in-force business
Review potential structures to alleviate reserve redundancies
Introduction to financial reinsurance
Summary of potential financial reinsurance structures (in-force business)
Detailed review of potential financial reinsurance structures (in-force business)
Coinsurance
Coinsurance with funds withheld (“WFH”)
Modified coinsurance
2
1
2
3
Rationale Description Examples in industry
1Transfer risk to limit
volatility in future
income or capital needs
• Products that cause insurers to incur significant volatility in GAAP
reserves or required capital do not promote stability of earnings over
time
• Variable annuity rider modified
coinsurance (Lincoln / Union
Hamilton)
• Fixed annuity coinsurance
(John Hancock / RGA)
2
Receive product
development,
underwriting or other
services
• Cedants that lack expertise with certain product lines (Indexed
Annuities, Variable Annuities, etc.) may work in conjunction with
reinsurer to develop tractable product(s) for distributors in market
• Co-developed product(s) are reinsured, leveraging reinsurer’s
administration systems, hedging capabilities, etc.
• Mutual companies looking to
start distribution of Fixed
Indexed Annuity products
3
Reduce current capital
needs or improve
returns on current
capital
• Reinsurance structures to alleviate redundancy in reserves can free
“trapped capital”
• Financial reinsurance structures can reduce the required capital
through transfer of risk to the reinsurer (solvency / capital support) and
provide alternative means of raising capital
• Numerous insurers use financial
reinsurance to increase overall
return on capital
Focus of training material
RATIONALE FOR IMPLEMENTING FINANCIAL REINSURANCE STRUCTURES
3
THREE QUESTIONS POSED BY CEDING COMPANIES AROUND FINANCIAL REINSURANCE
1 2 3Would financial reinsurance for in-force blocks be a viable strategy to increase overall return on capital?
What types of reinsurance structures are preferred?
What types of reinsurers would be most tenable in a financial reinsurance transaction?
A. Sourcing capital through reinsurance can provide significant flexibility and cost efficiencies over alternative capital sourcing, such as issuing subordinated debt or share issuance
B. Increasing overall return on capital is contingent on efficient deployment of capital that emanates from reinsurance structure
A. Structures that do not materially disrupt balance sheet
B. Obtaining reserve credit is imperative in any structure
C. Structures that allow option to recapture business at some point in time
A. On-shore and off-shore reinsurers are both tenable options, each with their own pros / cons
B. Price differentiation across reinsurers revolves around percentage of value of in-force paid as ceding commission
C. Off-shore reinsurers would need to hold assets in a Regulation 114 market value trust; trust may need to be on-shore depending on chosen structure
4
Dimension Redundant reservesRealizing high projected statutory net
income
1Present on balance sheet
today?Yes
No; contingent on projected statutory net income
materializing as expected
2 Target products to reinsureIn-force products in which statutory
and economic reserves differ
materially
In-force products that have generated high statutory
net income from strong underwriting and pricing
margins
3 Goals of reinsurance
Transfer profits embedded in
redundant reserves into capital,
increasing available capital at inception
of reinsurance
Realize future profits of business today, increasing
available capital at inception of reinsurance via
ceding commission
Increase overall return on capital Increase overall return on capital
4 Reinsurer domicile Off-shore On-shore or off-shore
5Reserve basis of reinsurer in
structureStatutory (“Economic” like)
• On-shore: US NAIC RBC
• Off-shore: Local statutory (“Economic” like)
6Impact of reinsurance to
balance sheet• Liabilities decrease
• Available capital increases
• Assets and available capital increase by
amount of ceding commission
SUMMARY OF TYPICAL ISSUES WITH SELECTED IN-FORCE BUSINESS
5
In-force A&H
reserves
ISSUE 1: REDUNDANT RESERVES ON BALANCE SHEET
Alleviation of redundant reserves on cedant’s balance sheet through reinsurance
6
Definition of issue• Statutory reserves requirement for A&H products can
be overly conservative, often multiples of an“economic” type reserve requirement (e.g., U.S. GAAP)
• Traditional methods of reserve funding have become costly
Impact of issue to cedant• Capital strain / reduction in free surplus
• Reduction in return on capital
Reinsurance structures to alleviate• Cede redundant reserves to offshore entities,
where local statutory reserving requirements are less onerous, such as permitting the use of U.S. GAAP
Key impacts of reinsurance structures• Unlocking of statutory profits embedded in
reserves: transform statutory reserve into an “economic” type reserve upon transferring liabilities to an off-shore entity
• Increase in capital: Available capital is increased by difference between statutory and economic reserve
Statutory reserve redundancy
Statutory reserve redundancy reduces available capital / free
surplus
Statutory profits embedded in
reserves realized in capital
“Economic” type reserve
ISSUE 2: EXTRACTING CAPITAL FROM IN-FORCE PRODUCTS ON BALANCE SHEETExtracting capital on balance sheet through modified coinsurance structure
7
Definition of issue
• In-force A&H products have demonstrated consistent track record of high statutory net income, which increases available capital as profits emerge
• Need to wait for statutory profits for its high margin in-force A&H products to materialize to improve its capital position
• Raising capital through subordinated debt or share issuance is expensive
Impact of issue to cedant
• Reduction in return on capital
Reinsurance structures to alleviate
• Financial reinsurance
• Reinsurers can be domiciled on-shore or off-shore
• Typical structures include (but are not limited to) coinsurance, modified coinsurance and coinsurance with funds withheld
Key impacts of financial reinsurance structures
• Financing considered an asset: Ceding commission is a cash item and is reflected directly on the balance sheet
• Capital: Available capital is increased by value of the financing
• In-force products have realized high statutory net income over time
• Without reinsurance, the distributable earnings that will emerge from these products cannot be realized today
Realization of quota share of future profits of in-force A&H products
(financing)
Subsidiary
Debt Issuance
to investors
Funded from cash flows from in-force
A&H products ceded
Contributed capital
Parent
POTENTIAL SPECIAL PURPOSE VEHICLE (SPV) #1DEBT ISSUANCE
8
Commentary
• SPVs are expensive to establish
and often not established until a
sufficient volume of business has
been issued to justify expenses
• Issuance of bonds in capital
markets has dried up since global
financial crisis
• Risks ceded to SPV are some form
of coinsurance; YRT generally will
not transfer redundant reserves,
although guaranteed premium YRT
could do so
• Asset structure must be formatted in
a manner to allow cedant to take
US statutory reserve credit; use of
trust facilitates allowance of reserve
credit
% coinsurance
Captive
Issue bonds
Cash
Cash proceeds from bond issuance
Redundant
Reserve Trust
Economic
Reserve Trust
Capital
Account
Contributed capital from holding company
Subsidiary
Bank
Funded from cash flows from in-force
A&H products ceded
Contributed capital
Parent
POTENTIAL SPECIAL PURPOSE VEHICLE (SPV) #2LETTERS OF CREDIT / ASSETS
9
Commentary• Primary advantage of Letters of Credit
(LOC) financing is that only the amount
of annual redundancy needs to be
funded by the LOC, along with a bank
commitment to increase the LOC
amount each year during the period of
financing at the fixed charge for the
LOC
• Prior to financial crisis, only long-dated
financing option was securitization
because banks would not issue LOCs
for more than 5-7 years
• After securitization in the capital
markets disappeared, some banks
became willing to provide long-dated
LOC financing
• With impending AG48 Guidelines,
investors have to provide hard assets
% coinsurance
Captive
LOC / Assets
Cash proceeds from bond issuance
Redundant
Reserve Trust
Economic
Reserve Trust
Capital
Account
Contributed capital from holding company
Business Application of financial reinsurance Typical cedant characteristics
1 New business
• Help alleviate cost of acquiring new policies (new business
strain financing)
• Many statutory frameworks do not allow insurers to fully
capitalize acquisition expenses, resulting in a technical loss in
first year
• Young, fast growing insurers in initial
stages of building a liability portfolio
that is incurring particularly high up-
front acquisition costs
2In-force
business
• Provide early realization of value of in-force policies (value of
in-force financing)
• Enables insurer to finance growth initiatives or re-investment
into other businesses at any time
• Mature companies with profitable in-
force policies
• Companies looking to earning higher
return on capital
INTRODUCTION TO FINANCIAL REINSURANCE
Financial reinsurance background• Geared either to help alleviate the cost of acquiring new policies (new business strain financing) or to
the early realization of the value of in-force policies (value-of-inforce financing), enabling an insurer to finance growth initiatives at any time
• Financing is an upfront commission from the reinsurer based on the future earnings of the new business or in-force business; ceding commission factors in earnings from renewal premiums
Financial reinsurance can be applied to both new or in-force business
10
Dimension Commentary
1 Flexibility
• Size and timing of ceding commission (available capital) is flexible
• Reinsurance contract can continue after ceding commission (plus reinsurer risk
charge) has been paid off or business can be recaptured
2 Cost
• Cost of financial reinsurance generally compares favorably to other available
means of accessing capital from public sources, such as share issuance and
subordinated debt
3 Risk Based Capital (RBC) • Higher RBC ratios, given lower required capital and higher available capital
4 Transactional efficiency • Minimal transaction costs
5 Transparency• Clear definition of derivation of ceding commission and pay-back arrangement
(amortization of ceding commission)
6 Partnership• Aligned interests of cedant and reinsurer
• Continuity via long-term business partnership
7 Additional services• Potential additional services from reinsurer, such as medical underwriting, claims
management, and product development support
ADVANTAGES OF FINANCIAL REINSURANCE
11
Cedant cash flow profile: portfolio before
in-force financial reinsuranceCedant cash flow profile: portfolio after
in-force financial reinsurance
-100
-50
0
50
100
150
200
250
300
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Profits
KEY CONSIDERATIONS WITH IN-FORCE FINANCIAL REINSURANCE
12
-100
-50
0
50
100
150
200
250
300
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Profits Financing Reinsurance Premium
Represents repayment
of financing from
earnings of ceded
portfolio (plus profit
margin for reinsurer)
Future profits
of ceded
portfolio at
present value
• Portion of future payments used to pay down
financing commission is contingent on quota-
share
• Financing commission is reduced
proportionately by lower quota share
Desired
characteristicCoinsurance
Coinsurance with funds
withheldModified Coinsurance
1Provides infusion
of capital
• Financing commission increases
available capital to deploy to
increase return on capital
• Financing commission increases
available capital to deploy to
increase return on capital
• Financing commission increases
available capital to deploy to increase
return on capital
2Minimal
disruption to
balance sheet
• Premium and reserves are ceded
• Ceded assets from investment of
premium maintained by reinsurer
• Premium and reserves are ceded,while assets are retained by cedant
as a receivable (liability)
• Premium is ceded, while assets and
reserves are retained by cedant
• Ceded premium is offset by Mod-co
adjustment from reinsurer
3Provides reserve
credit
• Risk transfer definition met
through ceding of underlying
liability obligations, as reinsurer
takes risk of profits not
materializing as expected
• Risk transfer definition met through
ceding of underlying liability
obligations, as reinsurer takes risk
of profits not materializing as
expected
• Risk transfer definition met through
ceding of underlying liability
obligations, as reinsurer takes risk of
profits not materializing as expected
4Allows
recapturing of
ceded business
• No risk charge, so less flexibility to
recapture liability obligations after
financing commission is paid
down
• No risk charge, so less flexibility to
recapture liability obligations after
financing commission is paid
down
• Risk charge affords option to
recapture liability obligations after
financing commission is paid down
Overall
Meets dimension Fails to meet dimension
EXECUTIVE SUMMARYCOMPARISON OF POTENTIAL IN-FORCE FINANCIAL REINSURANCE STRUCTURES
13
Dimension
CoinsuranceCoinsurance with funds withheld
(“WFH”)Modified coinsurance
Retained / received by
cedant
Retained / received by
reinsurer
Retained / received by
cedant
Retained / received by reinsurer
Retained / received by cedant
Retained / received by
reinsurer
1Liability obligations
X X X
2 Reserves X X X
3 Premium X1
1 X1
1 X1,6
1,6
4 Assets X 4 X5
X
5Collateral requirement2
X X X
6Ceding commission3 X X X
7Interest on reserves
NA NA NA NA X
DESPITE TECHNICAL VARIATIONS, FINANCIAL REINSURANCE STRUCTURES ALL INVOLVE RISK TRANSFER
1. Initial premium equals the gross reserves on portion of policies reinsured
2. Off-shore reinsurers are required to hold a market value trust; for funds withheld
and modified coinsurance structures, book value trust (if needed) is held on-shore
3. Paid by reinsurer to cedant at initiation of reinsurance treaty
4. Cedant establishes a liability for the funds withheld
5. Reinsurer establishes an asset for the funds withheld; (receivable from cedant) trust for
the funds withheld and financial performance of assets belong to reinsurer
6. Initial mod-co adjustment paid by reinsurer is equal to reserves at inception of contract;
the mod-co adjustment thus offsets the gross reserve held by the cedant
Key considerations –Cedant• Gross reserves for ceded business
are calculated and ceded
• Premium ceded is set equal to the
gross reserves ceded
• Assets will need to be liquidated to
cede premium or sufficient cash
needs to be available
• Range of practices around
reflecting increase in available
capital into statutory net income
Key considerations –Reinsurer• Financing commission = x% *
Present Value of distributable
earnings from ceded business
(based on local statutory)
• Premium ceded is invested in assets
to support liability obligations
• Off-shore reinsurers are required to
post collateral using a Regulation
114 Trust (market value)
Reinsurer
Financing
commission
% Reserves and Premium associated
with in-force business
Cedant
POTENTIAL STRUCTURE 1COINSURANCE (1/3)
15
Balance sheet gross and net, 50% quota-share
Balance sheet commentary
• Assuming 50% quota share, $40 of gross
reserves are ceded; gross premium ceded is
set equal to gross reserve ceded
• Financing commission is $10
• Quota share = 50%
• PV(distributable earnings) = $25
• X% = 80%
• 50% * $25 * 80% = $10
• Available capital increases by amount of
financing commission ($10)
% Liability obligations ceded
Realization of quota share of future profits of in-force A&H products (financing)
Quota-share reduction in
gross reserves
Premium is not quota-shared, but instead reduced by ceded gross reserves
DimensionCedant
ImpactCommentary
Reinsurer
Impact1 Commentary
1 Required capitalNo capital charge applied to ceded premium
Higher; extent of increase depends on capital treatment in reinsurer’s domicile of ceded premium and assets supporting ceded reserves
2 Available capitalFinancing commission increases available capital
Free surplus reduced by amount of financing commission and increase in required capital
3 RBC Ratio(Available / Required) ratio increases
(Available / Required) ratio decreases
4 ReservesReserves calculated for in-forceliability obligations to be ceded to reinsurer
Reserves ceded; extent of increase depends on reserve treatment in reinsurer’s domicile
5 PremiumSet equal to reserves ceded to reinsurer
Equal to ceded reserves assumed by reinsurer
6 Assets
No general account assets are ceded to reinsurer, but assets will likely need to be liquidated to cede premium
Reinsurer will use ceded premium to purchase assets to support liability obligations
1. Assumes on-shore reinsurer managing to statutory framework
POTENTIAL STRUCTURE 1 COINSURANCE IMPACT AT INITIATION OF FINANCIAL REINSURANCE (2/3)
16
DimensionCedant Impact
CommentaryReinsurer
ImpactCommentary
1 Required capital1No change in required capital requirement; less than 100% quota share would increase requirement
Ceded renewal premium and assets supporting ceded reserves increase required capital requirement
2 Available capitalAssume available capital from financing commission is deployed
Higher required capital requirement will reduce available capital / free surplus
3 RBC Ratio1 (Available / Required) ratio decreases (Available / Required) ratio decreases
4 ReservesReserves associated with renewal business ceded to reinsurer
Higher reserves from initial and renewal in-force premium ceded
5 Premium Premium = quota share * renewal premium Renewal premium ceded
6 AssetsNo general account assets are ceded to reinsurer, but assets will likely need to be liquidated to cede premium
Renewal ceded premium funds purchase of assets to support liability obligations
Key considerations – Cedant• Gross reserves are calculated for
liability obligations underlying ceded
renewal premium
• Gross premium = quota-share * renewal
premium
• Unlike treaty inception, ceded premium
and reserves are not equal throughout
treaty
• No assets are ceded
• Cedant retains no responsibility around
paying down financing commission
Change from treaty inception, assuming 100% quota-share
Key considerations – Reinsurer• Experience refunds are seen in
coinsurance structures as way of cedant
participating in “upside” (e.g., lower
expenses / claims than expected, higher
investment income on assets than
expected)
• Retain risk of statutory profits being
sufficient to pay down financing
commission
• Responsible for increase in reserves and
capital from ceded in-force liability
obligations
1. Assumes on-shore reinsurer managing to statutory framework
POTENTIAL STRUCTURE 1COINSURANCE TREATMENT THROUGHOUT FINANCIAL REINSURANCE TREATY (3/3)
17
%Claims
Experience refund
% Expense allowance
ReinsurerCedant % Reserves and Premium associated with in-force renewal business are ceded
% Liability obligations ceded
Key considerations –Cedant• Gross reserves for ceded business
are calculated and ceded
• Premium ceded is set equal to the
gross reserves ceded
• Ceded reserve credit taken
• Liability established for funds
withheld
• RBC treatment is same as RBC
treatment in a coinsurance structure
Key considerations –Reinsurer• Reinsurer is assessed capital charges
on the assets supporting the reserves
• Assets backing ceded statutory
reserves are either composed of 1) a
receivable from cedant or 2) a deposit
of assets to cedant (and reinsurers
own assets if needed)
• Asset established for funds withheld
• Financial performance of assets
belong to reinsurer
ReinsurerFinancing commission
% Reserves and Premium associated
with in-force business
Cedant
POTENTIAL STRUCTURE 2COINSURANCE WFH (1/3)
18
Balance sheet gross and net, 50% quota-share
Balance sheet commentary
• Assuming 50% quota share, $40 of gross
reserves are ceded, requiring $40 of gross
premium to be ceded
• Reinsurer invests $40 of ceded premium in
assets to back ceded reserves, which are
subsequently deposited back to cedant
• Cedant recognizes $40 of assets on balance
sheet and $40 of accounts payable (liability)
• Available capital increases by amount of
financing commission ($10)
% Liability obligations ceded
Assets backing ceded
reserves
Assets supporting ceded reserves are deposited back to cedant and treated as a liability
Dimension Cedant Impact CommentaryReinsurer
Impact1 Commentary
1 Required capitalNo capital charge applied to ceded premium and funds withheld assets
Higher; extent of increase depends on capital treatment of ceded premium and funds withheld assets in reinsurer’s domicile
2 Available capitalFinancing commission increases available capital
Free surplus reduced by amount of financing commission and increase in required capital
3 RBC Ratio(Available / Required) ratio increases
(Available / Required) ratio decreases
4 ReservesReserves calculated for in-forceliability obligations to be ceded to reinsurer
Reserves ceded; extent of increase depends on reserve treatment in reinsurer’s domicile
5 PremiumSet equal to reserves ceded to reinsurer
Equal to ceded reserves assumed by reinsurer
6 AssetsEstablish liability for the funds withheld
Establish asset for the funds withheld
1. Assumes on-shore reinsurer managing to statutory framework
POTENTIAL STRUCTURE 2COINSURANCE WITH FUNDS WITHHELDIMPACT (2/3)
19
DimensionCedant
ImpactCommentary
Reinsurer
ImpactCommentary
1 Required capital1No change in required capital requirement; less than 100% quota share would increase requirement
Ceded renewal premium and assets for funds withheld increase required capital requirement
2 Available capitalAssume available capital from financing commission is deployed
Higher required capital requirement will reduce available capital / free surplus
3 RBC Ratio1 (Available / Required) ratio decreases (Available / Required) ratio decreases
4 ReservesReserves associated with renewal business ceded to reinsurer
Higher reserves from initial and renewal in-force premium ceded
5 Premium Premium = quota share * renewal premium Renewal premium ceded
6 Assets Establish liability for the funds withheld (renewals) Establish asset for the funds withheld (renewals)
Key considerations – Cedant• Treat funds withheld as an account
payable (liability)
• Pay investment income on funds
withheld liability to reinsurer
throughout treaty
• RBC treatment is same as treatment
in coinsurance structure
Change from treaty inception, assuming 100% quota-share
Key considerations – Reinsurer• Assets backing statutory reserves for
renewal business are deposited to
cedant
• Receive investment income from
cedant on funds withheld
• Retain risk of statutory profits being
sufficient to pay down financing
commission
• Retain responsibility for increases in
reserves and capital
1. Assumes on-shore reinsurer managing to statutory framework
POTENTIAL STRUCTURE 2COINSURANCE WFH TREATMENT THROUGHOUT FINANCIAL REINSURANCE TREATY (3/3)
20
%Claims / % Allowance / Experience Refund
ReinsurerCedant% Reserves and
Premium (in-force renewal business)
% Liability obligations ceded
Assets backing ceded reserves
Investment income on funds withheld
Key considerations –
Cedant• Premium ceded is set equal to the
gross reserves of the policies
reinsured
• Reserves are retained by cedant, so
gross and net reserves are equal
• Assets supporting liability
obligations are retained by cedant
Key considerations –
Reinsurer• Financing commission = x% *
Present Value of distributable
earnings from ceded business
(based on local statutory guidelines)
• Reinsurer is assessed capital
charges on the assets supporting the
reserves (retained by cedant)
• Modified coinsurance adjustment is
paid by reinsurer to cedant to offset
the reserves held by cedant
ReinsurerFinancing commission
% Premium associated with in-force business
Cedant
POTENTIAL STRUCTURE 3MODIFIED COINSURANCE (1/3)
21
Cedant balance sheet gross and net, 50%
quota-shareBalance sheet commentary
• Gross and net reserves are equal under ModCo,
as ceded reserves are retained on cedant’s
balance sheet
• Assuming 50% quota share, $40 of gross
reserves would be ceded (but are retained)
• Gross premium ceded always equals ceded gross
reserves ($40)
• Cedant maintains all assets supporting reserves
• Available capital increases by amount of financing
commission ($10)
% Liability obligations ceded
Modified coinsurance
adjustment
Gross and net reserves are the same under ModCo because ceded reserves are retained on cedant’s balance sheet (on behalf of the reinsurer)
DimensionCedant
ImpactCommentary
Reinsurer
Impact1 Commentary
1 Required capitalNo capital charge applied to ceded premium and assets supporting gross reserves
Higher; extent of increase depends on capital treatment of ceded premium and assets supporting reserves (held by cedant)
2 Available capitalFinancing commission increases available capital
Free surplus reduced by amount of financing commission and increase in required capital
3 RBC Ratio (Available / Required) ratio increases(Available / Required) ratio decreases
4 Reserves Gross and net reserves are equivalent No reserve increase, since all reserves are assumed by cedant
5 PremiumSet equal to reserves for policies to be reinsured but is offset by Mod-co adjustment payment
Increased in ceded premium is offset by Mod-co adjustment payment
6 AssetsAssets supporting gross reserves are retained , but assets may need to be liquidated to cede premium
Mod-co adjustment negates ceded premium that would be used to purchase assets
1. Assumes on-shore reinsurer managing to statutory framework
POTENTIAL STRUCTURE 3MODIFIED COINSURANCE IMPACT (2/3)
22
DimensionCedant Impact
CommentaryReinsurer
ImpactCommentary
1 Required capital1No change in required capital requirement; less than 100% quota share would increase requirement
Ceded renewal premium and assets supporting reserves (both retained by cedant) increase required capital requirement
2 Available capitalAssume available capital from financing commission is deployed
Higher required capital requirement will reduce available capital / free surplus
3 RBC Ratio1 (Available / Required) ratio decreases (Available / Required) ratio decreases
4 ReservesReserves associated with renewal business retained by cedant
No reserve increase, since all reserves associated with renewal business are assumed by cedant
5 Premium Premium = quota share * renewal premium Renewal premium ceded
6 AssetsAssets supporting reserves for renewals are held by cedant
Renewal premium will be used to purchase assets to support reserves for renewal business
Key considerations – Cedant• Risk charge (x%) Mod-co reserve
adjustment over treaty pays back the
initial mod-co adjustment paid by the
reinsurer to cedant; calculated using
interest rate assumption applied to
reserves at inception of treaty
• is applied to financing commission
balance; it pays down the financing
commission balance and allows
cedant the option of recapturing
Change from treaty inception, assuming 100% quota-share
%Claims / % Allowance
Key considerations – Reinsurer• Reinsurer receives investment
income on assets supporting ceded
reserves (assets and reserves are
both fully retained by cedant)
• Reinsurer is assessed capital
charges on the assets supporting the
reserves for renewal business
(retained by cedant)
• Retain risk of statutory profits being
sufficient to pay down financing
commission
1. Assumes on-shore reinsurer managing to statutory framework
POTENTIAL STRUCTURE 3MODIFIED COINSURANCE TREATMENT THROUGHOUT FINANCIAL REINSURANCE TREATY (3/3)
23
ReinsurerCedant% Premium (in-force renewal business)
% Liability obligations ceded
Experience refunds
Mod-co adjustment
Risk charge