Understanding the Underwriting Process, Part 2

Now, what about actual rules companies have for how they underwrite relative to death benefit levels?

These terms and processes are all about Reinsurance. Effectively all insurance companies reinsure their larger risks. There are relatively few reinsurers in the market and regardless of the insurance company name on the cover of your policy, if it is large enough, they are mostly reinsured by the same reinsurers. In other words, whether it’s $5,000,000 with ABC Life Insurance Company or $100,000,000 with XYZ life Insurance Company, neither may be interested in paying out the entire death benefit from their own pocket when the insured individual dies.

Let’s start with Retention. Retention is the amount of risk a company will retain on it’s own without reinsuring it. For one company it might be $250,000 and for another it may be tens of millions.

The Auto Binding Limit is the amount of insurance the underwriting department at a particular life insurance company can make a decision on which automatically binds their reinsurers to the decision. Let’s say it is $10,000,000. The carrier might have a $1,000,000 retention but the reinsurer has agreed to stand behind the underwriter’s decision up to $10,000,000 based on certain covenants.

The reinsurer also comes in and audits the carrier’s files periodically so they know they are following the rules. This can make underwriting stickier. If the agreement is that the cholesterol limits for a 55 year old male to get Preferred rates are a total reading of 280 and a LDL/HDL ratio of 5.5 and your client has a reading of 281 or a ratio of 5.6, you may be out of luck if you are applying for an amount which must be reinsured. A carrier with a higher retention limit which encompasses the amount being applied for may make a more favorable decision based on other factors or relationships.

Here is another scenario… let’s assume your client doesn’t get an attractive offer. We’ll say he is approved at Table D, Table 4 or a 200% mortality charge rating per the underwriting parameters for Auto Binding. The underwriter might offer to the agent to send the case out “facultatively” to see how the reinsurers would view it. This can be a risk however. If the agent says to go for it, the Table D/4 is usually taken off the table. What if the reinsurers’ best offer is Table 6 or worse? On the other hand, one reinsurer might come back with a Standard offer. It can get tense.

Facultative Reinsurance is when the insurance company applied to has exceeded it’s Auto Bind levels and has to send the actual file to the reinsurer for them to review and sign off on. This isn’t necessarily negative but it does put the decisions one more relationship away.

Jumbo Limits can be confusing to people. A common Jumbo Limit is $65,000,000. This is the limit over which someone who doesn’t know what they are doing can really screw things up. An important issue to remember is that you calculate the limits by taking the currently in-force insurance and adding to it the total amount of insurance applied for with all insurance companies.

Consider this situation; we’ll assume a client has “only” $20,000,000 in force and he is working with an agent or a number of agents and he only wants to replace the $20,000,000 he has because it isn’t performing well. The client has decided competition is good (which usually is) and has called in three agents; an agent with a career shop such as Mass Mutual or Prudential or whomever, an independent agent and his financial advisor.

The career agent might only go to his or her main company but the other two might want to submit apps to two, three or more carriers. Very quickly we could have over $100,000,000 “in force and applied for” if there is no coordination.

The client might think he is being clever by pitting the agents against each other but there is more than that to it and there absolutely positively needs to be some coordination and someone in charge. This can quickly create a nightmare.

I’ll continue this story in the next post.

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