The Foreign National Client: Retain or Reinsure Risk? When Reinsurance Saved My Insurance Career
Previously, I discussed the larger role reinsurers play in writing policies on non-U.S. clients, particularly when issuing from non-U.S. life insurance companies. The ability for the life insurance carrier to retain a large amount of risk as well as the ability to call the shots on underwriting is typically quite a bit less when covering foreign clients.
In the third year of my life insurance career, I was promoted to be the sales manager of an international life insurance distribution based in the Bermuda subsidiary of a U.S. life insurance carrier. I was fresh from the U.S. Individual Insurance unit which, to compete with other carriers, had just began touting its ability to retain USD 30m in risk on an individual and USD 50m on a joint-life policy.
The underwriters in the Individual unit were viewed as rock stars who could unilaterally make the day of any wholesaler, producer and client with a decision. These underwriters could bind not only the insurance company but also its reinsurers to a decision in an increasingly competitive underwriting environment. (Table shaving anyone?)
Imagine my surprise when I arrived in the Bermuda unit and found a very different world. The insurance company’s retention was, at most, USD 5m. I could understand that-- foreign risks, of course—but what puzzled me was being assigned a senior underwriter who explained to me that he wasn’t really underwriting. Huh?
He explained that the lead reinsuer, Lincoln Re, would be making all the underwriting decisions and he was going to spend the next couple of years before his retirement in packaging all the material to send to Lincoln Re and acting as the go-between.
As luck would have it, the first case a producer brought to me was actually five policies to be written on a business owner and four executives at that owner’s company in the capital city of a Latin American country. Each policy was for a USD 5m face amount paid over ten years—so not the premium-financed single premiums so popular today. I prematurely considered myself an international life insurance superstar.
I continued feeling good about myself for about three months until just after when I was in a hotel room in Miami watching television. CNN Headline News was doing one of its “Around the World in a Minute” segments and reported on a massive shootout involving police in the central business district of a Latin American capital city. Unfortunately, nowadays, such shootings would hardly make the news, but I recall thinking, “Gosh, that is just awful” and then forgetting all about it.
My memory of that news story returned about three weeks later when a death claim for the business owner arrived. The details surrounding the Headline News-publicized death were something out of a movie. The client was with his young daughter and using an ATM machine when kidnappers grabbed the client at gunpoint, forcing him into a waiting car. Fortunately, the daughter was left behind.
Police either witnessed the kidnapping or were nearby and gave chase. The kidnappers began shooting at the police who returned fire as the cars weaved in-and-out of heavy downtown traffic. A bullet fired by the police hit and killed the insured and the kidnappers were taken into custody unscathed.
At my desk, I put my head in my hands, took a deep breath and then walked over to the underwriter’s office. Putting aside the emotion of the moment, there were business questions to be answered: How much death benefit was retained and how much was reinsured? Did the reinsurer make the underwriting decision? Did we send a full case file to the reinsurance company? Was the proper country code accessed (flat extra depending on the country)?
Unquestionably, the circumstances of the client’s death was a freak accident; though, kidnapping, at the time, was a real concern. Fortunately, all decisions about the underwriting were made by the reinsurer after receiving a robust file from our underwriter. A “C” country rating was assessed so higher insurance costs were collected as opposed to an “A” country like the United States.
Still, I was concerned about how much my company may have retained. As it turned out, the reinsurer took all but USD 250,000 of the net amount at risk, leaving the smallest amount possible being retained by my unit. We were able to off-set that ‘loss’ with some investment gains elsewhere in our relatively new distribution, so the financial impact was negligible. That was a relief.
Just months earlier, I wasn’t happy with having a heavily reinsured business where someone outside of my company was calling the shots on underwriting. I did not fully appreciate the potential benefits to this model, especially in a new business concentrating on emerging markets. It was a very early lesson in the importance of reinsurance and, over years of operating with international clients, I have come to appreciate the relationship a front-line carrier has with its reinsurance partners.
Over my career, I have happily given my reinsurance partners far more money than they have had to return in death benefit proceeds. Mitigating risk is good business.
Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at www.lifeinsurancestrategiesgroup.com.