Reviewability of Reinsurance Rates

Deepansh Jain, Charlene Lee

Table of Contents

• What are (fully) reviewable rates?

• How are they different from soft and hard guaranteed rates?
• Different market approaches in Asia.
• Philosophy behind different approaches.
• Premium Trend Model
• Comparison of 2 approaches
• SGPC Tool
• Rates reviewability in practice.
• Impact on capital requirements due to different guarantee structure
• Q/A

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What are (fully) Reviewable Rates?

• Rates that can be changed.

• The change can be increase or decrease in the rates.
• Applicable to both inforce business and new business.

Example contractual wordings- The rates in this schedule are not guaranteed and may be changed with 30
days of notice. Such change will apply both to new business (sold on or after the effective date of the
change) and to existing business (from the first accounting period starting on or after the effective date of
the change).

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How are Reviewable Rates different from Soft Guaranteed Rates?

• Soft Guaranteed rates can be reviewed subject to conditions in the treaty.

• There is a cap on increase.

Example contract wordings- The rates are guaranteed for the first N1 years after which the rates can be
increased by x% of original reinsurance rates every N2 years, with a hard cap of y% of original reinsurance
rates. Rate review trigger of z% loss ratio for the preceding M months.
Any rate increase allowance not utilized in a calendar year can be brought forward to the following calendar
year. The annual rate increase allowance, overall rate increase cap and loss ratios are to be applied /
assessed on the aggregate of benefits A, B, C.

*Text highlighted in red are parameters of soft guarantee wordings and subject to change from client to client.
*Not all the soft guarantee treaties will specify all the parameters.

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How are Reviewable Rates different Hard Guaranteed Rates?

• Hard Guaranteed Rates once quoted cannot be reviewed for inforce business.

Example contract wordings- The rates in this schedule are guaranteed for existing business for the entire
policy term. The rates in the schedule are not guaranteed for new business and may be changed with 90
days of notice. Such change will apply to new business from the accounting period starting on or after the
effective date of the change.

*Rates are always reviewable for New Business.

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Different Market Approaches

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Different approaches to allow for reviewability in different markets in Asia

Mortality rates are generally hard guaranteed for the entire policy term for all regions except for ANZ, so we
are considering Critical Illness (CI) business which is offered on all terms i.e. reviewable, soft guaranteed
and hard guaranteed for this presentation.

• SEAI HK TW- Historically no credit for premium trend is taken. Trend on incidence applied for 3-5 years.
In recent months for SEA market, full CI trend is applied while taking credit for premium trend.
In HK, CI is recently quoted on hard guaranteed terms due to client demands and market pressure.
• China- Full CI trend and taking credit for premium trend.
• ANZ- No credit for premium trend is taken. Trend on incidence applied for 3 years
• Japan Korea- Rates are generally hard guaranteed.

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Philosophy behind different
approaches used

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Approach 1: Applying 3-5 year trend on incidence and no credit of premium trend
Inherent assumption- After 3-5 years, premium trend will catch-up at the same rate as the trend of CI rates. So in other
words, for later years, we can review the rates to keep the loss ratio same as initial years.

Some concerns of this approach-

• The EVM figures may look right in relative terms (as % of Gross Premiums) assuming rates are reviewed as needed, but
the absolute figures will not be accurate.
• Best Estimate (BE) cashflows will not be representative of actual picture as we are only using 3-5 year of incidence
trend
• Is it realistic to assume premium will catch up the incidence rates for later durations? We may not be able to review
rates as and when we want due to different restrictions. More about this in later section.

Why this approach was then followed?

• Simplified approach
• Volume of the quotes is not too big and hence to avoid spurious accuracy

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Approach 2: Applying full trend on incidence and taking credit of premium trend
Inherent assumption- Actual future trend will move as assumed for the entire policy term and we can increase the rates
as and when required without any problem.

Some concerns of this approach-

• Taking too much credit of premium trend in the cashflows because rates may not be increased as expected due to
different restrictions. More about this in later section.
• The business may seem to be extremely profitable close to the end of policy term especially if the premium curve is
steeper than the cost curve. This may not be the case in reality.
• The longer the term of the policy, higher are the chances that the assumed incidence trend turns out to be different in
reality.
• Future medical advancements are difficult to predict which will impact the future incidence trend.

Why this approach is then followed?

• More appropriate than approach 1 as incidence trend is projected for longer duration than just 3-5 years.
• Loss making business in the initial years would not be written if approach 1 has been followed. But by taking premium
trend credit in future years, the profitability of the product can be improved, provided premium trend modelled reflects
reality.

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Premium Trend Model

The following section briefs about the model used by SEAI to calculate the premium trend.

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Premium Trend Model

• Inputs required
– Cashflows from CPT
– As per the below screenshot- Yellow cells

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Methodology

1. The model calculates the yearly loss ratios using the cashflows from CPT run as input.
2. If the loss ratio is higher than trigger loss ratio, premium trend is calculated as Actual Loss
Ratio/Required Loss Ratio.
3. This will be subject to cap on rate review each time and maximum increase in premium rates.
4. The output received from the model is duration wise premium trend.
5. This trend is then applied to the premium rates while modelling.

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Comparison of 2 approaches

Loss ratio Loss Ratio

84.00%
140%

83.00%
120%

82.00% 100%

80%
81.00%

60%
80.00%
40%

79.00%
20%

78.00% 0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 0 10 20 30 40 50 60 70 80 90

Loss ratio
Loss Ratio Loss Ratio - after premium trend

Approach 1 Approach 2

Loss Ratio= PV of Claims/PV of Premiums

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SGPC Tool
Soft Guarantee Profit Commission Tool

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SGPC Tool

• Came into effect from 1st January 2019.

• Official tool to calculate ODx capacity for Soft Guaranteed business by incorporate modelling of premium
trend.
• Used only for those deals where PV Claims (CI only) > USD 5M.
• Follows a simplified stochastic model approach.
• 25 scenarios are used to quantify the fluctuation of the level of best estimate.
• Same tool can be used to calculate Profit Commission as well.

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Rate reviewability in practice

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Rate reviewability in practice/ Restrictions on rate review

It is not always necessary that the rates can be reviewed the way it has been allowed for while pricing.
There can be several reasons for this-
• Cross subsidy involved across the Lines of Business (LoBs) or even across the treaties for the same client
and hence it becomes difficult to increase the rates of one LoB.
• The clause in the treaty doesn’t specify when the rates can be reviewed.
(Eg- The rates in this schedule are not guaranteed and may be changed with 30 days of notice. Such change will
apply both to new business (sold on or after the effective date of the change) and to existing business (from the first
accounting period starting on or after the effective date of the change).

This doesn’t specify the trigger event for rate reviewability.

• Different internal approvals are required to increase the rates.
• Clause in the treaty can restrict rate reviewability. For eg- we can’t increase the rates until an approval has
been received from local regulator by the client to increase their gross premium rates.

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Combating against rate restrictions

The below options suggest how to allow for the above mentioned rate restrictions and not taking too much
credit of premium trend-
• Inputting more stringent parameters in the model to be prudent. Eg- assume a review is only conducted
every 3 years instead of every year.
• Monitoring the mix of business where cross subsidy(ies) is(are) involved to ensure we are not writing less
profitable/loss-making CI business without a sufficient accompanying portfolio of risks we are
comfortable with, eg. mortality .
• Treaty wordings should be precise and clearly specify when the rates can be reviewed to avoid any
ambiguity.
• Negotiate with client not to include clauses where restrictions are not directly within SR or client's
control, eg. requiring approval from regulator before rate changes can be made effective.
• As a last option, terminate the treaty.

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Capital requirements

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Impact on capital requirements due to different guarantee structures

• Capital provides protection against adverse future experience and thus reduces the chances of getting
insolvent.
• Hard guaranteed business needs the highest capital because rates once quoted can’t be reviewed
irrespective of how bad the experience turns out to be. So to ensure financial solvency, higher amount
capital is kept aside.
• Reviewable business needs lower capital because of more flexibility.
• Below screenshot is from EVM Costing & Pricing Standards for L&H, Appendix B which shows lower
factors for reviewable business.

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Q/A

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