Stoploss: The Forgotten Reinsurance Product for Life Insurers
Life and health insurers can suffer significant shock losses from catastrophic events such as a natural disaster or ”act of god“ (earthquake or Tornado for example), an unintentional man-made disaster (train wreck, airplane crash or plant explosion), an intentional man-made disaster (terrorism), or an epidemic such as the most talked about ”Avian bird flu“.
Many life and health insurers consider purchasing either catastrophe reinsurance coverage or abnormal mortality stoploss to offset such losses emanating from these types of events.
The need for and understanding of reinsurance to protect companies from “act of god” or man-made situations has increased dramatically since the horrific events of March 11, 2011 off the northeast coast of Japan. Insurers with known concentrations of risk such as those writing group coverages are strongly advised to consider purchasing catastrophe or stoploss coverage particularly when the insurer focuses on the large group market. That being said, the individual writer can have significant unknown concentrations particularly when they have a large market share in a particular state, or province, or region.
In recent memory the use of an Abnormal Mortality Stoploss product by life and health insurers has been less favored primarily due to their own favourable mortality experiences, which lead to an abundance of cheaper quota share life reinsurance available which, in turn, resulted in companies having smaller net retentions. The cost of such a product far outweighed the benefits of the product.
What are the benefits of an Abnormal Mortality Stoploss product today?
Prior to September 11, 2001, the use of catastrophe reinsurance products was widespread. However, since September 11, 2001 many life and health insurers have not purchased catastrophe reinsurance because they believed the cost was too high in relation to the perceived exposure. As a result, today insurers are carrying severity exposures on their books net more so than years previously.
Additionally, recent public discussion about pandemic situations arising all around the world has also raised the awareness of life and health insurers about their own exposure to this type of loss scenario. As early as 2005, S&P reported “A pandemic's effects could last for several months, and insurers, especially those with geographic concentrations in such areas, might find themselves exposed to an aggregation of losses not fully protected by reinsurance”1 .
Abnormal Mortality stoploss protects a company against having greater than expected mortality claims in the aggregate in a given calendar year. Typically, a company will buy a protection attaching at 120% of expected claims. Reinsurance coverage above the attachment will depend on the needs and budget of the reinsured, however a small to mid-size company expecting claims of $20M may want to consider an additional 25% or $5M excess of the attachment. The reinsurer will normally require a 10% co-insurance within the layer of reinsurance coverage. Therefore, a typical cover for a small company may be 90% of 25% excess of 120% of expected claims, or if expected claims are 20M then 90% of $5M excess of $24M.
If the insurer in the example above did not have its own catastrophe protection, then in the event of a major catastrophic event this company could collect 90% of $5M or $4.5M from their stoploss program. They, in effect, have 4.5M of catastrophe protection as well as protection against abnormal fluctuations in their mortality. Therefore, an abnormal stoploss cover is also a catastrophe cover.
Clearly, abnormal fluctuations in a company’s mortality are possible when one considers the impact of an epidemic/pandemic situation today. As noted in the National Underwriter, “"Optimistic models" project that if the avian flu moves from birds to humans and causes a pandemic, it could cause $15 billion to $20 billion in U.S. insured losses, according to a Standard and Poor's analysis”1 . The stoploss programme noted above would react in the same manner as it would for a sudden catastrophic event.
How Can I get a quote for this unique protection?
We at Sutton Reinsurance Underwriters Ltd. specialize in this type of cover. Information required to quote can be provided in a questionnaire we have created.
About Sutton Reinsurance Underwriters, Ltd
Originally established in 1986, Sutton Reinsurance Underwriters Ltd. is a privately owned Canadian Company engaged solely in the business of specialized reinsurance underwriting management. Sutton Reinsurance Underwriters Ltd. provides local expertise and service to insurers and intermediaries in North America. Through specialized reinsurance agreements, we represent several A.M. Best “A” or better rated reinsurance companies.