This article is part of a series of case studies—real stories of how managed care companies increased profits by using Summit Re’s resources to increase sales, decrease expenses, and manage claims. Summit Re works with London Life Reinsurance Company to provide reinsurance transactions that achieve risk-based capital (RBC) relief for qualified prospects.
There are several potential benefits resulting from such reinsurance transactions:
- Proper capital and surplus management can improve debt and claim paying ratings.
- Reducing required capital requirements increases business line return on equity.
- Dividend capacity can be improved for entities with holding company structures.
- Individual plan or product line loss ratios can be stabilized for external understanding.
- New business can be more competitively priced.
These programs can be developed for single-site organizations as well as regional and national chains. They can be designed easily for entities that have affiliated domestic or offshore companies. However, they also can work with a nonowned, protected-cell approach. All programs are structured to meet applicable risk-transfer regulations. Solutions are customized to meet each company’s specific objectives and requirements.
Here’s an example of one of our clients' capital management programs developed through its relationship with Summit Re:
ABC Health Plan is a regional health plan. Its business is ceded to London Life via a 100% quota share above the HMO’s retention level. London Life, in turn, retrocedes the business on the same terms to a captive affiliate of ABC Health Plan. The transaction is designed to meet all regulatory requirements for full risk transfer and credit for reinsurance. In addition, the transaction has been disclosed to the insurance department of the state of domicile of ABC Health Plan.
Regulators often prefer or require independent professional reinsurers as the conduits for such transactions to minimize the potential for improper related-party transactions. The state insurance department in this case relied on the financial strength of the licensed and authorized professional reinsurer to fulfill its reinsurance obligations to ABC Health Plan. ABC Health Plan’s holding company is free to establish appropriate GAAP reserves and equity consistent with sound actuarial principles and subject to the reserve and capital requirements of the domicile of the captive.
Health RBC Relief Structure in Brief
The typical structure is modified coinsurance or coinsurance with funds withheld to minimize asset transfer. The only cash flow is your payment of the risk fee.
Reserves are held in asset trust by the reinsured.
There is parental guaranty on the retrocession treaty, if retrocession is used.
All profits, net of risk fee, are returned to you through an experience refund.
There is monthly accounting.
The health risk-based capital relief structure has the following risk reducing features:
- Expense allowances set about equal to “marginal” expenses.
- Losses to reinsurer are carried in loss carryforward and repaid through future profits. Ceding company must repay any losses if it terminates agreement early.
- Loss to reinsurer usually limited by stop loss (typically 10% of premium).
- Reinsurer can terminate agreement with minimum notice (usually 3 months).
- Allows ceding company to release RBC requirement on business ceded.
- Designed to pass required level of risk to reinsurer to meet risk transfer regulations.
- Minimizes the cost of reinsurance to the ceding company (1% of premium or less).