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Stop Loss Reinsurance Agreement

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Stop Loss Reinsurance Agreement document sample

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									                    Embedded Seminar for Health/Reinsurance Treaty
                                    Negotiations

           Insurer Team
           Givens in Preparation for Case Study:

               •   Proposal has been made by Reinsurer. Meet today to finalize agreement.
                       o Prior to this time, a due diligence has been completed
                       o Reinsurer has prepared initial offer.
                       o Meeting today to discuss and finalize.
               •   Insurer and MGU have general comfort, but some of the key terms need to be
                   discussed and refined to complete the deal.
               •   Each party has several needs which if not met will result in No deal.
               •   MGU acts as agent of Insurer. MGU is very interested in outcome of some of the
                   terms of the negotiations. If MGU does not agree to critical terms, there can be
                   no arrangement just between the Reinsurer and Insurer.
               •   Underwriting Guidelines have already been agreed to. These are the rules to
                   allow the MGU to automatically bind reinsurance risk and to bind the insurance
                   company.




           Goal: Complete the deal, with each party meeting its critical needs.




           Insurer Case Study                        Page 1                                   6/15/05

SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
           ABC Insurance Company
           Your team from ABC Insurance Company, an “A” rated carrier by Best’s, is in the
           process of finalizing a reinsurance agreement with XYZ Reinsurer. The reinsurance is
           for an employer stop loss business that will be managed by A1 managing general
           underwriter. A1 is an established MGU that will transfer a $10 million block of business
           to your paper as each of the accounts reach their next renewal.

           This is the first such program that you will write on ABC paper. The proposal is for
           ABC to reinsure 90% of the risk to XYZ. You need to finalize the reinsurance
           arrangement today with XYZ so that the groups with policy anniversaries of January 1
           can be offered a renewal by A1 on your paper.

           You also need to enter into a managing underwriter agreement with A1 to underwrite and
           administer the business. XYZ though will not have an agreement with A1. XYZ views
           A1 as your agent.

           Overall you are pleased at the prospects of working with A1 and XYZ. A1 is an
           established MGU that will transfer a $10 million block of business to your paper as each
           of the accounts reach their next renewal. A1 has also promised to grow the block. This
           block of premium will produce $400,000 to $500,000 of fronting fees to your company.
           In addition, there is the opportunity to make additional income from the underwriting
           results on the program. You expect that your administrative costs will be in the range of
           $250,000 (for allocation of home office time and expenses). ABC does have regulatory
           and reputation risk in the market if a problem develops on the program.

           First, you have several issues with the treaty. The Reinsurer has offered you a 4.25%
           fronting fee. You have requested a 5.0% fee. You have promised your management to
           receive at least a 4.5% fee. XYZ has offered an allowance of 2.5% for Premium Tax.
           You are agreeable to that offer.

           Second, the reinsurer wants to be able to exclude retroactively any group that has been
           written outside of the underwriting guidelines. That means that ABC would retain 100%
           of the risk on any such groups. XYZ will periodically audit, and at that time, can deem a
           risk as unacceptable and not reinsured. You have proposed that XYZ perform quarterly
           audits to track the underwriting in lieu of excluding retrospectively a group from being
           covered by reinsurance. It is not acceptable to you to have risks retroactively refused by
           XYZ.

           Third, the reinsurer wants to be able to terminate immediately for future business, at its
           discretion, if business is not being properly underwritten. This again concerns you since
           you may retain risk that you did not intend to keep.

           Fourth, you have concerns regarding the security of XYZ and whether they desire to be a
           long-term player in the business. XYZ has a Best rating of A. XYZ was down graded 12
           Insurer Case Study                       Page 2                                 6/15/05

SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
           months ago from A+. Though they have been in the property and casualty business for a
           long time, they have been involved with A&H reinsurance for only 4 years. Your
           management has suggested to you that you add a treaty provision that would require XYZ
           to put all reserves in trust if it is downgraded to a Best rating of B+ or lower. You are
           willing to forgo this provision, but will make it part of the negotiations. However, you do
           want some protection if XYZ’s rating is lowered to B+ or lower.

           Fifth, the treaty has a provision that states that the reinsurer desires to “counsel and
           concur” on any legal action. If the Carrier (ABC) takes actions without so doing, “any
           extra contractual loses will be borne only by ABC.” You would like XYZ to modify its
           stance, or clarify their position on this item.

           Sixth, on claims, the Reinsurer’s offer is that ABC (or A1) pays claims, and then XYZ
           will review ABC’s decision to see if it is covered by reinsurance. XYZ will not provide
           ABC (or A1) claim advice. You have a concern that you (or A1) will decide to pay a
           claim that XYZ will later determine is outside the treaty terms. You want some
           safeguards that ABC is not stuck with 100% of a given claim, i.e. XYZ refuses to
           reimburse you for a claim that has already been paid.

           Seventh, the treaty also includes a Profit Commission that will be paid by XYZ on the
           business to you, and then technically to A1. A1 wants all of the Profit Commission paid
           by and wants ABC to agree to pay a profit commission based upon the same formula on
           its 10% retained share. You are agreeable to this but want this as part of the negotiations.

           Lastly, the A1 MGU has asked that XYZ and you set up a working fund of 10% of
           annual premium (up to $1 million) that will be held to pay claims. A1 would like to have
           this working fund account so that they will not need to make periodic cash calls when
           there is unusual claim activity. You are in favor of A1’s recommendation but are willing
           to follow XYZ’s wishes provided a cash flow issue will not develop.


           On allowances, XYZ has offered as a % of Gross Premium:
           Offer by XYZ                    Your Comments or Issues
           Premium Tax of 2.5%             ABC’s actual premium tax has run 2.25%. However,
                                           there is risk of additional assessments in some states
                                           that could raise this number to 3.0%+. The state
                                           premium tax calculation is complicated and generally
                                           not determined until 1 or 2 years after a close of a
                                           year.
           Average Commissions: The        The A1 may write business that pays 15% and results
           lesser of actual or 11%.        in average commissions exceeding 11%. If more than
                                           11%, A1 must pay out of its MGU Fee.
           MGU Fee for A1: 8.5% with       A1 is concerned about the downside of receiving just
           1% at risk (paid back) if Gross 7.5% net
           Loss Ratio exceeds 75%.
           Fronting Carrier: 4.25%         ABC would like 5.0%, but needs a minimum of 4.5%
           Insurer Case Study                         Page 3                                    6/15/05

SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
           Profit Commission: 40% after       MGU A1 says that he deserves 60% of the profits after
           12% for Reinsurer’s margin and     10% Reinsurer’s expenses. You are not very
           expenses                           concerned except need to balance needs of A1 and
                                              XYZ. A1 also wants profit share from ABC on its
                                              10% retained share.




           Other Details:

           Prior Year Allowance Schedule:

                  A1 MGU Fee:            8% of Gross Premium

           Gross Loss Ratios for A1 Block:
                  Prior Year           66% of Gross Premium
                  2nd Prior Year       70%
                   rd
                  3 Prior Year         77%

           Items to Finalize Today

           You need to finalize the following items in the negotiations:
           With Reinsurer:
              1. Allowances (in the above)
              2. Handling groups written outside of underwriting guidelines.
              3. Reinsurer’s ability to terminate.
              4. Process if Reinsurer downgraded below Best A-.
              5. Counsel and concur language.
              6. Claim Process.
              7. Working fund question
              8. Profit Commission

           With MGU:
              1. MGU Agreement
              2. Profit Commission




           Insurer Case Study                        Page 4                                   6/15/05

SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
           Proposal from XYZ to ABC (and to A1)

           Allowances              Proposal Offer                      Final Agreement
           Premium Tax             2.5% of Gross Reinsurance
                                   Premium
           Average Commissions The lesser of actual or 11% of
                                   Gross Reinsurance Premium. If
                                   A1 exceeds 11%, the excess will
                                   be charged to A1’s MGU fee.
           MGU Fee for A1          8.5% with 1% at risk (paid back) if
                                   Gross Loss Ratio exceeds 75%.
           Fronting Carrier Fee to 4.25%
           ABC

           Other Treaty Terms        Proposal Offer                          Final Agreement
           Handling groups           “Any group written outside of
           written outside of        the underwriting guidelines will
           underwriting              be excluded from reinsurance
           guidelines.               coverage.”

           Reinsurer’s ability to    “Reinsurer can terminate
           terminate.                immediately for future business,
                                     at its discretion, if business is not
                                     being properly underwritten, that
                                     is outside of the underwriting
                                     guidelines. Otherwise 90 days
                                     prior to any anniversary.”
           Reinsurer Downgrade       No provision.

           Counsel and concur    If the Carrier (ABC) takes legal
           language              actions without first receiving
                                 XYZ’s consent, “any extra
                                 contractual loses will be borne
                                 only by ABC.”
           Claim Process         ABC (or A1) pays claims, and
                                 then XYZ will review ABC’s
                                 decision to see if it is covered by
                                 reinsurance. XYZ will not
                                 provide advice to ABC on
                                 whether a claim is covered under
                                 ABC’s policy.
           Working fund question None.
           Profit Commission     40% after 12% for Reinsurer’s
           formula               margin and expenses
           Any other items in
           Insurer Case Study                         Page 5                                   6/15/05

SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
           final agreement




           Insurer Case Study                        Page 6                                   6/15/05

SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
           Agreement Between ABC and A1
           Allowances                  Offer to A1 from ABC                Final Agreement
           Premium Tax

           Average Commissions         XYZ’s Offer: “The lesser of         Must match final
                                       actual or 11% of Gross              agreement with XYZ
                                       Reinsurance Premium. If A1
                                       exceeds 11%, the excess will be
                                       charged to A1’s MGU fee.”

           MGU Fee for A1              XYZ’s offer: 8.5% with 1% at        Must match final
                                       risk (paid back) if Gross Loss      agreement with XYZ
                                       Ratio exceeds 75%.

           Fronting Carrier:



           Other Items                  Offer to A1 from ABC           Final Agreement
           Handling groups written      XYZ’s offer: “Any group
           outside of underwriting      written outside of the
           guidelines.                  underwriting guidelines will
                                        be excluded from reinsurance
                                        coverage.”
           Insurer’s and Reinsurer’s    XYZ Offer: “Reinsurer can
           ability to terminate.        terminate immediately for
                                        future business, at its
                                        discretion, if business is not
                                        being properly underwritten,
                                        that is outside of the
                                        underwriting guidelines.
                                        Otherwise 90 days prior to any
                                        anniversary.””
           Working fund                 XYZ Offer: None.


           Profit Commission            Paid 100% of Profit Share
                                        from XYZ which is: “40%
                                        after 12% for Reinsurer’s
                                        margin and expenses.”
                                        No provision for Profit Share
                                        from ABC’s 10% of the risk.
           Other Items


           Insurer Case Study                        Page 7                                   6/15/05

SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
           Insurer Case Study                        Page 8                                   6/15/05

SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
                    Embedded Seminar for Health/Reinsurance Treaty
                                    Negotiations

           MGU Team
           Givens in Preparation for Case Study:

               •   Proposal has been made by Reinsurer. Meet today to finalize agreement.
                       o Prior to this time, a due diligence has been completed
                       o Reinsurer has prepared initial offer.
                       o Meeting today to discuss and finalize.
               •   Insurer and MGU have general comfort, but some of the key terms need to be
                   discussed and refined to complete the deal.
               •   Each party has several needs which if not met will result in No deal.
               •   MGU acts as agent of Insurer. MGU is very interested in outcome of some of the
                   terms of the negotiations. If MGU does not agree to critical terms, there can be
                   no arrangement just between the Reinsurer and Insurer.
               •   Underwriting Guidelines have already been agreed to. These are the rules to
                   allow the MGU to automatically bind reinsurance risk and to bind the insurance
                   company.



           Goal: Complete the deal, with each party meeting its critical needs.




           MGU Case Study                            Page 1                                   6/15/05

SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
           A1 MGU
           You need to have a written agreement to act as a managing general underwriter for ABC.
           In addition, you need to make sure that the terms in your agreement with ABC mirror the
           terms in the agreement between ABC and XYZ in regards to the allowances paid to you
           including fees at risk, profit commission, and underwriting guidelines.

           As A1 MGU, you are excited about moving your business to ABC insurance company.
           Your block is currently $10 million of premium, and you look to grow that block. ABC
           though is relatively new to the employer stop loss product. XYZ has a Best rating of A.
           XYZ was down graded 12 months ago from A+. Though they have been in the property
           and casualty business for a long time, they have been involved with A&H reinsurance for
           only 4 years.

           You are a small company that employs 15 people; of which 8 are focused on the
           employer stop loss business. You believe that the cost for you to run the stop loss MGU
           over the next 12 months is $800,000. This includes costs for the 3 owners, staff, benefits,
           rent, and amounts due on bank note. Fees received in excess of $800,000 would be a
           return to you on your investment in the business.

           Your major financial concern is that you receive revenue of at least $800,000 in the
           coming year. Also, if the program grows or produces good profits, you want to be
           rewarded by the risk takers for your successes. So for you, the most important item is the
           financial arrangement, i.e. the allowances and the profit commission. You are not against
           a “fees at risk” provision, but want to protect your revenue from dropping below
           $800,000.

           Another concern is losing your fronting carrier or reinsurer without at least 90 days lead-
           time to replace either one. Losing either will result in a loss of your ability to write
           business that will seriously impact your revenue stream.

           The reinsurer wants to be able to exclude from reinsurance any group that has been
           written outside of the underwriting guidelines. That means that ABC would retain 100%
           of the risk. ABC is concerned about this scenario since they are new to the business and
           are keeping only 10% of the risk, and reinsuring 90% to XYZ. XYZ wants to
           periodically audit you, and at that time, deem a risk as unacceptable and not reinsured.
           In addition, the reinsurer wants to be able to terminate immediately, at its discretion, for
           future business if they find business is not being properly underwritten. This again
           concerns you since you could lose your reinsurance (and ability to write business) in a
           day. You need to have ABC and XYZ agree to a provision that is less potentially
           onerous to you.

           You have asked ABC and XYZ to set up a working fund that you can use to pay claims
           rather than make a cash call. Normally, due to timing of paying the insurer and reinsurer,
           MGU Case Study                           Page 2                                   6/15/05

SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
           you have cash on hand in the amount of ½ to 1 month’s average claims. You have asked
           to hold up to 10% of annual premium up to a maximum of $1 million, but it would be
           acceptable if the amount agreed to is between $250,000 to $500,000.

           The business you sell generally has the following commission characteristics:
              • 0% on some TPA controlled accounts.
              • 5% to 10% on other TPA accounts
              • 10%-15% on accounts sold by brokers.
              • 15% on larger accounts controlled by brokers.
           Currently your block averages 10.75% commissions.

           On allowances, XYZ has offered as a % of Gross Premium:
           Offer from XYZ                  Your Comments or Issues
           Premium Tax of 2.5%             Seems appropriate.
           Average Commissions: The        You don’t want to be constrained from selling to
           lesser of actual or 11%. If A1  certain markets. If you sell all business at a 15%
           exceeds 11%, the excess will be commission, you will build this cost into the final rate.
           charged to A1’s MGU fee.        So why is this an issue with the reinsurer? You don’t
                                           like the aspect of having a charge back to your revenue
                                           if by chance the average commission rate goes above
                                           11% because you sell more business controlled by
                                           brokers, who demand 15% commissions.
           MGU Fee for A1: 8.5% with       The 8.5% is fine. You are concerned about your
           1% at risk (paid back) if Gross revenue dropping below $800,000.
           loss ratio exceeds 75%.
           Fronting Carrier: 4.25%         The Carrier Fee does not have a significant impact on
                                           your business with the exception that a higher fee does
                                           need to be built into the gross rates and may reduce a
                                           profit commission at some point in the future.
           Profit Commission: 40% after    You believe that you deserve 60% of the profits after
           12% for Reinsurer’s margin and 10% Reinsurer’s expenses, especially if the Reinsurer
           expenses                        wants to put some fees at risk

           You need to finalize the following items in the negotiations today so that you can begin
           to quote January 1 business now:




           MGU Case Study                            Page 3                                   6/15/05

SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
           Other Details Provided by A1 to ABC and XYZ:

           Prior Year Allowance Schedule:

                  A1 MGU Fee:            8% of Gross Premium

           Gross Loss Ratios for A1 Block:
                  Prior Year           66% of Gross Premium
                  2nd Prior Year       70%
                   rd
                  3 Prior Year         77%

           Best’s Rating
                  ABC A
                  XYZ A

           Items to Finalize Today

           With ABC in an agreement and with XYZ as reinsurer:
              1. Allowances (in the above)
              2. Handling groups written outside of underwriting guidelines.
              3. Insurer’s and Reinsurer’s ability to terminate.
              4. Working fund question
              5. Profit Commission




           MGU Case Study                            Page 4                                   6/15/05

SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
           Agreement Between ABC and A1
           Allowances                  Offer to A1 from ABC                Final Agreement
           Premium Tax

           Average Commissions         XYZ’s Offer: “The lesser of         Must match final
                                       actual or 11% of Gross              agreement with XYZ
                                       Reinsurance Premium. If A1
                                       exceeds 11%, the excess will be
                                       charged to A1’s MGU fee.”

           MGU Fee for A1              XYZ’s offer: 8.5% with 1% at        Must match final
                                       risk (paid back) if Gross Loss      agreement with XYZ
                                       Ratio exceeds 75%.

           Fronting Carrier:


           Other Items                  Offer to A1 from ABC           Final Agreement
           Handling groups written      XYZ’s offer: “Any group
           outside of underwriting      written outside of the
           guidelines.                  underwriting guidelines will
                                        be excluded from reinsurance
                                        coverage.”
           Insurer’s and Reinsurer’s    XYZ Offer: “Reinsurer can
           ability to terminate.        terminate immediately for
                                        future business, at its
                                        discretion, if business is not
                                        being properly underwritten,
                                        that is outside of the
                                        underwriting guidelines.
                                        Otherwise 90 days prior to any
                                        anniversary.””
           Working fund                 XYZ Offer: None.


           Profit Commission            Paid 100% of Profit Share
                                        from XYZ which is: “40%
                                        after 12% for Reinsurer’s
                                        margin and expenses.”
                                        No provision for Profit Share
                                        from ABC’s 10% of the risk.
           Other Items



           MGU Case Study                            Page 5                                   6/15/05

SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
                    Embedded Seminar for Health/Reinsurance Treaty
                                    Negotiations

           Reinsurer Team

           Items to Discuss in Preparation of Case Study:

               •   Proposal has been made by Reinsurer. Meet today to finalize agreement.
                       o Prior to this time, a due diligence has been completed
                       o Reinsurer has prepared initial offer.
                       o Meeting today to discuss and finalize.
               •   Insurer and MGU have general comfort, but some of the key terms need to be
                   discussed and refined to complete the deal.
               •   Each party has several needs which if not met will result in No deal.
               •   MGU acts as agent of Insurer. MGU is very interested in outcome of some of the
                   terms of the negotiations. If MGU does not agree to critical terms, there can be
                   no arrangement just between the Reinsurer and Insurer.
               •   Underwriting Guidelines have already been agreed to. These are the rules to
                   allow the MGU to automatically bind reinsurance risk and to bind the insurance
                   company.

           Goal: Complete the deal, with each party meeting its critical needs.




           Reinsurer Case Study                      Page 1                                   6/15/05
SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
           XYZ Reinsurer

           As the Reinsurer, you are pleased to be in a position to develop a relationship with ABC.
           In addition, A1 MGU has underwritten a profitable book in the past. A1 is an established
           MGU that will transfer a $10 million block of business to ABC paper and XYZ will
           reinsure 90% of the risk as each of the accounts reach their next renewal. A1 has also
           promised to grow the block. ABC, a Best’s “A” rated carrier, has limited experience in
           this market so you want to make sure that you have certain safeguards in the treaty. In
           addition, you want to make sure that A1’s interests are aligned to produce profitable
           business, not just earn fee revenue.

           Your company has a Best rating of A. XYZ was down graded 12 months ago from A+.
           Though you have been in the property and casualty business for a long time, you have
           been involved with A&H reinsurance for only 4 years.

           First, you want to be able, at your discretion, to terminate immediately for future business
           if A1 MGU does not follow the underwriting guidelines. In addition, you have
           proposed to not accept the risk on any group written outside of the guidelines. This
           would mean that ABC would be stuck with 100% of the risk. ABC has concerns about
           being put in this position.

           Second, you want to have alignment of interest. One way to accomplish is to have
           allowances as low as possible and have the MGU financially rewarded for good results
           and penalized for unfavorable. You have offered that a portion (1% of Ceded Premium)
           of the MGU fees be paid back to you if the loss ratio exceeds 75%. You have also
           offered a Profit Share to A1 on your portion of the risk.

           Third, you have a concern that the carrier is new to this business and may not allocate
           enough resources to situations such as contested claims. You believe that the carrier
           should pay claims, through its MGU agent, as though it had 100% of the risk. You want
           the carrier to “earn” its fronting fee. You want to keep overall expenses at not more than
           27.5% before your own expenses. You feel that major direct writers offer the product at
           22%-25% total expenses.

           Fourth, your offer includes language to “counsel and concur”. The carrier must discuss
           with your legal department any disputes before responding or you will not participate in
           extra contractual losses.

           Fifth, you have told ABC (or A1) that you will not provide advice on how to pay a claim.
           You will review ABC’s claim decisions, after they pay, and determine if the claim is
           covered. If you disagree with ABC’s or A1’s claim decision, you will not cover the
           claim. ABC has voiced a concern about this since they want you to pay if they pay. You
           are willing to compromise on this if proper safeguards can be established.

           Sixth, you understand that the carrier is concerned about a downgrade to XYZ since you
           were downgraded from A+ to A only 12 months ago. ABC has told you that their
           Reinsurer Case Study                       Page 2                                6/15/05
SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
           management would like a provision in the treaty that would require XYZ to place
           reserves ceded from ABC in a trust account if your rating drops below A-. Your
           management has concerns on agreeing to this. You do not believe this provision is
           necessary since this is short tail business. You are willing to consider other alternatives.

           Seventh, A1 MGU requests that XYZ agree to a working fund for cash flow purposes.
           Your CFO has concerns on losing control of a significant amount of cash. You are
           willing to offer a fund of $250,000 (approximately 2 weeks claims). You believe that the
           treaty allows A1 and ABC to pay premium to XYZ 30 days after the end of a month. In
           effect, they are holding 1 to 2 month’s premium, less claims paid, at any given point.


           On allowances, XYZ has offered as a % of Gross Premium:
           XYZ Offer                       Your Comments or Issues
           Premium Tax of 2.5%             You realize the that ABC’s current Premium Tax is in
                                           the range of 2.25%. However there is the risk to ABC
                                           of additional assessments in some states that could
                                           raise this number to 3.0%+. The state premium tax
                                           calculation is complicated and generally not
                                           determined until 1 or 2 years after a close of a year.
                                           Thus, your agreeing to reimburse actual Premium Tax
                                           is not administratively feasible.
           Average Commissions: The        You want to have A1 sell based on relationship, not
           lesser of actual or 11%.        always offering high commissions. If A1 exceeds
                                           11%, the excess will be charged to A1’s MGU fee.
           MGU Fee for A1: 8.5% with       You want alignment with A1, who is making the day-
           1% at risk (paid back) if gross to-day underwriting decisions.
           loss ratio exceeds 75%.
           Fronting Carrier: 4.25%         You must keep overall expenses at not more than
                                           27.5% before your own expenses. You believe that
                                           major direct writers offer the product at 22%-25%
                                           total expenses.
           Profit Commission: 40% after    MGU A1 requests 60% of the profits after 10%
           12% for Reinsurer’s margin and Reinsurer’s expenses. You are not very concerned
           expenses                        except need to balance needs of A1 and XYZ.




           Reinsurer Case Study                       Page 3                                    6/15/05
SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
           Other Details:

           Prior Year Allowance Schedule:

                  A1 MGU Fee:            8% of Gross Premium

           Gross Loss Ratios for A1 Block:
                  Prior Year           66% of Gross Premium
                  2nd Prior Year       70%
                   rd
                  3 Prior Year         77%

           Items to Finalize Today
           You need to finalize the following items today in the negotiations so that A1 can begin to
           make offers today on January 1 business for ABC:
           With ABC and A1:
              1. Allowances (in the above)
              2. Handling groups written outside of underwriting guidelines.
              3. Reinsurer’s ability to terminate.
              4. Process if Reinsurer downgraded below Best rating of A-.
              5. Counsel and concur language.
              6. Claim Process.
              7. Working fund question
              8. Profit Commission




           Reinsurer Case Study                      Page 4                                   6/15/05
SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
           Proposal from XYZ to ABC (and to A1)

           Allowances              Proposal Offer                      Final Agreement
           Premium Tax             2.5% of Gross Reinsurance
                                   Premium
           Average Commissions The lesser of actual or 11% of
                                   Gross Reinsurance Premium. If
                                   A1 exceeds 11%, the excess will
                                   be charged to A1’s MGU fee.
           MGU Fee for A1          8.5% with 1% at risk (paid back) if
                                   Gross Loss Ratio exceeds 75%.
           Fronting Carrier Fee to 4.25%
           ABC

           Other Treaty Terms        Proposal Offer                          Final Agreement
           Handling groups           “Any group written outside of
           written outside of        the underwriting guidelines will
           underwriting              be excluded from reinsurance
           guidelines.               coverage.”

           Reinsurer’s ability to    “Reinsurer can terminate
           terminate.                immediately for future business,
                                     at its discretion, if business is not
                                     being properly underwritten, that
                                     is outside of the underwriting
                                     guidelines. Otherwise 90 days
                                     prior to any anniversary.”
           Reinsurer Downgrade       No provision.

           Counsel and concur    If the Carrier (ABC) takes legal
           language              actions without first receiving
                                 XYZ’s consent, “any extra
                                 contractual loses will be borne
                                 only by ABC.”
           Claim Process         ABC (or A1) pays claims, and
                                 then XYZ will review ABC’s
                                 decision to see if it is covered by
                                 reinsurance. XYZ will not
                                 provide advice to ABC on
                                 whether a claim is covered under
                                 ABC’s policy.
           Working fund question None.
           Profit Commission     40% after 12% for Reinsurer’s
           formula               margin and expenses
           Any other items in
           final agreement
           Reinsurer Case Study                       Page 5                                   6/15/05
SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2
           Reinsurer Case Study                      Page 6                                   6/15/05
SOA 2005 June Spring Meeting - 20SEM, Treaty Negotiation for Employer Stop-Loss Programs: Part 2

								
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