Bob Diefenbacher, FSA, MAAA Manulife Reinsurance

1. PD5 Welcome to the Grey Area - Life Reinsurance Treaty Challenges Bob Diefenbacher, FSA, MAAA Manulife Reinsurance Kevin Hwee, FSA London Life

2. The facts and circumstances described in this presentation are for illustrative purposes only. Any similarity to actual events is unintentional and purely coincidental. The views and opinions expressed in this presentation are those of the presenters only and do not represent those of the presenter’s employers or their affiliates.

3. 5 Case Studies • All Case Studies Intentionally Have Some Ambiguity and Facts Left Out • There Is No Unanimity in the Industry On These Questions Your Participation is Required

4. Many of the case studies in this presentation have evolved from prior presentations involved others: Barry Dixon – Manulife Reinsurance Shaun Downey – John Hancock Keith Ryan – Lincoln Financial Connie Walker – Swiss Re Rasa Wilkinson – Manulife Reinsurance

5. Case #1: Reinsurance Treaty • Smith Life Insurance Company Has A First Dollar Quota Share Arrangement Covering Its UL Product. • Smith Life Retains 20%, Cedes 80% equally to 4 Reinsurers, including Jones Re. • Smith’s Maximum Retention Limit is $2,000,000. • The Automatic Pool Binding Limit is $28,000,000

6. Case #1: Applicant • 56 Year Old Male, NS Applies to Smith Life for a $2,000,000 UL Policy • APS Showed Rising PSA Levels • Biopsy Performed was Benign. 6 core samples confirmed Benign Prostatic Hypertrophy • Follow-up visit – PSA Levels Even Higher, thought to be result of trauma from biopsy • Current blood profile showed PSA = 11%

7. Case #1: Applicant Smith Life’s Underwriting Manual says PSA < 15% is a Decline Underwriter talked to Medical Director, who in turn talked to applicant’s urologist Urologist felt prostate history was benign Result: Smith Life Underwriter issued case Standard

8. Case #1: Claim • Insured Died 18 Months After Issue • Claim Papers Reveal • Follow-up visit to doctor after policy issued. • Repeat biopsy showed high-grade malignancy • Immediate surgery – total prostatectomy. • Died shortly thereafter of pulmonary embolus

9. Case #1: Questions Is Jones Re Contractually Obligated to Pay This Claim? How Should This Case Be Handled?

10. Case #1: Variations What If The Insured Died of A Heart Attack Before the Discovery of Cancer? What If The Underwriter Simply Made an Error, and Missed the Reference to the PSA in the APS? What if Smith’s Underwriting Manual Defines PSA < 15% as Table D, Not a Decline?

11. Case #2: The Policy and Treaties • $10 million term policy issued by Life Co on July 1, 2008, and reinsured with ABC Re automatically • ABC Re’s reinsurance treaty indicates that conversions are automatically covered, point-in-scale • ABC Re also reinsures Life Co’s whole life plan • July 1, 2010 – Life Co changed reinsurers for its whole life plan. The whole life product is now reinsured with DEF Re for new business.

12. Case #2: The Conversion • Term policy converts to whole life on July 1, 2012 • The new converted-to policy is erroneously reported to DEF Re • Life Co did pay point-in-scale rates • In its reporting to DEF Re, Life Co lists the issue date of the policy as “July 1, 2008” • The insured dies on August 15, 2015. • At this point, the reporting error is discovered by DEF Re

13. Case #2: Questions • Who is liable for this risk – ABC, DEF, or neither? • How would this be handled in practice? • Would you answer change if the insured died 1 year after conversion? • Would your answer change if Life Co then discovered a systems bug led them to cede 1,000 policies in error to DEF?

14. Case #3 – Facultative Submission • ABC Life has an automatic pool. ABC retains $2 million and can automatically bind its 4 pool reinsurers for $5 million each. ($20 million total) • ABC Life submits a case facultatively looking for $10 million of capacity. ABC already kept its full retention of $2 million for this life on a prior policy. Within 24 hours, ABC receives the following facultative quotes from its pool reinsurers: • DEF Re offers $10 million at standard rates • GHI Re offers $6 million at standard rates • JKL Re and MNO Re think that the life should be declined.

15. Case #3 – Mistakes Were Made • ABC Life’s underwriter, confident that he has secured capacity, issues the policy at standard rates. • ABC Life does not communicate its acceptance to either DEF Re or GHI Re. • The case is incorrectly coded “automatic” in ABC Life’s reinsurance administration system. $2.5 million is reported to each of the 4 reinsurers.

16. Case #3 – Mistakes Discovered • The life dies 4.5 years later • ABC Life recognizes its reporting error while processing the claim. • ABC Life then submits a $5MM claim to each of DEF Re and GHI Re, along with back premiums for the extra face amount. • ABC Life seeks a refund of premiums from JKL Re and MNO Re

17. Case #3 - Questions Recap: • What Amounts Are Each DEF Re and GHI Re contractually obligated to pay? • How Should DEF Re and GHI Re respond to this claim submission? • Would your answer change if ABC had formally accepted the offers? • What if GHI Re Offered 2 Million?

18. Case #4: The Original Application • John Doe applies for $15 million of term insurance with XYZ Co on January 15, 2009 • All of XYZ CO’s insurance products are reinsured with the same pool of four reinsurers (each having a 25% share) • Their pool has a $10 million autobind limit • There are different lead reinsurers for each product • For its term product, the lead reinsurer is ABC Re • XYZ Co submits facultatively to ABC Re who declines the risk

19. Case #4: The New Application • The autobind limits for all products’ pools were increased to $20 million on July 1, 2009. • John Doe applies for $15 million of UL insurance on September 10, 2009 • For its UL product, the lead reinsurer is DEF Re • The XYZ Co underwriter calls her DEF Re contact and they come to an agreement whereby the case can be automatically bound at standard rates • John Doe dies on November 6, 2013 • ABC Re denies liability on the grounds that “once fac, always fac” was not followed for this case.

20. Case #4: Questions • Is ABC Re justified in its denial of the claim? • Would your answer change if XYZ’s auto bind limit had not been increased? • Would your answer change if the only reason XYZ submitted the original policy fac was because it was over the autobind –i.e. it was a “clean case”? • Would your answer change if, instead of denying the original policy, ABC Re offered a rating of 200%, which John Doe declined?

21. Case #5: The Policy • Male aged 65, has 5 million in force and buys 15 million universal life policy from Best Life Ins Co. • The policy includes a death benefit rider for automatic increases of 5% per annum • Best Life Ins Co has a reinsurance treaty with Super Re that has an autobind of 20 million and a jumbo of 30 million • The illustration shows the Net Amount at Risk at 25 million by age 92

22. Case #5: The Claim • The insured dies in year 13; death benefit is 28MM, account value is 7MM and Net Amount at Risk is 21MM • Best Life discovers that their admin system did not pick up the increases and reported only 15MM death benefit from policy inception • Best Life seeks to collect 21MM from Super Re

23. Case #5: Questions • Was the policy correctly ceded to Super Re? • What amount should Super Re pay? • 0 • 15 • 20 • 21

24. Case #5: Variations • Would your answer change if…. • The maximum net amount at risk shown on the illustration was less than 20 million? • What if the increases were driven by the mechanics of the policy (e.g. PUA’s, corridors) rather than in part due a pre-programmed rider? • Best Life had been properly reporting the increases at all points in time?

25. Case #6 – Reinsurance Treaty • Alpha Life Has a Reinsurance Pool With Two Pool Members In it: Beta Re and Gamma Re • Requirements for Automatic Capacity in Treaty With Beta Re Include Language Explicitly Stating That Underwriting Must Adhere to Published Underwriting Requirements and Its Underwriting Manual In Order To Automatically Cede Risk to Beta Re • Gamma Re’s Treaty is Silent Regarding Underwriting Requirements • Pool Has a $20MM Autobind

26. Case #6 – The Policy • Insured Age 63 Applies for $20MM • Alpha’s Underwriter Cannot Get a Treadmill Per Underwriting Requirements, But Thinks He Has Enough Other Info To Conclude Case is OK to Issue Standard • Communicates Decision to Issue Standard to Agent and Starts Processing • Then, Realizes Language in Beta Re Treaty, So Submits Case Facultatively to Beta Re • In the Meantime Policy Is Issued • Beta Re Replies, Offers $10MM, But Rates Table D • Alpha Accepts the Offer, and Eats the Difference Between Table D and Standard on Beta’s $10MM

27. Case #6 – Questions • Gamma Re Is Not Contacted, And Is Ceded $10MM Risk Standard • Insured Dies 2.5 Years Later • Is Gamma Re Contractually Obligated to Pay? • What Seems Fair? • What If Alpha Life Called Beta Re To Get Approval, But Did Not Formally Submit Case? • What If Gamma Re Knew Beta Re Had Different Language?

28. Case #7 - Recapture • Ritz Life Has A Treaty With Carlton Re, Where They Cede Amounts in Excess of Their $1,000,000 Retention, $10,000,000 Autobind. • Treaty Covers 1,000 Lives With Issue Years 1993-98 • Recapture For Increases in Retention is Allowed After 10 Years • Ritz Life Increases Its Retention to $2,000,000 in January, 2008 • Ritz Life Notifies Carlton Re of Intent to Recapture in Accordance With Treaty • Ritz Life Recaptures 800 Policies in 2008

29. Case #7 – Systems Problem • In 2013, Ritz Life Moves to a New Reinsurance Administration System • The Old System Was Only Capable of Checking Retention “Per Policy” While the New System Aggregates “Per Life” • Ritz Life “Un-recaptures” 100 Lives Under Carlton Re’s treaty, paying back premiums to 2008 and reporting back claims.

30. Case #7 - Questions • Is Carlton Re Contractually Obligated to Re-assume These Lives and Pay Claims? • Does It Matter Whether Ritz Life Knew of the Inadequacy of Its Old System • What Would Happen In Practice?

31. Case #7 - Alternatives Alternative #1 • What if Ritz Life Had Recaptured All 1,000 Policies in 2008? Alternative #2 • What If, Instead of a Systems Problem, Ritz Life Simply Had a Clerical Error, and Discovered 1 Policy, with a $10,000,000 face, in 2013?

32. Case #7 - Alternatives Alternative #3 • Instead of Recapturing 800 Eligible Policies, Ritz Life Recaptures 500 in 2008 • In 2013, They Realize They Should Have Recaptured Another 300 • Ritz Life Then Recaptures 300 Effective in 2008, Requests Back Premiums Less Back Claims

33. Thank You!