The risks factors in critical illness insurance may be greater than that of life insurance. Reinsurance of critical illness insurance may be a solution to eliminate some of the financial loss an insurance company might incur. The procedure may take place through quota share or an excess of reinsurance. Let’s have a look at some of the factors important for the reinsurance of critical illness insurance.
There had been difficulties in assuming the incidence rates. So, the critical illness premiums values may be readjusted or reviewed depending on the magnitude of the loss made by the company. Insurers and reinsurers may then avoid premium guarantees exceeding five years. As a matter of fact, if the insurer decides to increase the critical illness premium rates, the reinsurer also might have to share an equal proportionality in these increases.
Furthermore, reinsurance might be used by insurers in the critical illness segments where they have less experience. For example, small life insurers might choose to follow a trend for their critical illness products dissimilar to that of their pure life products so that they would have to suffer less. Moreover, if the critical illness insurance is a prepayment, the insurer and the reinsurer may be required to have an equal involvement concerning both life and critical illness risks. Otherwise in case of a doubtful critical illness claim, problems might crop between the insurer and the reinsurer.
For example if the insured died due to a heart attack, the fact that the critical illness was in rule with the policy definitions may remain unclear. As said before, the insurer and reinsurer may have to share the life and the critical illness risk equally. If that’s not the case, both parties might then have the idea to either make the claim a death claim or a critical illness claim. This may depend on the cause of the claim. Thus, the loss whether it be a root of critical illness or life may affect both insurer and reinsurer at the same rate.
According to Munich Re, This can easily be achieved with a quota share reinsurance agreement. For example, the insurer might reinsure 30 percent of its life and prepayment critical illness business. In case of a reinsured policy with USD 200,000 life sum insured and a critical illness acceleration benefit of 50 percent, the reinsurer may pay USD 30,000 (30 percent of 50 percent of USD 200,000) upon critical illness and another USD 30,000 (30 percent of [USD 200,000–USD 100,000]) succeeding death, or USD 60,000 (30 percent of USD 200,000) if death occurred first.
As per Munich Re, if the reinsurance is carried out on a surplus basis, it may be advisable to fix only a retention for the life risk. The critical illness risk may then be reinsured in the same proportion as the corresponding life risk. For example, the insurer might want to retain all life risks up to an amount of USD 50,000. A policy with USD 200,000 life sum insured and 50 percent prepayment in the case of critical illness would be reinsured as follows: The excess of USD 150,000 over the life risk retention, i.e. 75 percent of the total sum, could be assumed by the reinsurer. The critical illness risk may then be reinsured in the same proportion. In the case of a critical illness claim, the reinsurer may pay out USD 75,000 (75 percent of 50 percent of USD 200,000) and another USD 75,000 (75 percent of [USD 200,000–USD 100,000]) on subsequent death, or USD 150,000 (75 percent of USD 200,000) if death occurs first.