Understanding and Using Reinsurance Treaties for Guaranteed Products

Michael Winkler

This chapter will examine the use of reinsurance for the management of guaranteed products. At first glance, reinsurance is a risk management tool, and offloading risks from a company’s own balance sheet is indeed an important reason for reinsuring guaranteed products. However, there are many other, equally important, drivers for using reinsurance, having their specific impact on the practical structure of the reinsurance transactions, whose variations will also be covered in this chapter.

HISTORY

Using reinsurance for life insurance products with guarantees started with the reinsurance of variable annuities (VAs) as these new products emerged in the US market in the 1990s. The entry point for reinsurers to provide cover for guaranteed minimum death benefit (GMDB) at that time was pricing support. This was similar to traditional cover, as many unexperienced product developers were looking for help from reinsurers who backed their pricing up by taking the risks at the same rates. However, the pricing methodology used by many reinsurers in those early days was not very sophisticated: many GMDB covers were priced based on actual claims cost in the past, which is hardly a good

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