Life & Income
Reinsurance Sits Behind Every Large Life Policy
Life insurers pass much of the risk on large policies to reinsurers, whose terms shape the underwriting questions, definitions and limits a customer eventually sees.
A life insurer rarely retains the whole risk on a large policy. Much of it is passed to reinsurers, whose requirements reach back into the application form.
Why an insurer cedes risk
A single very large claim can be significant relative to an insurer's capital. Sharing the risk smooths results and reduces the capital that must be held against it.
Reinsurance also buys expertise. Reinsurers see risks across many insurers and many countries, which gives them a broader data set on mortality and morbidity than any single company holds.
The arrangement is invisible to the customer, who contracts only with the insurer. The insurer remains liable for the whole claim regardless of what it has ceded.
Retention limits explain the underwriting thresholds
Each insurer sets a retention limit, the maximum it will keep on one life. Cover above that is ceded automatically under a treaty with the reinsurer.
Applications above certain sums therefore trigger additional requirements, because the reinsurer's evidence rules apply rather than the insurer's own. Medical examinations and financial evidence appear at these thresholds.
Applicants often read the extra requirements as suspicion. They are a function of the sum applied for crossing an internal boundary.
Aggregation across the market
Because a handful of reinsurers stand behind many insurers, the same life can be reinsured several times through different companies. Reinsurers track total exposure per life for that reason.
This is one reason applications ask about cover held elsewhere and applications in progress. The answer affects the reinsurer's aggregate position, not only the insurer's view of need.
Non-disclosure of other cover therefore has consequences beyond the individual policy, which is why the question is asked so directly.
How reinsurance shapes the product itself
Definitions in critical illness and disability cover are heavily influenced by reinsurers, who price the wording. A broader definition costs the insurer more to reinsure.
When reinsurers revise their view of a risk, insurers follow, which is why definitions across the market move in the same direction at roughly the same time.
Product changes that appear to be competitive decisions are often reinsurance repricing arriving at the customer end of the chain.
What it means for a policyholder
The policyholder's contract is with the insurer, and reinsurer insolvency does not remove the insurer's obligation to pay a valid claim.
Protection arrangements for policyholders where an insurer itself fails are a separate statutory matter and differ considerably between jurisdictions.
Retention limits, treaty terms, evidence thresholds and definition wordings vary by insurer and jurisdiction and change over time. The policy documentation issued governs the contract.
Questions readers ask
Do I have to pay for a medical exam?
Normally no. Where an insurer wants evidence, it arranges and funds it, whether that is a nurse screening or a report from your doctor.
Will asking my doctor for a report affect anything else?
The report goes to the insurer with your consent and in many jurisdictions you can ask to see it first. It does not change your medical care. Data rights vary by country, so check yours.
