— By DuWayne Kilbo
Jumbo cases can be challenging. Defined by many carriers as total line of coverage applied for including coverage in force exceeding $65 million, this is especially true for super jumbo applications that involve total lines in excess of $100 million, and where health conditions or applicant age become factors.
Every application is unique and individual case facts make the task of putting jumbo and super jumbo cases together anywhere from reasonably challenging to downright impossible. However, with premiums from five figures to several million, we need to approach these situations with working knowledge of all available resources—including those of direct carriers and reinsurers.
As with many clients, and especially with large cases, an insured’s health condition may suggest an informal shopping effort to gauge carrier appetite for a particular medical impairment. But even then, deciding which carriers to shop depends upon product selection, pricing and carrier niches.
The ability and reputation of a brokerage agency to put together any type of case is important, but this becomes critical in the large case market where just pennies more per thousand of coverage can make or break a case.
Carriers expect a certain level of informal case shopping, especially in the large case market. However, they approach these situations with expectations that they will ultimately win a fair share of business they see. When they perceive cases being shopped needlessly, where time, energy and resources are burned up reviewing cases they have no chance of putting on the books, the long term effect is often inferior underwriting effort and offers.
So other than to populate a spreadsheet—which often isn’t a good enough reason—it’s neither efficient nor effective to shop carriers that have no reasonable chance of winning a case.
Another problem arises if formal applications are submitted to multiple carriers, because carriers and reinsurers consider the total face amount of ALL applications in the marketplace, even if a lesser amount is intended to be placed. The ultimate impact may be further restriction on available large case capacity, even from carriers targeted to provide the best available rates and terms for the situation at hand.
But all of that isn’t new.
What is new is the use of facultative reinsurance—where reinsurers review direct carrier papers—to provide additional capacity on jumbo and super jumbo cases.
In the past, a typical large case shopping plan would avoid facultative reinsurance at all costs, since conventional wisdom was that “reinsurance will screw up my case.” And in certain situations there was some truth to this statement. This caused brokerage underwriters to shop multiple carriers in order to stay within retention or automatic binding limits. Depending upon the total line to be placed, this approach typically took much more time and effort and quite possibly resulted in inferior rates and terms due to carrier product and price differences.
At Windsor we have discovered that reinsurers have newly developed a much greater appetite for risk and have become more willing to negotiate. Why? Because carriers are retaining more mortality which in turn has meant fewer reinsurance cessions—one of the primary means by which reinsurers make money.
We have found, especially in jumbo cases, reinsurers take a “reasonable man” approach and make an effort to match direct carrier offers, and in several situations have actually improved upon direct carrier offers. However, as indicated already, the reinsurers earn money primarily from mortality and are paid by direct carriers on a yearly renewable term basis for ceded business or coverage accepted facultatively. Unlike direct carriers, they don’t make money on large first year or short pay premium solves, or investment spread and fees. In view of this, they won’t take unnecessary risk.
In addition to this, we have found “hidden” capacity available from a couple of reinsurers in the market. The reinsurance market is very concentrated so it isn’t difficult to determine who these reinsurers are. However, this capacity is only available via select direct carriers — in our case, Lincoln Financial and Prudential. The reinsurers in question have rewarded these select carriers with capacity approaching $100 million or more in certain situations for both permanent and term plans of coverage, while providing significantly less capacity to other carriers who may use them. And along with internal direct retention and capacity available via other reinsurers, these same direct carriers can often put together cases on their own paper in the $150 million neighborhood. This is an absolute winner for everyone involved—client, producer, BGA, carrier and reinsurer–if these carriers provide the best available rates and terms.
In another recent example of large-case-forward-thinking, Prudential has put together a $100 million jumbo limit along with a very substantial automatic limit of $75 million. This increased capacity comes with restrictions, but is something to keep in mind when considering large case submission and positioning.
In summary, putting together the jumbo and super jumbo case takes considerable planning and insight. If done right, taking advantage of special hidden direct carrier reinsurance capacity and improved automatic and jumbo limits, the effort required is minimized and the ability to achieve the best results for everyone involved is significantly enhanced.