A question that I often hear from life insurance and reinsurance professionals is ”what happens at the end of a term life insurance product?” Well, the answer is that once it comes to an end, you may have the option to convert it to a permanent product. Converting a policy happens quite often and in reinsurance, it is important to adhere to the terms of the treaty, otherwise, it will cause a downstream impact when claim time approaches.
As a reinsurance analyst, we all struggle with administering conversions from time to time, especially in scenarios where there have been many amendments to a treaty or treaty information is difficult to identify. When I administer term conversions like these, there are three questions I typically ask myself to ensure I’m following the guidelines of the treaty. (PS – see here for a great overview of what a Reinsurance Treaty is as well as Seven Essential Components!)
# 1 – What does the treaty say?
Generally, treaties will have what’s called a conversion provision which will provide information about how to administer the converted policy. It will include guidelines about how premiums are paid and whether the reinsurer’s share will remain the same. It may also include information about whether the converted policy will continue to be reinsured under the same treaty agreement. This will then drive the treaty code you use in your system under which to reinsure the policy.
# 2 – How are premiums paid and what is point-in-scale?
If the original term policy was reinsured under a coinsurance treaty, the conversion provision may state that reinsurance premiums will be on a point-in-scale YRT basis. This means that the rate is based on the insured’s original issue age and current duration.
# 3 – How will all parties know a term conversion was issued?
Converted policies are reported during the regular reporting schedule and this is where accuracy and quality data becomes essential (it will also facilitate a smoother process at claim time!)
PRO TIP! Some of the data elements reported include:
- Changing the issue type of the converted policy to conversion or
- Adding the original policy number to the billing records.
- Validating that the original policy has been terminated as a conversion.
- Adding the original reinsurance effective date. (An effective life reinsurance system will use this date to calculate the current reinsurance duration.)
What happens if term conversions aren’t administered based on the treaty provisions?!
If term conversions are not administered based on the provisions of the treaty, they tend to cause a bit of a headache and some grief. How so? Well if there is a claim and you’re trying to validate premiums but cannot trace back the rates that were used or how the original policy was reinsured, you might run into some trouble. Rest assured, there is pain relief for that headache. Be sure to read your treaty, check your rates and most importantly, report accurate data.
What do you look out for when administering term conversions? What types of pain points do you experience?