The treaty is a key source of data in reinsurance. It is the formal contract that binds the ceding company with the reinsurer and lays out the terms of the agreement. Therefore it is referenced whenever there are questions about how reinsurance should be administered. However, treaties are often extremely long and contain a lot of standard legal information to sort through. This makes it challenging to zero in on specific information when you need to review treaties to answer key business questions. When do these treaty reviews happen?
Long story short, treaty reviews can happen at anytime but usually occur when organizations need to confirm if reinsurance is being administered properly.
For example, if you are acquiring a new block of business, you can conduct a treaty review to validate that the incoming data matches the paper version of the treaty.
What components of a reinsurance treaty should you reference during a treaty review?
Being able to read and understand the paper treaty is a key to performing a treaty review. Given the abundance of information, you need to recognize what information is and is not relevant. Below I am breaking down 6 key components that we reference during treaty reviews.
1) The First Page
Often quickly overlooked, the first page of a treaty can have a slew of important details. Here you should find the name of the companies the contract is between and the effective date. Sometimes you can also find whether the treaty is Yearly Renewable Term or Coinsurance and a treaty number for tracking purposes.
The first page is used to test effective date during a treaty review
This first page is useful for testing the effective date of the treaty against the effective date in your reinsurance system. It is a starting point for determining if the business ceded under this agreement meets the date criteria. It should be noted that information found later in the treaty could alter this date test (i.e. if policies issued in the six months’ prior are permitted) however it is an excellent starting point for your effective date testing.
2) Plans / Business Covered
Sometimes vague and sometimes nitty, gritty detailed, the plans/business covered section tells us what business the treaty belongs to. This can vary from “all business between Date A and Date B” down to a specific list of plans, series, riders, effective dates, etc. As can be expected, the plans/business covered page is often one of the first Exhibits.
Being aware of the plans and business covered helps confirm policies that should and should not be ceded
Knowing the plans and products covered under the treaty is essential to accurate reinsurance administration and is vital to a detailed treaty review. This comparison between the policies being reinsured and the plans and products which are identified in the treaty as being covered helps to identity the policies not currently being ceded and those that are being ceded in error.
3) Retention & Binding Limits
One of the most important sections in reinsurance admin, retention and binding limits are found in the Exhibits, often together on the same page. These limits define the terms by which the reinsurer and the ceding company share in the death benefit amounts.
For almost any question regarding reinsurance administration, the retention and binding limits are often the first things to be checked. Making sure that what is in the administrative system matches what is in the treaty is crucial to maintaining quality data.
Confirm the correct amounts are being ceded by reviewing retention & binding limits
By validating the retention and binding limits reinsurers can confirm that the proper amount has been ceded and that the risk amounts do not exceed the limits established in the treaty.
4) Reinsurance Premiums and Allowances
Also found in the Exhibits, the premium and allowance pages outline the terms by which the ceding company pays the reinsurer for taking on its share of the risk on a coverage. The terms covered here define the pay percentages or allowances, premium rate schedules to reference, and Joint Life calculation methods where applicable.
Reinsurance premiums are vital to a treaty review
The premium section of the treaty provides vital information regarding the financial agreement between the ceding company and the reinsurer. These pages detail not only the calculation method but the frequency (i.e. monthly, quarterly, annually) that payments are required. As part of a treaty review this section is used to validate that the premiums being received match the terms and methodology outlined in this section.
5) Rate Schedules
You can’t calculate premiums without rate schedules. Rate schedules, which usually follow the premiums page in the paper treaty, provide the rates per every age, duration, and class used in calculating reinsurance premiums. If you’re doing any premium testing on your reinsurance data or testing against your administrative system, you will need these numbers.
To validate premiums during a treaty review you need rate schedules
Rate schedules provide the underlying support for premium calculations. During a treaty review a comparison is made between the rate tables in the treaty and the rate tables in the reinsurance system. This test is a critical first step in the premium validation process.
6) Amendments & Addendums
Amendments and addendums are documents outside of the Articles and Exhibits that make alterations to the original treaty. An amendment changes any aspect of the original treaty effective the date shown on the amendment. For example, the ceding company retention could be changed by an amendment at any time. An addendum is an addition to the treaty, such as adding new plans, effective the date shown on the addendum.
PRO TIP: Amendments can significantly alter any part of the treaty and be added at any time, so make sure to first check if the details and dates of an amendment apply to your inquiry.
A review of amendments & addendums ensures all changes are captured and being administrated
Incorporating information from Amendments and Addendums into a treaty review is extremely important. Over time some or all the parameters of a reinsurance agreement can change. Effective treaty reviews require that all changes to the agreement be reflected in the testing to ensure that administration mirrors these changes.
More information on treaty reviews:
These components of a reinsurance treaty are key reference points for our team when conducting comprehensive treaty reviews. Learn more about our approach to treaty reviews here:
**Originally authored by Jennifer Agosta, updated by Mindy Epstein