Managing life risk options: Unable to offer umbrella catastrophe coverage to corporate customers, direct writers may instead partner with reinsurers on accidental-death carve-outs. (Underwriting Insight: Life/Health).

In response to a continued hard market in catastrophe coverage, carving out the accidental-death portion of group and individual life insurance emerges as an innovative and effective way to help insurers manage their net risk retentions for accidental death--while meeting the protection needs of their corporate clients.

While group life reinsurance prices generally have held steady since Sept. 11, 2001, catastrophe coverage costs have escalated dramatically. Higher prices and limited availability help make the lack of catastrophe coverage a significant, and potentially long-term, gap in risk management strategies. Insurers are faced with a choice of either paying much more for coverage, or going without it.

Accidental-death carve-out can be a practical remedy for moderate-sized companies. It allows direct writers to retain the more predictable mortality risk, while the reinsurer shares losses related to accidental death on a quotashare basis, with a single-occurrence cap of $10 million to $20 million. For example, for a group customer with coverage needs of $100 million, the direct writer might quota share its net retention 50/50 up to a single-occurrence limit of $20 million, and then seek traditional catastrophe coverage for the remaining $80 million. The insurer ends up reducing accidental-death exposure, but also sharing some of the profits. By carving out only the accidental-death portion, however, the insurer still preserves its profits on the remaining portion of the mortality risk.

Although many of these reinsurance programs limit losses on a per-occurrence basis, they can provide meaningful protection to the direct writer. The carve-out reduces the overall need for catastrophe coverage, which, beyond its costly price tag, is limited in what it now provides. Usual catastrophe exclusions include nuclear, chemical and biological acts of terrorism--all realistic concerns. In the accidental-death carve-out, the reinsurer is, in effect, offering coinsurance alongside the direct writer.

Underwriting a carve-out of this kind includes reviewing a company's historical claims data for accidental death and an experience analysis comparing historical-claims costs vs. industry norms. Increasingly important in evaluating and managing group life insurance risk is the availability of data about employee locations.

In fact, the decisions made by the insurer and reinsurer in assessing whether to share risks in this new way depend largely on each organization's appetite for risk seen through this new prism--concentration of risk, ZIP code by ZIP code, block by block, and building by building.

Here, life insurers and their customers can learn from the property and casualty marketplace, where insurers not only know the addresses of insured buildings, but also the details of construction, operations, emergency systems and market value. Perhaps it's an easier order for property/casualty insurers since buildings don't pick up and relocate, as many corporate employees will do during the course of a year. Knowledge about employee locations is now essential to determine risk.

Clearly, location data is becoming essential to underwriting and to accurate pricing of coverage. Lack of concentration-of-risk data might soon make a deal untenable because insurers and reinsurers will increasingly manage their exposure by building, not necessarily by corporate client. Within the accidental-death carve-out, claims experience, employee location and concentration come together to drive pricing. This, in great part, influences whether a company's business fits within the reinsurer's risk tolerance.

Interestingly, more knowledge about concentration risk across their business might lead some insurers to decide to keep more risk. Gathering and analyzing data about their clients' geographic distribution can allow direct writers to more accurately decide what risks, and profits, to retain. With a full risk inventory by location, an insurer can better design its overall risk-management strategy. In the meantime, while the marketplace is still adjusting to the costs and limits of catastrophe protection, the accidental-death carve-out allows insurers to retain the more predictable mortality risk while partnering with reinsurers for a reasonable hedge. No accidental-death carve-out product is poised to replace the full and affordable umbrella of catastrophe coverage that disappeared after Sept. 11, 2001, but it appears to be a viable strategy to help direct writers manage their net retained risk.

Scott Machut, a Best's Review columnist, is vice president, Special Risk Reinsurance, for the ING Re Group Accident and Health Reinsurance operation in Minneapolis. He can be reached at [e-mail].