Yearly Renewable Term Plan of Reinsurance

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Yearly Renewable Term (YRT) Reinsurance

What it is

Yearly Renewable Term (YRT) reinsurance is a reinsurance arrangement where the ceding insurer transfers mortality (or morbidity) risk to a reinsurer on an annually renewable basis. The reinsurer charges a rate per unit of sum insured (e.g., per $1,000 of death benefit) that is reviewed and reset each year based on the insured block’s experience, updated mortality tables, and other risk factors.

YRT is commonly used for term life and group life products and for blocks where exposure or pricing uncertainty makes fixed long‑term reinsurance unattractive.

How it works

  • The ceding insurer cedes specified sums insured (individual policies or a portfolio) to the reinsurer.
  • The reinsurer charges an annual premium equal to the YRT rate × insured amount (often expressed per $1,000).
  • At each renewal (annually) the reinsurer can adjust rates to reflect actual claims experience, changes in mortality assumptions, expense loads, or portfolio characteristics.
  • Contracts can be written on a facultative or treaty basis. Treaty YRT provides an agreed framework covering a class of business; facultative YRT applies to individual risks.

Pricing drivers

Rates and renewals are influenced by:
– Age, sex, underwriting class and benefit amount of insured lives
– Product type (term, group, temporary coverages)
– Persistency and lapse experience
– Historical and recent mortality/morbidity experience
– Reinsurer expense and capital costs, and margin requirements
– Credibility of the experience (volume of lives/exposure)
– Market competition and reinsurer appetite

Typical contract features

  • Rate tables: published per‑$1,000 rates by age/sex/issue class used to price ceded premium.
  • Renewal provisions: timing and mechanics for rate changes (often annual).
  • Credibility rules: threshold exposures needed before full experience rating applies.
  • Profit commissions / experience refunds: adjustments when experience is favorable.
  • Caps or collars: limits on rate increases/decreases in a single renewal.
  • Stop‑loss or excess mortality features: protections that limit reinsurer losses above a threshold.
  • Termination and run‑off clauses: notice periods, commutation, and treatment of inforce business on termination.

Advantages

  • Flexibility: rates can be updated to reflect emerging experience, protecting reinsurer and ceding insurer from long‑term mispricing.
  • Quick capacity: enables insurers to write business without building long‑term reinsurance programs.
  • Appropriate for short‑duration products: aligns with risk horizon for term and many group products.
  • Simpler administration than full coinsurance for certain blocks (no transfer of reserves in many structures).

Risks and disadvantages

  • Rate volatility: renewal rates can rise materially if mortality deteriorates or if experience is adverse.
  • Renewal uncertainty: ceding insurer faces margin/earnings variability and potential expense to retain risk if rates increase.
  • Adverse selection and lapses: if healthier lives lapse disproportionately, remaining block may have worse experience, driving further rate increases.
  • Capital and reserve implications: frequent rate adjustments can complicate pricing and reserving.
  • Possible dependency on reinsurer decisions: rapid rate changes can affect insurer strategy and distribution.

Use cases

  • Startups or smaller insurers seeking capacity while they build pricing credibility.
  • Temporary cover or new product launches where long‑term mortality assumptions are uncertain.
  • Large, single or high-limit risks where reinsurer prefers annual review.
  • Group life or employee benefit plans where membership composition changes frequently.

Comparison with common alternatives

  • Coinsurance: transfers both premiums and reserves proportionally; more stable long‑term pricing but requires reserve transfers and more complex administration.
  • Quota share: proportional cession with fixed percentage—stable but may be less flexible.
  • Excess mortality / stop‑loss: reinsurer pays only for losses beyond a threshold—used to limit catastrophic or adverse mortality risk.
    YRT provides greater short‑term flexibility than coinsurance but less price certainty.

Practical checklist when negotiating YRT

  • Obtain transparent rate tables and renewal mechanics (how and when rates can change).
  • Include caps or glide‑paths to limit abrupt rate spikes.
  • Negotiate credibility thresholds and experience refund formulas.
  • Clarify stop‑loss layers and how claim spikes are treated.
  • Define data and reporting requirements, audit rights, and timing of payments.
  • Understand termination provisions and run‑off or commutation terms.
  • Model sensitivity: test outcomes for persistency, mortality deterioration, and large cohorts.

Example (illustrative)

  • Block: $10,000,000 sum insured (total face).
  • YRT rate quoted: $0.80 per $1,000 of face annually.
  • Annual ceded premium = ($10,000,000 / $1,000) × $0.80 = $8,000.
    If next year the reinsurer revises the rate to $1.20 per $1,000 due to adverse experience, premium would increase to $12,000—illustrating renewal volatility.

Key takeaways

  • YRT reinsurance offers annual flexibility and is well suited to term and short‑duration covers or where mortality uncertainty exists.
  • It shifts mortality risk to reinsurers but creates renewal risk for cedents; contract design (caps, stop‑loss, profit share) can mitigate volatility.
  • Insurers should model scenarios, tighten data/reporting clauses, and negotiate renewal protections before committing to significant YRT programs.