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Reinsurance programs provide payments to health insurers to help offset the costs of enrollees with large medical claims. Today insurers will pass this subsidy on to consumers, so this program will reduce premiums (in aggregate) by roughly the amount of the subsidy. Ex: In a state where total annual premiums in the individual market amount to $1 billion, a $100 million reinsurance program will reduce premiums by about 10%. In some cases, a reinsurance program can also make insurers more willing to remain in or enter a state’s individual market.

In addition, since the ACA requires insurers in the individual market to accept applicants regardless of health status or pre-existing medical conditions, insurers may try to use tactics such as benefit design or marketing efforts to avoid enrolling people with high-cost medical needs. Along with risk adjustment, these programs can reduce insurers’ incentives to do so.

How do reinsurance programs work?

There are various definitions for this concept. Many states have modelled their programs on the temporary federal program. It provided reinsurance payments to individual-market plans when their annual cost for an enrollee exceeded a specified amount, called the “attachment point.” Those payments covered a portion of plan costs between the attachment point. And a limit called the “reinsurance cap,” above which the insurer stopped being eligible for its payments.

The federal program was an “attachment point model,”. An alternative approach is a “condition-based model,” in which reinsurance payments are made only for specific high-cost conditions.

Reinsurance Options at the Primary Insurer’s Disposal

The primary insurer is the insurance company to which one submits a life insurance application. There are mainly two basic and broad options the primary insurer has when it comes to this.

  1. Automatic Reinsurance 
  2. Facultative Reinsurance

Automatic Reinsurance

This is the ability of the insurance company to automatically shift some portion of a policy’s guarantees onto a reinsurer. The primary insurer and the reinsurer enter into an agreement that gives the primary insurer authority. That is to make approval offers on behalf of the reinsurer given certain circumstances and providing the primary insurer practices underwriting within certain guidelines.

Facultative Reinsurance

This is an agreement with the primary insurer to send a case to the reinsurer for consideration. Under facultative agreements, the reinsurer is under no obligation to accept the risk. A practice that is growing in popularity among some insurers is to skip facultative reinsurance unless specifically asked.

The logic behind this is that the underwriting department at the primary insurer knows the risk appetite at the reinsurer(s) well enough to know when they’d be likely to accept a risk and when they’d be likely to deny it. There may be some prudence in specifically requesting facultative reinsurance–or at least discovering.

Types of Reinsurance

There are two main types of insurance type. The two main categories are,

  1. Proportional
  2. Non-Proportional

Proportional Reinsurance

This type typically takes either the form of a stand-alone additional policy that would indemnify the loss incurred by the primary insurer and coinsurance meaning the primary insurer and reinsurer divide responsibilities between them to back all of the benefits of the policy. This includes the reinsurer’s need to build part of the cash value life insurance policy’s reserve and pay dividend or interest earned by the policy. In the event of a loss (claim) both companies would then share, in the preset proportion, in indemnifying the beneficiary to the policy.

Non-Proportional Reinsurance

Non-proportional reinsurance is a much more common and a much more developed practice in the Proper and Casualty insurance businesses. It’s mostly concerned with the practice of preventing macro-like losses from larger/systemic type risks of loss.

In Practice

Mechanically reinsurance is merely a mechanism that allows insurers to more prudently mitigate the risks they face each day by being in the business of absorbing risks for families and businesses. The practical ramifications of having such an option on the table are subtle but important to note.

And also, there are many articles related to insurance protection in and


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