- 13 - consideration that is less than the policy’s cash surrender value and (2) the policyholder terminates the policy before the initial consideration plus renewal profits exceed the cash value. The risk of investment is threefold; namely, the risks of credit quality, reinvestment, and disintermediation. Credit quality is the risk that invested assets supporting the reinsured business will decrease in value, which, in turn, may lead to a default or a decrease in earning power. Reinvestment is the risk that invested funds will earn less than expected due to a decline in interest rates. Disintermediation is the risk that interest rates will rise, and that assets will have to be sold at a loss in order to provide for withdrawals on account of surrender or maturing contracts. Investment risk may or may not be transferred to the reinsurer. Investment risk is fully transferred if the reinsurer receives the funds backing the block of policies to invest for its own account. If the ceding company holds the assets backing the reinsured block, the terms of the reinsurance agreement dictate whether the investment risk is borne by the ceding company or the reinsurer. There is generally no single accepted method of quantifying the risk of mortality or surrender, and there is no recognized Federal standard. Risk may be quantified based on: (1) The amount of the reserve for the reinsured policies; i.e., the present value of future benefits less the present value of future premiums determined on a statutory basis, (2) the facePage: Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Next
Last modified: May 25, 2011