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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 face
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