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surrender, and (3) excess mortality. The 1989 Agreement involved
the transfer of significant risks from excess mortality, excess
surrender, and investment. With respect to the risk of
surrender, this risk increased as the underlying policies aged.
The insurance policies underlying the 1989 Agreement contained
surrender provisions that increased the likelihood of surrender
as the policies aged.
The 1989 Agreement obligated petitioner to pay Guardian a
death benefit equal to the death benefit paid by Guardian on the
portion of the contract reinsured so long as the 1989 Agreement
was in effect. The 1989 Agreement also provided that petitioner
would pay Guardian a surrender benefit equal to the surrender and
matured endowment benefits paid by Guardian on that portion of
the contract reinsured, so long as the 1989 Agreement was in
effect. The 1989 Agreement provided no way for petitioner to
escape from actual losses in the event of Guardian’s insolvency.
The primary method petitioner had to recover the $1 million
ceding commission in the 1989 Agreement was through the profits
of the business. No provision in the 1989 Agreement guaranteed
that the reinsured business would be profitable or that
petitioner would in fact recover its ceding commission.
Petitioner had the risk under the 1989 Agreement of losing more
than its $1 million ceding commission. Petitioner had 100
percent of the risk of claims exceeding revenue. Petitioner
could lose money if either the mortality of the insureds or the
rate of surrender under the reinsured policies turned out to be
higher than predicted. If enough policies terminated through
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