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disagree. The reinsurance of older policies under the facts
herein resulted in a greater risk transfer than if the policies
had been new. In contrast to what commonly happens, the risk of
surrender increased as these policies aged. This was because the
policies carried surrender charges, which decreased over time,
creating an incentive to defer the surrender of the policies.
As Ms. Wallace testified, the surrender rates on policies of this
kind tend to be higher after surrender charges have been reduced.
Mr. Starr’s credible testimony also established that petitioner’s
risk of loss increased over time because the decreasing surrender
charges reduced a source of profit for petitioner.
This factor favors petitioner.
ii. Character of Business Reinsured
Coinsurance of yearly renewable term life insurance (YRTLI),
as contrasted to ordinary life insurance, generally does not have
a significant tax avoidance effect because coinsurance of YRTLI
does not involve the transfer of long-term reserves. Id. at
1063, 1984-3 (Vol. 2) at 317. In a typical reinsurance agreement
involving YRTLI, the parties negotiate each year's risk premium
that will be paid to the ceding company to cover the risk that is
transferred for that year. Because the reinsurer receives a
premium each year to cover the risk for that year, the reinsurer
does not establish long-term reserves.
The SPDA and SPWL policies at issue required one-time, lump-
sum payments of premiums on an up-front basis, and as a
consequence the policies were backed by relatively long-term
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