What Is the Yearly Renewable Term Plan of Reinsurance?

The yearly renewable term plan of reinsurance is a type of life reinsurance where mortality risks of an insurance company are transferred to a reinsurer through a process referred to as cession.

In the yearly renewable term plan of reinsurance, the primary insurer (the ceding company) yields to a reinsurer its net amount at risk for the amount that is greater than the retention limit on a life insurance policy.

This plan is a reinsurance instantiation of a yearly renewable term (YRT), which consists of one-year term policies that are renewed annually.

Understanding the Yearly Renewable Term Plan of Reinsurance

Reinsurance allows insurance companies to reduce the financial risks associated with insurance claims by spreading some of the risk to another institution. Therefore, a yearly renewable term plan of reinsurance allows the primary insurance company to spread some of the risk involved in a life insurance policy to another institution.

The amount transferred from the primary insurer to the reinsurer is the net amount at risk, which is the difference between the face value and the acceptable retention limit determined by the ceding insurance company. For example, if a policy's death benefit is $200,000, and the ceding company determines the retention limit to be $105,000, then the net amount at risk is equal to $95,000. If the insured dies, the reinsurance pays the portion of the death benefit that is equal to the net amount of risk—in this case, the amount above and beyond $105,000. When setting up a reinsurance agreement, the ceding company will prepare a schedule of the net amount at risk for each policy year. The net amount at risk on a life insurance policy decreases over time as the insured pays premiums, which adds to its accrued cash value.

For example, consider a whole life insurance policy issued for a face value of $100,000. At the time of issue, the entire $100,000 is at risk, but as its cash value accumulates, it functions as a reserve account, which reduces the net amount at risk for the insurance company. Therefore, if the cash value of the insurance policy rises to $60,000 by its 30th year, the net amount at risk is then $40,000.

Once the ceding company calculates the net amount at risk each year, the reinsurer develops a schedule of yearly renewable term premiums for reinsurance based on this schedule. The reinsurance premiums paid by the ceding company vary based on the policyholder's age, plan, and policy year. The premiums are renewed yearly under the renewable term reinsurance policy. If a claim is filed, the reinsurer would remit payment for the assumed portion of the policy's net amount at risk.

How Yearly Renewable Term Reinsurance Is Used

Yearly renewable term (YRT) reinsurance is typically used to reinsure traditional whole life insurance and universal life insurance. Term insurance wasn't always reinsured on a YRT basis. This was so because coinsurance made for a better match of reinsurance costs with premiums received from the policyholder on level premium term products. It also passed the risk of the adequacy rates along to the reinsurer. However, as alternative capital solutions have become more popular, YRT became a more popular method of reinsuring term insurance as well.

YRT is usually the best choice when the goal is to transfer mortality risk because a policy is large or because of concerns over claim frequency. YRT is also simple to administer and popular in situations where the anticipated number of reinsurance cessions is low.

YRT is also good for reinsuring disability income, long-term care, and critical illness risks. However, it does not work as well for reinsurance of annuities.

Since YRT reinsurance only involves a limited amount of investment risk, little persistency risk, no cash surrender risk, and little or no surplus strain, reinsurers may have a lower profit objective for YRT reinsurance. YRT can thus usually be had at a lower effective cost than either coinsurance or modified coinsurance. As long as annual premiums are paid, the reserve credit is equal to the unearned portion of the net premium of a one-year term insurance benefit. Yearly renewable term insurance normally does not provide reinsurance ceded reserve credit for deficiency reserves.