$201 Million Policy Could Be Good Omen
March 28, 2014 by Linda Koco
The eye-popping $201 million life insurance policy — now dubbed the “most valuable life insurance policy” by the Guinness Book of World Records — may be a sign that the big case market is reviving.
Reinsurers are seeing an increase in jumbo cases as the economy improves. That’s significant, because reinsurers are the companies to which the direct writing carriers turn for help in writing the cases.
If reinsurers are seeing more cases than previously, that means money is moving at the primary level. That’s a good omen for agents and advisors in the big case market and for others whose business swirls around big cases.
It’s not as if the super-wealthy are popping up everywhere. “The trend was actually higher pre-2008, prior to the economic downturn,” said Nate Johnson, vice president and chief underwriting officer at SCOR Global Life Americas in Leawood, Kan.
But now, with the slow economic recovery, “the industry is beginning to see a slight trend upward again in larger/jumbo risks,” Johnson said.
Michael Pado, president and chief executive officer of Auigen Reinsurance Company of America, Red Bank, N.J., is seeing it too. The increase is tracking with the growth of the ultra-wealthy population, he told InsuranceNewsNet.
Growth of the ultra-wealthy
That growth spans all the high-net-worth categories. In 2013, for example, the number of billionaires in the U.S. rose to 443 from 334 in 2008, according to WealthInsight. The multimillionaire category (people with over $30 million in net assets, excluding principal residence) is up too — to 44,934 individuals from 30,807 in 2008, the researcher said.
For the $25 million and up category (excluding residence), Spectrem Group found there were 132,000 individuals in 2013 — up from 84,000 in 2008. For the $5 million and up category, the 2013 numbers hit a record high of 1.24 million, up from only 840,000 in 2008, Spectrem said.
The $201 million case now deemed “most valuable” by Guinness is clearly outsized. Sold by Dovi Frances, managing partner of SG LLC in Santa Barbara, Calif., on the life of a well-known U.S. billionaire, it has unseated the previous Guinness record — a $100 million life policy sold in 1990 by Peter Rosengard from the United Kingdomon the life of a U.S. entertainment industry figure.
Why would any ultra-wealthy person want or need life insurance? Most jumbo cases are written for business purposes, Pado said.
One frequently-cited example is the case of the late Malcom Forbes, publisher of Forbes magazine and father of Steve Forbes, the current chairman and editor-in-chief of Forbes Media. Malcom died in 1990 with millions of dollars of life insurance in force. Reports differ over the total face amount he held at time of death — the range is from over $40 million to under $70 million — but virtually all sources agree the money enabled the family to keep Forbes magazine and other assets in the family, since the life insurance paid the estate taxes.
That was over 20 years ago, but today’s ultra-wealthy are still subject to estate taxes, so they buy life insurance.
Big case tips
Reinsurers have a few thoughts for agents and advisors who want to enhance the chances of their big cases being placed successfully.
The most important thing is to ensure there is control and coordination of the case as it moves through the underwriting process, Pado said.
“If it’s a $100 million case, it will likely be placed with a number of insurers and reinsurers, ideally with no pre-existing exposure to that life,” he said. “No one company has that much capacity available for one person — it’s just too risky.” Sometimes even the reinsurers’ capacity is taxed, so their own insurers — the “retrocessionaires” — may be involved too.
Typically, when an agent has a big case prospect, the agent goes to his or her distributor, or to a broader producer group when necessary. This is for assistance with gathering the necessary information and searching for direct carriers.
The distributor or producer group establishes a lead company, which will take the largest retention, say $20 million on a $100 million case, Pado said. The lead company typically coordinates the approach to reinsurers.
A structure like this helps to establish the control and coordination that Pado says is so essential.
Each of the other companies that participate in the risk will have a lesser retention, but all will check their own records to see if they have any additional exposure on that life. So will the reinsurers, when and if involved. (Typically, five or six reinsurers do get involved.)
“Primary companies often use the same reinsurer,” Pado noted. That means a reinsurer may have several requests on the same life, and a lot of coordination will be needed to ensure capacity is not exceeded.
Johnson of SCOR pointed out that the writing agent is not typically directly involved with the reinsurer.
However, Pado noted that the originating agent does need to keep abreast of the case via the producer group, thus helping to ensure that control and coordination is continuing.
This also helps ensure that the originating agent does not get forced out, he said, noting that “the agent has a good chance of staying with the case as long as the control is well established, and especially if the agent has a good relationship with the prospective policyowner or payer.”
The originating agent will be compensated according to the terms of the contract, he said.
“The highest probability of success for the case occurs when the parties act like a team,” he added.
Things to watch for
- This market requires full underwriting. The agent should be prepared to present the entire financial justification of the case, said Johnson. That includes providing an outline of the need for the ultimate total line in-force and applied-for, and supporting documents including any tax records and personal/business financial statements relative to the reason for the ultimate total line.
“In addition, the agent should be prepared for each company involved to require their respective age/amount underwriting requirements, as well as all pertinent Attending Physicians Statements.”
The case will go much smoother, Johnson added, if the agent provides all the pertinent facts upfront. That “will hopefully avoid any ‘surprises’ for all involved entities.”
- Cases can and do “blow up.” Johnson noted that anywhere from 7 to 15 or more direct companies can be involved in a case. “Implicitly that means that there may be more than one writing agent — as a matter of fact there may be competition amongst agents. Invariably that tends to make the process very complicated and prone to ‘blow up.’”
Blow-ups can also happen if there is not enough capacity at the reinsurer level, Pado said. It can happen if a lead carrier is not selected first, too. Or it can happen if the case is not approached in a way that establishes control. “If a blow-up occurs, you have to withdraw and start over.”
- Not all direct carriers can play. There are 900 to 1000 life companies but only the top 25 or 50 would be suitable as direct carriers on jumbo cases like this, Pado said. “The others are too small, don’t have the right products, or do not have good enough ratings.”
- It’s U.S. but it’s global. Jumbo cases on U.S. individuals are typically written in the U.S. by companies that are licensed to do business in the U.S, Johnson said. “But the reinsurers and retrocessionaires involved may be from all over the world, although they will be licensed to do business in the U.S.”
A few jumbo cases take years to close, but Johnson says the typical range is from six to 12 months.
