An Answer to One of the Life Insurance Industry's Most Costly Concerns
September 3, 2021
Jumbo treaty violations can cost a carrier millions of dollars and have a significant negative impact on the company's financial position. While they may not happen often, carriers that issue jumbo policies may not be fully aware of the level of risk represented by these policies. In 2020, we conducted a study and found that roughly 2 percent of all inforce policies involved potential jumbo violations. Across the industry, this equates to approximately $72B at risk.
In 2017, our ReShip (Reinsurance Study of Highly Insured Persons) analysis revealed that around 40 percent of jumbo policies were at risk of being in violation, and 80 percent of those were outside the contestable period. The level of risk this represents varies by carrier, but based on conversations with our members, we understand many have not budgeted for potential jumbo treaty violations.
What is a Jumbo Treaty Violation?
Jumbo limits refer to the amount of coverage inforce and applied for on an individual life for automatic reinsurance – generally $35-$65 million per person in the U.S. market. A breach occurs when a policy is issued that pushes the amount over that limit.
Jumbo Treaty Violations: Underwriting's Blind Spot
Underwriters are the first line of defense against jumbo treaty breaches. When they write policies with a high face value, underwriters will spend significant time and energy collecting evidence to ensure the amount offered is within treaty limits. This due diligence may include:
- Calling reinsurers to confirm and reserve capacity
- Confirming with the agent and applicant the amount inforce and pending
- Documenting the case, including any concerns and issuing amendments to ensure cases are being replaced or terminated
- Following up, post issue, by checking MIB Insurance Activity Index (IAI) and MIB Follow-Up Service (Plan-F) to make sure new policies are not being applied for
Despite the tremendous effort expended by underwriters, there are no guarantees, and many jumbo violations aren't discovered until the contestable period is over and a claim is made against the policy.
Late identification of jumbo violations often leads to tense moments as reinsurers and carriers discuss who is responsible for the violation and how to fund claims. These meetings are almost always elevated to the carrier's C-Suite as there is a lot at stake. The company may even invest extensive resources to prove they did their due diligence as they negotiate a settlement with the reinsurer.
Jumbo treaty violations have a significant impact on reinsurers, too. Based on conversations with the reinsurance community, it was estimated that inforce policies written over a ten-year period carried between $25-75M in potential violations and organizations spend two to eight million every year just managing potential jumbo breaches.
As accumulated wealth grows and more individuals take out higher value policies, the problem may be getting worse. In our ReShip analysis, we found that the number of jumbo breaches had increased from 4,079 in 2013 to 6,294 in 2017 for an increase of 54.3 percent.
TAI and MIB Tackle the Elephant in the Room
Jumbo violations have been a long-standing pain point in the industry and even made the top 10 list of concerns in a 2016 study conducted by RGA on life insurance fraud and abuse. Today, the due-diligence process remains time-consuming and error-prone even for the most experienced or well-trained underwriters. While insurers and reinsurers are aware of the jumbo treaty violation challenge, they aren't always cognizant of just how much risk potential violations represent to their organizations.
Two obstacles make researching potential violations particularly problematic for underwriters:
Lack of access to inforce data – An individual may take out a policy through several different carriers. Carriers typically don't share their policy data, and there is no central repository designed for this purpose.
Lack of visibility into pending applications – Even if the underwriter is able to discover all inforce policies, the individual may have additional policies pending.
By joining forces with TAI, the market leader in reinsurance software and consulting services, we believe we can provide an industry-wide solution to address both obstacles and resolve one of the life insurance industry's most costly concerns.
MIB IAI for visibility into pending applications - Many carriers already rely on MIB's Insurance Activity Index (IAI) to get an industry-wide view of an individual's application activity for the past two years. This database is the only database of its kind in the industry.
TAI for access to inforce data - We estimate that TAI does business with carriers representing 74% of all inforce policies in the US and processes approximately 90% of all inforce policies susceptible to a jumbo violation. TAI also offers the industry's only comprehensive inforce policy management software.
By combining the MIB Insurance Activity Index with data collected by TAI, we've created the only data solution in the industry providing insight into both inforce and pending application activity.
The MIB Jumbo Service
Simply providing access to these two data sources would help eliminate the potential for many jumbo treaty violations. However, by integrating the database into a common view, we're able to provide underwriters with a complete, real-time snapshot of an individual's total inforce and potential coverage. This service will dramatically reduce the time and hassle of researching potential jumbo breaches while simultaneously reducing the risk of a violation.
As with all MIB solutions, the MIB Jumbo Service was developed with participation from our industry partners. In Q4 2020, we launched an MVP program with six participating carriers and reinsurers to validate the solution and provide real-world feedback. When we ran a report against 4.5 million inforce data records from TAI and over 3 million application records from the MIB Insurance Activity Index, we identified hundreds of potential violations for each of the participating insurers.
The report helped convince these partners of the value of the solution, and they were able to provide vital insights into how to create a service that was easy for underwriters to integrate into their daily processes.
The MIB Jumbo Service is available immediately.
For more information about the program and how to join, contact MIB at email@example.com.