Yearly Renewable Term Plan of Reinsurance

A yearly renewable term plan of reinsurance is a type of life reinsurance where mortality risks are transferred to a reinsurer. In the yearly renewable term plan of reinsurance, the primary insurer (the ceding company) yields to a reinsurer its net amount at risk (the difference between the face value and the cash value of a life insurance policy) for the amount that is greater than the retention limit on a life insurance policy to a reinsurer. If the insured dies, the reinsurance pays the portion of the death benefit that is equal to the net amount of risk. Also called yearly renewable term (YRT) or risk premium reinsurance basis.

Reinsurance allows insurance companies to reduce the financial risks associated with insurance claims by spreading some of the risk to another institution. 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 premium paid by the ceding company for the reinsurance varies based on the policyholder's age, plan and policy year.

Yearly renewable term reinsurance is typically used to reinsure traditional whole life insurance products and for universal life. Term insurance wasn't always reinsured on a YRT basis. This is 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. As alternative capital solutions have become more popular, YRT became a more popular method of reinsuring term insurance.

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. Therefore, YRT can 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.