The reinsurance of life insurance business in Canada has grown in magnitude to the point where in 1981 approximately 15% of all new sums assured landed with the reinsurers – both with companies that are exclusively reinsurers or with direct writers that actively solicit reinsurance or retrocession business. In addition to today’s size of the reinsurance industry, we have the rather open criticism of reinsurers both from the direct writing insurers and other reinsurers. It is now in vogue to blame the reinsurers for almost all adversity that befalls the life industry that cannot be allocated to the federal liberal party. From where did the reinsurance industry ascend to such notoriety?” is the question I felt needed answering.
To answer such a leading question, I started on a path, which I originally perceived as a simple collation of various direct writing companies’ experiences in reinsurance since inception of Canadian life companies. Through friendly persuasion I was able to elicit the assistance of Harry King, recently retired from North American Life and in most quarters deemed to be the most knowledgeable reinsurance historian. Harry approached several companies for historical anecdotes, early treaties, and any other relevant information that would help in the construction of a reinsurance history – hopefully void of bias and innuendo! Unfortunately for Harry and I this formal request for information proved in the majority of cases, fruitless. Excuses varied from “previous records destroyed” to “hopefully we can supply information in the near future”. As the near future dragged well past one year, I suddenly realized a complete yet concise history was beyond my grasp. I would like to acknowledge the contributions of Manufacturers Life’s reinsurance department and Mr. Gordon Beatty previously at Canada Life. Without their contributions, this project would have been infinitely more difficult.
THE EARLY YEARS
From Harry King’s former company came copies of a couple of treaties, which must be qualified as one of oldest treaties between Canadian life insurers. The first is between North American Life Assurance Company and the Ontario Mutual Life Assurance Company signed on June 15, 1883. This treaty provided automatic reinsurance from one to the other and vice-a-versa. In most respects this hand written treaty varies minimally from what would exist today between reinsurer and reinsured. The striking difference is that what was said 100 years ago on three pages now has been expanded through rather complex legal jargon to 36 pages or more. It was surprising to discover both companies agreeing to allow the same coinsurance commissions on each other’s business. The commissions used in this exchange were 60% first year and 10% thereafter regardless of whether the plan was permanent or term insurance – yes, Virginia term insurance has been around a long time (excuse the Charlie Willism!).
By 1887, the second treaty reflects a modern approach to reinsurance – it was typewritten. Fortunately for all involved, the treaty was a very concise bilateral agreement entailing a page and a half of wordings. This treaty between North American Life Assurance Company and Temperance and General Life Assurance Company of North America appears to have been on a modified yearly renewable term rate basis including a percentage of expenses in the first year. The original correspondence is still in the possession of Temperance and General, now called Manufacturers Life. (This treaty is difficult to comprehend for there appears to be a yearly charge based on the number and size of claims, but that is only a guess.)
A third representative treaty for the exchange of excess risk was between the Imperial Life Assurance Company and North American Life Assurance Company, signed on the 16th of December, 1899. This agreement, comparable to treaty of 1883 mentioned earlier, was a coinsurance contract. Both parties to the treaty agreed to commissions of 50% first year and 7% on renewals for ordinary life, limited pay life and term insurance of three years or more. On endowment policies of all durations the commission was 5% in the first year only. And to think, we in the industry believe aggressive coinsurance allowances from reinsurers are a product of the 1980’s! Simplicity still existed, as only two pages of wordings were required to cover all essential points of the agreement.
The term “gentlemen’s agreement” is often used to describe reinsurance affairs. It implies a trust on both parties’ part that each will be treated by the other in an honourable and fair fashion. After reviewing the early documents, I would conclude that a lot was left to the imagination in comparison with many of today’s long and sometimes uninterpretable treaties. In the brevity of early treaties, there was an obvious sense of security for both parties as the handshake was the bond that meant more than pages of dialogue. Has today’s desperate attempt by reinsurers to encompass all possible contingencies replaced the time honoured “gentlemen’s agreement”? The answer is obviously debatable but my guess would be that it has reached the point more words, and fewer hands. Clearly, there are circumstances today that prevail on the industry to document in treaty form our beliefs and expectations of reinsurance facilities. Frequent staff turnover in companies, frequent changes in reinsurers and more complex coverages and financing is but a few of today’s facts of reinsurance operations.
The “Model Reinsurance Agreement” was to the best of my knowledge the first example of a universally acceptable agreement to cover the transition of reinsurance in Canada. The model wording was produced by a group or committee representing the Canadian Life Insurance Officers Association (the forerunner of the C.L.I.A. and now the C.L.H.I.A.) in 1901. Like the later agreements (1938 Coinsurance Provisions and 1965 YRT Provisions) there was no official binding acceptance of this set of rules by the companies of the period. The 1901 agreement formed the foundation for the resolution of reinsurance disputes and the exchanges of reinsurance when no other formal reinsurance document existed between the disputers.
From correspondence reviewed, I would have to judge the early part of the 20th century as mundane as far as life reinsurance is concerned. The exchange of reinsurance went smoothly with very little involvement of exclusive (professional) reinsurers as we encounter today. Most, if not all, medium to large size companies were using each other’s retention or part thereof to cover large amounts of coverage on an individual case basis.
Bearing in mind the coinsurance allowances were generally equal for the exchange of excess risk, the only item left to debate was the premium per mil charged by the reinsured company. Letters written during this period imply very little fluctuation in premiums charged for various plans. When there occurred a significant difference, a written complaint was lodged with the ceding company by the reinsuring company. Probably a representative disagreement was the one between Mutual Life and Manulife in 1917: Mutual Life, the reinsurer argued that the premium per mil on a particular case should have been no less than $24.55. Manulife, the ceding company, countered with the price of $22.65 on the policy in question, which by the way was already in force. Over two months of correspondence did not seem to resolve the problem and the reader of the old files is left to wonder if Mutual Life or Manulife won or was an alternative reinsurer found who was more amenable to such a competitive premium being offered by Manulife. In comparison to the 1980’s we would find that the rate situation is resolved well before the case is even underwritten or at worst before an individual case is issued.
In 1922, the Ontario Equitable Life and Accident Insurance Company of Waterloo, Ontario entered the reinsurance field in a competitive fashion. Their letter to Manulife in February 1922 was the only true example of a company aggressively seeking reinsurance. They described their coinsurance allowances and YRT rates as “attractive and liberal”. The letter itself reflects a similarity to letters written today by a new reinsurer entering the Canadian market place. The following constitutes the heart of the letter:
“It is our practice to give very prompt service by wire and we have established satisfactory connections with quite a number of Canadian and American companies, who have been pleased with our facilities and arrangements.
We accept reinsurance without a formal treaty and in all cases where companies have given us business we have endeavoured to reciprocate.”
Reinsurance “watchers” will be startled to realize the Ontario Equitable offered carte blanche coinsurance allowances on a wholesale basis to all potential ceding companies solicited both in Canada and the United States. This certainly must confirm that there was a uniformity of premium rates within the industry that in no way exists in the later part of the 20th century.
Canadian companies expanded their horizon for more reinsurance and naturally traversed the border into the U.S.A. With the cooperation that existed in the 1920’s amongst Canadian companies, it would seem a natural progression to cooperate in a joint venture to solicit U.S. life reinsurance. The original treaty was referred to as a two party agreement providing automatic facilities for New York Life, the Mutual Life of New York, the Penn Mutual Life and the Union Central Life by the Confederation Life and Canada Life. The list of U.S. companies grew to six with the later addition of Equitable of New York and Equitable of Iowa. The Canadian contingent was expanded as well by the inclusion of Manufacturers, Imperial and Mutual.
Canada Life acted as the catalyst for the unusual treaty and in spite of the fact they had pulled out of New York State some years before they re-entered for the sole purpose of reinsurance. New York Life in turn was the figurative leader of the U.S. companies. Each respective leader in turn had agreements with its country cousins to share in the excess risk being offered. For example, at the point in time when only Canadian companies were involved, each assumed a percentage of the risk – Canada 42%, Confederation 16%, Imperial 17% and Manufacturers 25%.
The treaty in question was on a coinsurance basis with only minimal variances in allowances depending on which company was the direct writer. In fact, the range was less than 5% in the first year and zero thereafter. The automatic coverage was one times the ceding companies’ retention to a maximum of $300,000. This of course was for standard issues only and varied depending on age and mortality assessment. Interestingly, the amount was further restricted in the following ways:
a) For female lives the amount was restricted to $150,000,
b) For all term plans the schedule of automatic acceptance was limited to $150,000 (one-half the schedule),
c) For all term plans issued to females the restriction was one-third or a maximum of $100,000, and
d) The coverage automatically available was only applicable to cases written by the ceding companies’ own agent (implying no brokerage business!).
The close working relationship of the Canadian side of this unusual treaty expanded to encompass various other reinsurance requirements. First, we had a four party agreement to cover all direct written business of Canada, Confederation, Imperial and Manufacturers signed on May 12, 1924. That treaty was duplicated in April 1930 to provide reinsurance for the direct written business in U.S. dollars of the Canada, Confederation, Imperial and Mutual. The final link amongst these companies was a five-party treaty (Canada, Confederation, Imperial, Manufacturers and Mutual) covering all insurance issued outside the United States of America, by any one of the companies as well as to all business issued in the United States by the Manufacturers.
The above treaties representing a very active group of reinsurers flourished up until the outbreak of the Second World War and then faded into oblivion by the early 1950’s as the group gradually divided.
The available correspondence representing the first four decades of the 20th century leads me to surmise that most if not all companies were involved in assuming reinsurance. The list of companies included many who by the 1980’s were not involved in receiving reinsurance beyond the very rare case or not at all. Reciprocity was a large feature and the logistics of balancing reinsurance in with reinsurance out must have required a fine science of juggling accounts. With so many companies exchanging excess risk, the task of keeping abreast of each other’s plans and rates consumed a large amount of time. This is printed out in the numerous letters exchanged between London Life and Manulife during the 1920’s. These two companies were exchanging facultative coinsurance cases on similar allowances and thus went to great length to keep each other informed of new plans, wordings, etc. to ensure uniformity.
An article published in 1937 outlines the growth and magnitude of reinsurance in the early years. This same article describes the swiftness with which the reinsurance fortunes can and did change; a lesson well remembered in the 1980’s. I feel the article is a splendid dissertation on the historic early years and thus I am including the majority of the material entitled “A Survey of Reinsurance of Life Insurance in Canada” by J.G. Parker (Toronto) in the following excerpts:
“…. that this reinsurance should, in the great majority of cases, be obtained by contracts co-insuring all the terms and conditions of the original company’s contract rather than by the reinsurance of the excess risk on the renewable term plan.”
The reinsurance thus obtained proved to be profitable due to the comparatively favourable mortality and the relatively low expense of conducting the business. As a consequence several of the Canadian companies went beyond the borders of Canada seeking reinsurance, generally on the same terms as they had previously granted within their own group. This resulted in a marked growth in reinsurance received, particularly during the years 1920 to 1929.
The extent to which the business of reinsurance had grown is shown by the fact that during the year 1929 there had been received by the Canadian companies over 172 millions of dollars of reinsurance, an amount equal to 11% of the gross amount of business written by these companies in that year. There was in force at the 31st of December, 1929, over 774 millions of dollars of reinsurance constituting over 12% of the total amount of the business in force in Canadian companies.
The change in business conditions during the so—called depression years had a serious effect on the business of reinsurance in Canada. New reinsurance diminished to about one-third of the former amount due to the great decrease in the number of large policies being purchased. Not only did fewer large policies offer, but also the companies became decidedly stricter in their selection of large risks, and the possibility of over-insurance made companies look somewhat askance at applications for amounts of insurance, which previously would have been accepted and reinsured. Moreover, the changed business conditions seriously affected existing reinsurance by producing an excessively high rate of termination among large policies and also producing a large increase in the rate of mortality due principally to deaths arising from cardiac impairments and from suicide.
The extent to which the business of reinsurance was affected by these changes is clearly shown by the fact that during the year 1935 only 26 millions of dollars of reinsurance was received, or only 15% of the amount received in the year 1929. This was, however, a substantial amount as compared with the total new business written by the Canadian companies, being 4% of the gross business for that year. Moreover the reinsurance in force had decreased from 774 millions of dollars at the end of 1929 to 537 millions of dollars at the end of 1935.
As has been stated, while the Canadian companies originally obtained their reinsurance mainly from their own group, about the year 1920 there began to be received an increasingly large volume of new insurance from United States companies. A comparison of the amount of reinsurance ceded by the Canadian companies themselves with the amount of reinsurance actually received affords an approximation of the large amount of business, which came to Canada from sources outside of the Dominion.
Of the 774 millions of dollars of reinsurance which was in force at the end of 1929, approximately $360 millions had been ceded by the Canadian companies themselves, and of the 172 millions of dollars of new reinsurance obtained in that year, $70 millions originated from Canadian business.
It would therefore appear as if $414 millions of the reinsurance in force or over 53% of the total, had come to Canada from outside companies, and of the new reinsurance received in that year $102 millions, or 60% of the total, had been obtained from sources outside the Dominion, mainly from companies situated in the United States.
At the end of the year 1935, the figures, while reflecting the decrease in business received and in force, also showed a considerable change, particularly in the division of the reinsurance received. Of the 537 millions of dollars of reinsurance in force at the end of that year $265 millions had been ceded by the Canadian Companies but of the $26 million of reinsurance received $17 millions had been ceded from within their own group. While, therefore $272 millions, or about 50% of the reinsurance business in force originated outside of Canada, only $9 millions, or 35% of the reinsurance received came from without the Dominion. With the revival of business, applications for large amounts of insurance are again being made, but it is doubtful if the Canadian companies will be eager to accept any large amount of reinsurance, as in former years, from outside sources but will be more likely to content themselves mainly with reinsuring such risks as are undertaken by their own group.
The reinsurance transacted between the Canadian Companies has been largely co-insurance, the reinsuring company guaranteeing all of the benefits under the original company’s policy. In many cases no special reinsurance contract exists, the companies being free to offer the reinsurance where, they might see fit and possibly where there might be some opportunity of securing reinsurance in return. In all such cases the papers concerning the risk are forwarded to the reinsuring company for its acceptance or declension. Under these circumstances all matters such as commissions, expense allowances, etc., in regard to each individual case are arranged at the time that the reinsurance is submitted. On acceptance a copy of the original company’s policy is forwarded to the reinsuring company to have endorsed thereon a clause guaranteeing to the ceding company the benefits under the original policy and this document constitutes the reinsurance contract applicable to this particular case.
“The agreements further provide for certain types of risks to be submitted facultatively to the various companies in the group. Such cases are infrequent and usually involve some special hazard not encountered in the ordinary risk. Where facultative reinsurance is offered all of the papers are forwarded to the reinsuring companies for acceptance or declension, with full particulars of the action of the original company and the amount that it proposes to accept at its own risk. On acceptance the reinsurance proposal is completed in the usual way.
“In general the mortality experienced by the companies accepting reinsurance has been as good as the general mortality of the original company ceding the business. This is particularly true of the reinsurance ceded by the Canadian companies themselves, of business underwritten by their own agency staffs. Unfortunately a very heavy death rate was experienced for about three years following the year 1930 in that reinsurance which originated outside of Canada. It was composed mostly of reinsurance on lives carrying very large amounts of insurance, or what was termed “jumbo risks”. The two principal causes of death in this group of cases were, as has been stated, cardiac impairments and suicide.” (Emphasis added).
In Canada the companies in general arrange all of their reinsurance with Canadian companies, or with those, which are registered in the Dominion. In this way in preparing their annual statements of account they are allowed to deduct from their liabilities the reserves on the amount of the policies that they have reinsured. In business which originates outside of the Dominion of Canada and under which deposits of reserves or other deposits have to be maintained in the country where the business originates, reinsurance may be arranged with companies not registered in Canada and the reserves on such business may be deducted from the total liabilities of the company in making up the annual report for the Dominion.
In addition to the co-insurance contracts, of which a general description has been given above, some reinsurance in Canada has been affected by means of reinsurance agreements providing for the reinsurance of the net amount at risk in each year under a Yearly Renewable Term policy. (Emphasis added). The amount at risk in any year, is the amount first ceded by the original company, decreased each year by the reserve which the original company accumulates under a like amount of the original policy. The premium is usually a net premium, making allowances for initial expenses and for the initial favourable mortality due to selection by means of an especially low rate of premium in the first policy year, generally 50% of the ultimate rate. Under such agreements the same arrangements are usually made with respect to automatic coverage as have been described under co-insurance agreements. The reinsurance contracts are non-participating, without surrender values, providing for an amount of insurance decreasing yearly covering the risk of death.
The experience under this type of reinsurance has been favourable, especially where the reinsurance was obtained from companies with a small limit and where as a consequence the business ceded included a normal group of average lives. Where, however, a group of large insurers were included in the reinsurance the experience has been unfavourable, the same as has been the experience under co-insurance of this same class of risk. (Emphasis added).
The outstanding feature of the reinsurance business in Canada is the case and expedition with which reinsurance may be arranged among the Canadian companies. A committee of Medical Directors and Actuaries of companies associated with the Canadian Life Officers Association has met periodically over a period of many years and has done a great deal to promote uniformity of practice in the selection of risks. Laws governing policy conditions are in force throughout the various Provinces of Canada and ensure uniformity of policy contracts in their essential provisions. Agency contracts, while differing widely in maximum commissions payable to the agent, yet are in many respects similar, making it quite feasible to arrange satisfactory commission and expense scales applicable to reinsurance. A committee of those in the various offices having charge of the settlement of claims meets regularly to discuss their various problems ensuring a consistently uniform practice in this regard among the various companies. Similarly there exists a practical uniformity in the method of reinstating lapsed policies and in the rules governing changes of policy contracts. “Consequently it is only natural that reinsurance should be easily arranged amongst the Canadian companies themselves and the favourable experience of the past years would indicate no change in the practice which has been so consistently of value in the expeditions and profitable handling of excess risks in the life insurance business of Canada.”
The above article is an excellent reference on an era that was the same as today yet different. Concern with pricing and mortality was expressed yet not in an overly cautious way; similar to the early 1980’s when we have the same concerns. This was the time of no licensed, foreign domiciled, predominantly European reinsurers. The element of competition seemed to be missing in its current exaggerated form as the literature from the early days portrays more reciprocal agreements. The competitive aspect of reinsurance was secondary to the insurers primary intent to cover excess risks at a price that both the direct writer and reinsurer were comfortable with as representative of the risk. Because of the duality of numerous treaties, the reciprocity feature also allayed any concern over possible adverse pricing. The premiums and volumes that were exchanged represented approximately 7% or less of all life insurance in Canada. Of the new business issued in the latter years of the decade of the 1930’s only in the region of 5% was subject to reinsurance.
The growth of exclusive reinsurers in Canada was in an embryonic stage and a future article will try to document the growth to maturity of the exclusive reinsurers of the 1980.