Financial Crisis Reduces Life Reinsurance Premium Volume; But Demand For Cover May Rise As Insurers Seek More Protection
October 28, 2009
Copyright 2009 Crain CommunicationsAll Rights Reserved
Business Insurance
October 26, 2009
NEWS; Pg. 0018
1085 words
Financial crisis reduces life reinsurance premium volume; But demand for cover may rise as insurers seek more protection
COLLEEN McCARTHY
Demand for life and health reinsurance is expected to rise as direct writers look to relieve pressure on their capital after the financial crisis, observers say.However, a slowdown in the traditional life and health insurance market, due to the economic downturn, has reduced premium volumes for reinsurers. “Whole life premiums are down, life insurance sales are down, and variable annuities are down, so overall, the space of the direct writer is seeing less premium, and that’s translating into reinsurers having less volume to compete over,” said Robert Hafner, associate director for Standard & Poor’s Corp. in New York.In addition, the percentage of premiums ceded by U.S. life insurers—referred to as the cession rate—has declined in recent years, as insurers have retained more risk, experts say. Last year, the trend continued, albeit at a slower pace, with direct life writers ceding 35.2% of their new business premiums to reinsurers, compared with 36.1% in the prior year, according to a study by the Schaumburg, Ill.-based Society of Actuaries. Cession rates peaked in 2002 at 61.5% due to low pricing and insurers’ improved capitalization at the time. While cession rates are not expected to decline much further, some observers said they would have increased last year had reinsurers not been limited by their own capital constraints.“Reinsurers are life health companies as well, and we’ve had some of the same exposures that the primary companies have had,” said Donna Kinnaird, managing director of Swiss Re Life & Health North America in Armonk, N.Y. Despite the “strong” demand, “reinsurers could only provide so much capacity,” she said.There is no comparable data for reinsurance purchased by health insurers, but experts say their cession rates also are declining slightly.Meanwhile, cession rates for the group life and health market are relatively flat, experts say. The group market typically only cedes between 1% and 2% of its business to reinsurers, experts say. However, they too are experiencing lower premium volumes due to a reduction in workforce and employee payrolls, said Jim DePre, senior vp of Towers Perrin’s reinsurance brokerage business in Philadelphia.The industry is working to emerge from the financial crisis in which the life insurance industry as a whole suffered a severe blow in 2008. Reinsurers were not unscathed, but fared better than insurers, observers say. Direct life writers experienced steep losses on their life investment portfolios, and were forced to increase reserves to protect consumers from losses on variable annuities.“Reinsurers do not have the large amounts of equity-based products that large direct writers do” and that helped to reduce volatility, said William Pargeans, assistant vp in the life and health division of Oldwick, N.J.-based A.M. Best Co. Inc. Reinsurers also benefitted from their conservative investment strategy, as compared with the traditional market. In addition, most global reinsurers also write property/casualty reinsurance, and that diversification helped insulate them further, experts say.The relative strength of reinsurers, and the weaker position of the primary market, is providing opportunities for growth, observers say. Because the overall reduction in capital across the life sector is expected to drive up cedents’ demand for reinsurance, “those companies that have capital to deploy will likely see a boost,” said S&P’s Mr. Hafner. But, he noted, any significant uptick in demand likely will come in the form of portfolio transactions, rather than a higher volume of new recurring premiums.
A portfolio transaction involves a cedent passing on an entire block of in-force business to a reinsurer and can “generate a significant amount of capital relief with a single transaction,” Mr. Hafner said. Alternatively, new recurring premiums involve new policies being put on the books, and ceded to a reinsurer who has agreed to accept the business as written, he said.The reduction in capital also is likely to increase reinsurers’ pricing power for recurring business and portfolio transactions, experts say. “A reinsurance company may be looking at four or five portfolio transactions, but only have the capital to do one or two deals. So pricing on those transactions is going to be favorable, just because capital is still so precious,” Mr. Hafner said.Pricing on life reinsurance has been “relatively soft” and it is generally viewed as “competitive” due to a highly concentrated market that works to maintain market share, said Mr. DePre.However, as a result of the financial crisis, “there is a heightened focus on pricing and underwriting to conserve capital,” Mr. Pargeans said.Life reinsurers also are expected to seek out nontraditional risks to expand and sustain growth beyond the mortality and retirement savings segments. The sector is more actively supporting long-term care, critical illness, longevity, and health care risks, Mr. Hafner said. The growing proportion of retirees in developed markets also is expected to provide growth opportunities.On the group life and health reinsurance side, one of the biggest growth opportunities is the move toward “voluntary” products for non-medical employee benefits, observers say. As rising medical costs put pressure on employers, many have responded by cutting back on basic group life and disability benefits. To offset the cuts, many employers are offering employees the ability to voluntarily purchase the benefits through their insurance company. But, “not all primary insurers offer a voluntary product, so they are turning to reinsurers to partner up with,” said Mr. DePre.Atlanta-based Munich American Reassurance Co., a life reinsurance subsidiary of Munich Re, said reinsurance premiums from voluntary benefits has increased as much as 10% in the past year. “There is very strong demand both for reinsurance and for expertise in pricing the products,” said Steve Rulis, vp of group reinsurance at MARC.Meanwhile, expected changes in U.S. health care reform is driving a lot of primary insurance companies to diversify away from health care into other lines of business in an effort to “hedge against potential declines that may come as a result of legislation” said Dennis Arizin, senior vp of Towers Perrin’s reinsurance brokerage business in Philadelphia.“The public option is the wild card, and that could significantly change the landscape for health insurers,” he said.Copyright 2009 Crain Communications Inc. All Rights Reserved.
October 28, 2009
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