Best’s Special Report: Consolidation Narrows Reinsurance Options for U.S. Life/Annuity Insurers Despite Increased Appetite

OLDWICK, N.J.--(BUSINESS WIRE)-- U.S. life/annuity insurers have increased the aggregate face amount of policies ceded to reinsurers by 83% since 2006, to $28 trillion, although a recent A.M. Best survey found that reinsurance in the life/annuity sector is increasingly being used as a risk management tool with capital management benefits a secondary factor. A new Best’s Special Report, “Consolidation Narrows Reinsurance Options Despite Greater Reinsurance Risk Appetite for L/A Insurers,” notes that many life/annuity companies view the reinsurers they do business with as business partners, and that half the survey respondents stated that the terms and conditions of the reinsurance contract were a more important consideration over price and security.

Ongoing consolidation in the U.S. life reinsurance segment has resulted in a more concentrated market, with the majority of business spread among five major players. As a result, counterparty concentration has grown as a concern for direct writers and new entrants to the life reinsurance market likely would be welcomed. However, the U.S. life reinsurance market presents significant barriers to entry, which A.M. Best believes adds some stability to the market.

The use of captive insurance companies to aggregate and manage insurance risks has increased as well, particularly when reinsurance is not reasonably available. While collateralized facilities are available, life/annuity respondents tend to favor traditional reinsurance arrangements. Differing collateral requirements across jurisdictions can lead to market disruptions, especially if a particular jurisdiction has more favorable provisions; however, the recently agreed upon covered agreement between the United States and the European Union removes collateral requirements for EU reinsurers operating in the United States, subject to certain solvency standards being met.

According to the report, life/annuity insurers cede the majority of their business to U.S.-domiciled reinsurers, but approximately 30% moves offshore. Cedents may cede business to U.S. companies/reinsurers, but in many cases the large multinational reinsurer will cede significant business to affiliates outside the United States for their own capital and tax efficiencies. Barbados housed the most business in 2016 (9.5%), followed by Ireland (7.0%) and Bermuda (4.7%).

A.M. Best believes reinsurance plays an essential role in the risk-spreading process and provides insurance companies with varying degrees of financial stability. Broadening reinsurer diversification and maintaining consistent communication with their chosen reinsurers are also avenues of risk management. Limiting the amount of risk per reinsurer and using reinsurers that meet stated criteria and objectives are also beneficial risk mitigation tools. A.M. Best expects rated insurers to continue measuring and monitoring performance and counterparty risk as an ongoing risk management control function.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=269626.

A.M. Best is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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Source: A.M. Best