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How Well Capitalized Are The Unlockers of Capital?

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If reinsurers can unlock capital, as interviews suggest, then just how well capitalized are these unlockers of capital?

Those who follow the reinsurance market say that overall, this segment of insurance is well capitalized, although there may be a shift in that capital as consolidation occurs.

If new capital in the reinsurance market is becoming available because of off-shore reinsurance operations, then much of that capital is being directed to property-casualty and workers compensation lines of business, says Scott Machut, vice president-special risk reinsurance with ING Re in Minneapolis.

Although the p-c catastrophe reinsurance market is still hard, it may be showing signs of flexing, but that is not so for the life cat market, he adds.

One possible reason, Machut offers is that there is a greater familiarity with the risks associated with p-c cat risks than with life cat re risks.

But, in terms of life reinsurance that does not protect against catastrophic risks, Ron Colligan, a principal with Guy Carpenter, Norwalk, Conn., says that the industry is well capitalized.

Colligan says Guy Carpenter has been involved in the sale of cat bonds on the p-c side of the business and the concept could work on the life side because “mortality contingency is eminently more modelable than the property risk.”

However, he says the current availability of capital in the life reinsurance market is reflected in low prices and, consequently, life reinsurance would be used more than other ways to free capital such as securitizations.

That will continue to be true, Colligan explains, until there is a new and innovative way of securitizing. Until then, it would probably be more economical to reinsure, he says.

Overall, he continues, “capital enhancement is an extremely important part of what reinsurers offer.”

It relieves strain and takes the reserves down, and in essence, allows life reinsurers to be mortality managers, he adds.

In general, reinsurers assume lower mortality costs than direct writers because the blocks of business they reinsure are more diversified in terms of size, underwriting class and geographic region, Colligan continues.

Capital reserving can be quite enormous and although there may be a few large securitizations to ease that burden, overall, the cost of reinsurance is still cheaper, Graham Bancroft, senior vice president-reinsurance with Clarica Life Insurance Company, Toronto, concurs.

Not only are reinsurers easing financial requirements by assuming mortality risks, but they are also helping to more accurately pinpoint those risks, says Arnold Dicke, senior vice president and chief actuary with ING Re, Denver.

The more accurately you can pinpoint mortality, the lower the economic capital requirements, he adds.

And by assuming mortality risk, reinsurers are allowing direct writers to lock into mortality costs and smooth the volatility of returns they earn on capital, says Kurt Hagelman, senior vice president and chief marketing officer, Hannover Life Re, Orlando, Fla. Financial reinsurance is still the cheapest way to accomplish this, he adds.

As ratings become increasingly important, direct writers will look to reinsurers to help free up capital, Hagelman continues.

Rating agency analysts offered their own takes on how reinsurance figures into todays life insurance market.

With consolidation among reinsurers, there is a shift of capital with a greater weighting of capital concentrated in fewer companies, says Julie Burke, a managing director with Fitch Ratings, Chicago.

That consolidation, which has really become evident in the last five years, is resulting in a concentration of capital but since reinsurers are diversified by different product lines, capital deployed is being diversified, says Robert Riegel, managing director-U.S. Life & Health Insurance with Moodys Investors Service, New York.

The concentration of capital in the reinsurance business will be among about a half dozen competitors over the next few years, says Rodney Clark, director-financial services ratings, Standard & Poors Corp., New York.

That concentration of capital may make it more difficult for companies based in Bermuda to continue to offer a cost advantage realized through tax advantages over reinsurers with operations in the United States, he adds.

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 7, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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