The Life Reinsurance Business Is Entering A New Phase
Until mid-2001, a buoyant life reinsurance industry seemed to have it all–growth, favorable claims results driven by continued mortality improvements, and increasing revenue and profits.
Now, the boom is leveling out, for reasons that range from weaker mortality results to what might be a new market equilibrium for the amount of risk that insurers retain and cede to reinsurers.
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The life reinsurance industry in the 90s was characterized by rapid growth. Total face amount of recurring new business increased from $156 billion in 1972 to $985 billion in 2000. The percentage of new life insurance ceded to reinsurers by direct writers more than quadrupled from nearly 14% to almost 62% over the same period. Life reinsurers basked in the resulting revenue and earnings growth. The prospects for the U.S. life reinsurance industry looked very bright.
Several factors fueled growth. Insurers saw attractive pricing by reinsurers as a means to substitute a lower fixed cost for their own higher (and non-guaranteed) mortality assumptions. Reinsurers were bullish on future mortality improvements and the impact of new preferred classes with tough underwriting guidelines. Tightened policy illustration controls encouraged insurers to cede mortality risk to reinsurers to be able to show better policy projections.
Life reinsurers also expanded their offerings to include assistance with developing and launching new products. This reduced time to market and helped insurers meet the need to provide their distribution force with competitive products. In return, the reinsurers assumed a portion, often the majority, of the mortality risk on the product.
However, over the last 12-18 months things started to change. After years of growth, the U.S. life reinsurance market shrank by 5% in 2001. The cession percentage dropped by about 3%. Mortality results weakened, with some public reinsurers reporting poor claims experience in 2001 and 2002.
What happened to cause this seemingly abrupt turnaround for an industry that was on a roll just short months ago? And where does the U.S. life reinsurance industry go from here?
Certainly the terrorist attacks of 9/11 had a claims impact but didnt lead to the changes in the life reinsurance market.
During the late 90s, life reinsurers had a more aggressive view on mortality risk than insurers. Insurers seized this opportunity to turn mortality into a “profit center.”