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.
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.”
Clearly, an imbalance in perceptions about future mortality cant go on forever. One side will turn out to be right, causing the other to re-evaluate its view of what constitutes a fair price.
Another major contributor to the reinsurance boom was the need for relief from Triple-X reserves. The new 2001 CSO table will reduce strain, and the need for reinsurance for this purpose will diminish.
Rampant growth had to end sometime. Market equilibrium in the cession percentage will be reached, and the growth in the life reinsurance market will fairly closely align with growth in the life insurance market. We have quite possibly reached this point, with a cession percentage around 60%-65% being a reasonable long-term expectation.
Life reinsurers have been seduced by double-digit growth rates. As noted above, this growth already slowed dramatically in 2001; the industry will not return to those heady days without a fundamental change in growth rates in the U.S. life insurance market.
Life reinsurers expense ratios will come under increased pressure as expenditures continue on their upward curve but revenue growth flattens. The industry will have to tighten its belt and learn to live in a low-growth, slow-growth environment.
In the late 90s, the concentration of life reinsurance market share among the top five companies increased, from just over 50% in the mid-90s to about 70% by the end of the decade. Given the current uncertainty in the market, this trend will continue.
Insurance companies will increasingly look for life reinsurers who offer knowledge and expertise, and are interested in a long-term mutually beneficial relationship.
Life reinsurers are facing increased scrutiny from shareholders, parent or holding companies, and rating agencies. These forces will increase focus on bottom-line earnings and return on equity rather than top-line growth.
The life reinsurance industry is undergoing change and uncertainty, but it remains well capitalized and financially strong. Customers can expect to see continued strong competition among a number of quality competitors. For the informed and disciplined player, it remains an attractive market.
is President of ING Res Individual Life & Health Operation, based in Denver. ING Re is a core business of ING North America Insurance Corporation and part of ING Group. His e-mail address is jim.senn@ING-RE.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, December 30, 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.