Retrocession Market Ebbs, But Some See Areas Of Opportunity

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The retrocession supply is declining for life reinsurers with the exit of several reinsurance carriers, due to losses and constraints on capital, industry experts say.

Retrocession is reinsurance for the reinsurer, allowing the reinsurer to spread risk it has assumed from a direct writer.

These forces have made reinsurers either focus on their core business or exit the market, observes Andrew Kligerman, an analyst with UBS Warburg, New York.

“Purchasers are requiring more collateral, which is making it more difficult for retrocessionaires to write business,” Kligerman says. “And rating agency capital pressures are factoring into this equation.”

Industry officials agree that the reinsurance market is near capacity, and consequently, there will be less growth in the retrocession market.

“Many direct companies have reinsured up to 90% of new business, so now it is hard to cede more,” comments Claude LaPointe, vice president of life reinsurance for RBC Liberty Insurance, a subsidiary of the Royal Bank of Canada, Toronto. “So I dont think there will be growth in the new future.”

However, some executives in the industry see opportunities in the retrocession market, however.

“I think there are some interesting growth opportunities,” says Mike De Koning, managing director of life reinsurance for Manulife Financial Corporation, Toronto.

Although organic growth in the market is declining because of industry consolidation in increased retentions by life carriers and reinsurers, that can be a good thing for those carriers that remain, he says.

“The underlying life reinsurance market is hardening, and that goes in our favor as more companies are facing capital constraints,” De Koning says.

He sees market opportunities opening up for Manulife as a result of increased industry focus on group concentration situations, such as in corporate-owned and group life insurance.

Ron Laeyendecker, vice president of life insurance markets, Great West Life and Annuity Insurance Company, Winnipeg, Canada, says his companys retrocession business has grown, at least in part because it has focused on steadily growing market segments.

“We have not pursued the term market,” he says. “We look for whole and universal life.”

Laeyendecker also expects his company to benefit from a continued consolidation of reinsurers.

“For instance, if Swiss Re acquires two or three other reinsurers, they are going to have to lay off a lot of that business,” he explains. “So you see fewer and fewer retrocession outlets, and thats why we are asked more and more to quote on pools.”

Laeyendecker also anticipates an increase in the face amount of policies, which will provide additional opportunities for retrocession.

“The general level of inflation of earnings and wealth will drive up face amount of policies,” he says.

That, he adds, will cause retroceding companies to increase their retention limits.

David Atkinson, chief operating officer of the Reinsurance Group of America Inc., St. Louis, estimates that life reinsurance industry revenues could grow at 15% over the next three to five years.

In a recent teleconference sponsored by UBS Warburg, Atkinson said a strong demand for reinsurance would be driven by primary writers looking for capital relief from Triple-X business and other statutory pressures.

The Valuation of Life Insurance Policies model regulation, also known as Guideline Triple-X, establishes reserving requirements for nonlevel premiums for term and universal life products.

In that same teleconference, however, Chris Stroup, CEO of Swiss Re Life & Health North America, said he expects the North American life reinsurance market to grow less than 10% annually, based on cession rates remaining around 60% and primary premium growth at below 10%.

However, some life reinsurers could grab considerably more share of the market than others, Stroup observed.

Kligerman believes life reinsurance capacity is falling due to increased conservatism by reinsurers, retrocessionaires retrenching or leaving the market and a decrease in the supply of letters of credit.

For instance, he points out that RGA has decided to write less Triple-X reinsurance and will not reinsure universal life secondary guarantees because of the long-term risks.

Moreover, he notes, reinsurers, in general, are no longer underwriting variable annuity guaranteed minimum death benefit risks.


Reproduced from National Underwriter Edition, July 7, 2003. Copyright 2003 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.