When The World Is Changing, Thats The Time To Partner
Its a new worldagain–in the evolving relationship between life reinsurers and direct writers as market factors challenge companies to find new ways to partner with each other successfully.
The cumulative effects of the past decade of reinsurance dynamics, combined with difficult economic conditions, present new challenges to the insurance-reinsurance model.
Part of that challenge will be to emphasize a true partnership of give and take rather than in the sense of a legal obligation. Heres why:
The dynamic between reinsurers and direct writers first shifted a decade ago as the process of realizing the protective value of blood testing started a downward trend on mortality pricing. By virtue of ready access to more robust data, reinsurers generally were quicker than direct writers to push down mortality pricing.
As reinsurance mortality pricing moved downward, attractive prices led to a major shift in risk sharing. Cession rates, which had historically run in the 10-15% range, climbed rapidly to over 60%.
This shift in the risk-sharing model provided reinsurance companies with spectacular growth through the 1990s. Direct companies were able to utilize attractive pricing, with rates often near or below their mortality assumptions, to obtain needed capital relief, access to reinsurers services and expertise, and protection from mortality fluctuations. Most importantly, companies were able to improve their products to consumers due largely to short product cycles that capitalized on a continual downward trend in mortality pricing.
Today, there are new challenges to meeting the same goals. Direct writers seek relief from constrained capital and increasingly must manage short-term earnings expectations that are threatened by mortality fluctuation. Foremost, companies strive to enhance offerings and develop better products.
This is a challenge as the “well” of lower mortality pricing, one of the catalysts of product improvement from the past decade, has run nearly dry.
As reinsurers and direct writers alike converge on todays mortality levels via 10 years of data since the preferred-blood testing era began, there is little, if any, room for a further downward trend in mortality assumptions.
This shift also occurs at a challenging time for life insurance and reinsurance pricing, in general. Economic conditions are far from ideal. Interest rates are at a historical low. Costs of securing reserve credit to provide capital relief in the reinsurance offerings are increasing significantly. Consolidation in the reinsurance marketplace has put additional constraints on capital.
Clearly, the change in the environment presents challenges to reinsurers and direct writers to find ways to work together in a mutually beneficial way that also benefits the end customer.
Converging mortality assumptions between direct and reinsurance providers and an adverse pricing environment may contribute toward a perceived lessoning of the financial value of reinsurance. Still, the risk management, expertise and services provided by the reinsurance market have a key role to play in helping writers provide quality products.
While there are no easy answers, one thing is clear: Now, more than ever, both sides of the relationship need to focus on a partnership-based approachnot in the sense of a legal obligation, but rather that of an interactive relationship of give and take.
This concept is frequently given lip service, but it is important for companies to live by it since each side has become heavily dependent on the other.
A partnership starts with good communication, and good communication starts upfront. Partners need to spend the time to engage in an initial dialogue that clearly articulates each sides business objectives, abilities and restrictions. The goal is establishing appropriate expectations of each other, and identifying where collaborating is mutually beneficial and where it will not make sense.
For direct companies, the solution starts with involving its reinsurers early in the process. Sharing strategic direction can provide a context for working together to find creative solutions. The goal is avoiding the disappointment potentially created when premiums are committed to and the reinsurance pricing to support them turns up unavailable from preferred partners.
Reinsurers need to be cognizant of their clients needs and objectives and use creativity to achieve them. In some cases, it simply comes down to greater flexibility.
Product development services offer a simple example. The reinsurance product development model of the past 10 years was largely centered on an exclusive, long-term “locked in” arrangement. In todays era, reinsurers must provide their services, including product terms.
Multiple reinsurers may need to be part of the pool to provide pricing support, capacity and other solutions. Multi-year lock-ins need to be a thing of the past. Companies should be tied together because its mutually beneficial, not because a contract calls for it. Otherwise, the benefits to both parties are lost.
Clearly, more static mortality pricing and a more challenging economic environment will test the dynamic of finding more attractive products for consumers. But with a strong partnership, reinsurers and direct writers can both benefit.
, FSA, MAAA, is Vice President, Business Expansion and Research for ING Res Individual Life and Health Operation, based in Denver. His e-mail address is Chris.Shanahan@ing-re.com.
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 10, 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.