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.