New Entrants Eye Life Reinsurance Market

Reinsurers, in theory at least, could use securitizations in lieu of retroceding business, transactions that are becoming harder to come by, according to interviews.

The continued shrinking of retro capacity ultimately will impact binding and jumbo limits in treaties, says Wayne Adams, senior vice president and chief marketing officer with Reinsurance Group of America, St. Louis. Reinsurers and ceding companies are building more protections such as insolvency provisions, rating triggers and underwriting stipulations into treaties, he continues.

Going forward, Adams says, the shelf life of products will be longer because reduced access to reinsurance at cheap prices will create more caution in bringing new products to market.

But securitization is not necessarily a simple solution to diminished retro capacity, according to interviews. There are more hurdles to jump, says Carl Friedrich, consulting actuary with Milliman USA, Chicago. For example, reinsurers do not have homogenous databases or experience studies that facilitate a securitization.

Instead of securitizations, he adds, some direct writers are taking the risk internally.

Others are turning to financial reinsurance, says Curt Hagelman, senior vice president and chief marketing officer with Hannover Life Re.

And, according to E&Ys Lash, for the nearly nonexistent reinsurance market for variable annuity guarantees, companies will turn to hedging once they have more of a comfort level with the process. “There is a thirst in the [VA] industry for solutions,” Lash says.

But that thirst will go unquenched for some time, according to interviews.

Guaranteed minimum death benefits will remain a “slim area” for coverage, says Hannovers Hagelman.

“Reinsurers are still getting over the GMDB fiasco,” Hannovers Burt concurs. What has happened, he continues, is that GMDBs have become synonymous with annuities, making it difficult to get the product line reinsured.

There will not be much change in the availability of reinsurance for variable products with guarantees, says Tim Pfeifer, a principal with Milliman USA, Chicago.

But if direct writers have more success with hedging and they are able to structure the product properly, then reinsurers may begin to take a look at working with them again, Pfeifer says.

Indeed, one industry executive is trying to raise capital to do just that (see story on page 5).

Reinsurers could act as consolidators of dynamic hedging programs especially for second-tier companies that do not have the expertise or the technology to hedge, he says. Dynamic hedging uses futures contracts to safeguard against volatility.

But there is not the interest in just reinsuring VA guarantees, he says. A significant reason is the “capital pop” companies face in light of new regulatory capital requirements that are being implemented, Pfeifer continues.

The tighter reinsurance market is becoming evident in who is writing what business. Larger reinsurers are gravitating to bigger reinsurance transactions, leaving smaller reinsurers to pick up other business, says E&Ys Lash.

The thought is that “it doesnt make sense [to reinsure] if it just adds pennies to the bottom line,” he says.

Part of the reason there is greater focus on business that maximizes profitability is because the cost of business going forward is increasing. For instance, the cost of letters of credit, which ensure a transaction has sufficient financial backing, is rising, says David Rains, second vice president-life solutions, Transamerica Re, Charlotte, N.C.

What will help direct writers keep their reinsurance costs from rising too much is detailed information on the business they are ceding, he says.

The direct writer that can provide the best information is more likely to be given the best terms, he says. Price also varies by product type and carrier, Rains continues.

Reproduced from National Underwriter Life & Health/Financial Services Edition, January 23, 2004. Copyright 2004 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.