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Where The Reinsurance Pros See Strains And Opportunities

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Those companies and executives contemplating entering the life reinsurance market can get a taste of what to expect by noting a number of trends that old pros in the field expect to play out this year.

One of the major concerns is that a model regulation and actuarial guideline will raise the cost of reinsurance for level premium term products and UL products.

The two regulatory guidelines, the Valuation of Life Insurance Policies model regulation, otherwise known as Guideline XXX, and Guideline AXXX, respectively address reserving for level premium term products and universal life products with secondary guarantees.

Higher reserves necessitate the need to reinsure more of this business and the need for reinsurers to look offshore to seek relief, interviews suggest. Offshore reinsurance increases the need for letters of credit which rise in cost as demand grows, experts say.

In lines with intermediate to long-term guarantees such as a 15-20 year term, or UL with secondary guarantees, reinsurers are using offshore solutions to take care of reserving issues, says Carl Friedrich, consulting actuary with Milliman USA, Chicago.

If you retrocede to offshore entities, then there are reserve credits that you need to establish and letters of credit are the most typical way to do this, he continues.

And, because of increasing demand for these LOCs, there will continue to be a firming of price for reinsurance this year, Friedrich adds.

There will be some relief on the horizon when the 2001 CSO Table becomes effective, but that wont start to become evident until 2005, he says.

The increased costs from factors such as rising LOC prices will prompt reinsurers to write treaties so that they better reflect the obligations of the ceding company, says David Rains, second vice president-life solutions, Transamerica Re, Charlotte, N.C.

Details will include price, underwriting criteria, methodology and claims practices, among other points, he continues.

The fine points in a treaty are important not only to make certain that reinsurance is properly priced, but also to ensure there is compliance with provisions of the Sarbanes-Oxley Act, he adds. Because of this new requirement, reinsurers need to make certain they have a complete understanding of the fundamentals of business they are reinsuring, Rains explains.

UL secondary guarantees are causing strain for a lot of companies, according to Joseph F. Kolodney, managing director with AON Re Global Life Reinsurance practice area, Stamford, Conn.

And, because of increased costs, prices are rising, he says. However, even though “pricing has bottomed, [increases] wont be crazy like the p-c business.”

Pricing actuaries for reinsurers wont be as aggressive as in the past, but Kolodney says, “it is still a long-term business” and companies dont want the reputation of being a “profiteer.”

Another business with a long time frame, long term care insurance, is an area that reinsurers say holds promise for future growth.

There is enough promise in it so that ERCs accident and health division actively is focusing on the individual LTC market, says Nick Von Moltke, senior vice president and business leader of the U.S. Accident and Health division of ERC in Avon, Conn.

The promise for LTC reinsurance is greater than life reinsurance because life re is now “very commoditized,” he says.

Part of that promise, he says, will be the result of medical technology and new cures for medical ailments that trigger LTC claims.

The group market is another area that continues to be an opportunity for reinsurers, says Mike Emerson, president of the group life, accident and health operations with ING Re, Minneapolis.

While conditions remain relatively similar to those of 2003, he says, there could be an effort to bring the group design for an accidental death carveout contract to individual clients.

For reinsurers that participate in the modco reinsurance business, an implementation statement from the Financial Accounting Standards Board, Norwalk, Conn., could significantly impact the modco market, interviews suggest.

Implementation rule B36 for FAS 133 that addresses embedded derivatives as they relate to modified coinsurance arrangements may not be the death knell for modco arrangements, but they will impact that business, says Steven Lash, a partner with Ernst & Young, New York.

How embedded derivatives in these arrangements are accounted for will potentially make earnings more volatile as well as create more administrative work in order to meet the new requirements, he explains.

The impact of the new accounting requirement is not fully understood by the industry, and there is a wide perspective of differences over what will happen, he says.

For producers considering participating in the agent-owned reinsurance business in the coming year, Jerry Schwartz, managing partner, ELAR, a limited liability company based in New York, says “the economics are challenging” because reserving requirements make it difficult to make a profit.

He adds that in order to attain profitability, it is important to achieve volume. This is accomplished by focusing on one or a small number of carriers, he says.

Schwartz says that in his companys case, this strategy has enabled it to sell back blocks of business to the carrier and earn more than $100 million over the last 10 years. His company focuses on variable products and not general account business, he adds.

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.