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.”