The U.S. life reinsurance market may be on track to grow less than 10% per year.[@@]

That’s the conclusion of a team of securities analysts at UBS Securities, New York. Andrew Kligerman, the head of the team, and his colleagues acknowledge that growth was stronger in the 1990s, but they argue that past growth in life reinsurance volume was driven partly by reinsurers’ successful efforts to use low prices to persuade primary insurers to cede a higher percentage of the risk that they were assuming.

“Our own projection is that the long-term sustainable growth rate for North American individual life insurance in force — the product from which life reinsurers’ derive the bulk of their profits and from which they are likely to continue to derive the bulk of their profits — is in the single digits, mirroring expected U.S. [gross domestic product] growth,” the analysts write in a 48-page review of the life reinsurance market.

The UBS analysts also argue that life reinsurers’ profits depend n continuing increases in U.S. lifespans to make reinsurance prices match the actual death rates.

The underlying U.S. mortality experience might continue to improve, and underwriting systems changed in the mid-1990s, the analysts write. But, even under those conditions, improvements in mortality experience for reinsured life policies might be disappointing because efforts to identify “preferred” and “super-preferred” life applicants might prove to be less effective than hoped and the structure of level-term policies and universal life policies tends to encourage the sickest insureds to hold on to their policies the longest, the analysts write.

Meanwhile, the new life settlement companies are paying to keep the policies of the holders with the shortest life expectancies in force in an effort to collect the policy proceeds, the analysts write.

Efforts to cope with the challenges facing the life reinsurance industry could backfire: “When life reinsurers try to increase prices, primary insurers simply cede less,” the analysts write.

Several major primary insurers already are considering proposals to retain more risk, the analysts report.

Consolidation may not offer life reinsurers much relief, because the fixed costs for individual life reinsurers are relatively low, and early efforts to get Wall Street investors to back life reinsurance arrangements have been unimpressive, the analysts write.

The UBS analysts do see some room for growth in the European annuity reinsurance market as a result of European governments’ efforts to expand private retirement savings systems.