Growth And Consolidation Shape Reinsurers Future

>Pricing. While consolidation has resulted in a firming of reinsurance rates, the market continues to offer sufficient capacity. Rates have increased in the 10% range, but it’s important to note that the increase relates primarily to changes in the cost of doing business, not opportunistic pricing. Mortality improvement, often the underpinning of inexpensive reinsurance, has been fully factored into reinsurance pricing. In addition, the current interest rate environment and emerging experience for long-term lapse rates are moving reinsurance rates upward. Ceding companies that relied on reinsurance prices to fuel term competitiveness have to reassess their product strategies.

Underwriting. Much progress has been made over the past year in strengthening underwriting policies and procedures that had shifted from a “rules” based to a “guidelines” based approach under first dollar quota share agreements. Because the ceding company underwrites on behalf of its reinsurer in a FDQS arrangement, collaboration at the front-end is fundamental to producing expected results for both the companies. Today, ceding companies and reinsurers are working together to reach agreement on underwriting performance standards, controls and transparency. Since the margins remain thin, however, reinsurers are concerned that direct writers maintain discipline in following published underwriting guidelines.

Treaty Terms. Reinsurance has been, and continues to be, an industry based on fairness and good faith. Reinsurers and ceding companies agree, however, on the need for greater specificity with regard to key treaty terms and conditions. The objective is to achieve clearer and more balanced treaty terms that give both parties appropriate safeguards. But the devil is in the details, especially those involving guarantees, underwriting standards, claims adjudication practices, data reporting requirements, counterparty risk, and recapture terms and conditions.

>Reserves. The direct market’s need to manage capital efficiently in light of Regulation Triple-X and A-Triple-X provides opportunities to the reinsurance industry. Guarantees differentiate life insurance from other financial products, but reserves associated with guarantees pose significant challenges. Few primary insurers can afford to go it alone, so the challenge to reinsurers is to find the ways and means to serve client needs while contributing to their own profitable growth.

Concern that the cost and availability of letters of credit could threaten offshore reinsurance for Triple-X-related term coinsurance deals has subsided in recent months.

The LOC market together with financing alternatives within the capital markets provide solid assurance that Triple-X reserve solutions will be available for the foreseeable future. The jury is still out on the long-term means of dealing with secondary guarantees, but capacity appears to be available given a mutually agreeable solution and the ability to demonstrate the adequacy/redundancy of the reserves.

Going forward, capital markets will play an increasing role in providing capacity as larger companies access it directly and others access it through reinsurance.

Although principles-based reserving standards could, if adopted, have a dramatic impact on the ongoing need to seek reserve relief from “traditional” reinsurers, this is truly an event where the stars would have to align. The existence of a Federal Charter, strong oversight by the American Academy of Actuaries and the regulatory authorities will be key.

Life reinsurance continues to generate attention as stakeholders and observers consider the impact of consolidation. Current market conditions, however, help to define the value that life reinsurance brings to the primary market. While alternatives exist, the benefits of reinsurance–namely highly effective capital and risk management–are extremely difficult to replicate.

Craig M. Baldwin, FSA, MAAA, is a vice president at Transamerica Reinsurance, Charlotte, N.C. He can be reached at [email protected].

5 players made up 81.3% of the reinsurance market in 2004