While the direct life insurance market deals with low interest rates and competition from other financial market segments, the reinsurance market is emerging from two industry-altering trends: dramatic growth and equally dramatic consolidation.
The issues that dominate the life industry today–whether enterprise risk management, pricing discipline, concentration of risk, underwriting consistency, outsourcing, or the recent emergence of securitization–are all affected by the changing landscape and the factors that have led to the reordering of the life reinsurance industry.
The 2004 Munich American Reassurance Company survey provides insight into U.S. market trends in recurring life reinsurance (primary business issued in the same year it was reinsured) and portfolio reinsurance (primarily business issued in year(s) prior to being reinsured).
Important take-aways include:
==Lower Cession Rates: The percentage of life business ceded to reinsurers, on a recurring and portfolio basis, dropped from 59.7% to 56.5% in 2004. While this is the second decline in a row, cession rates peaked at a high level and some drop-off could be expected.
Reinsurance continues to play an essential role in supporting the growth of primary life insurers, but the cost of providing mortality and capital management solutions has increased, and these expenses are reflected in reinsurance rates. Some buyers are resisting higher prices and a few larger carriers are examining alternatives to the traditional approach of first dollar quota share agreements.
==Concentration of Capacity: Market share breakdown shows the nearly complete dominance of the top 5 players, which now include Scottish Re, Swiss Re, RGA, Munich American and Transamerica Reinsurance. Together they made up 81.3% of the total recurring market in 2004. By comparison, in 1994 it took 11 companies to get to an 81% market share. Some carriers are raising concerns that this concentration of risk is becoming an issue for their risk managers.
>Recent changes in the life reinsurance market have elevated interest in and dialogue around a number of issues that impact the reinsurance partnership. In some respects, concern about consolidation has created a better climate for facilitating solutions to problems that have beleaguered the industry for some time.
Consolidation is also driving innovation that offers promising opportunities for ceding and reinsuring companies. One of these is finding a way to access the middle market, which has been underserved for some time due to cost constraints. Both groups can benefit from a streamlined, cost-effective approach to this market since it could signal the start of a new growth curve.