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Life Health > Life Insurance

Reinsurers Rethinking The Business

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Life reinsurers are exerting new discipline, rethinking the business and preparing for product, regulatory, financial market and climatic changes that will reinvent the market, interviews with National Underwriter suggest.

Life reinsurance leaders offered their insight on how the market is changing.

Weldon Wilson, CEO of Swiss Re Life & Health America, New York, and a member of Swiss Re’s executive board, says “the state of the industry is still very strong. There are significant opportunities for companies that are committed for the long term. Reinsurance is not an industry that you jump in and out of.”

For those who choose to stay, he adds, “there has been some consolidation in the last several years and people might say it is shrinking.” But, he notes, there also have been new entrants and capital from outside the industry, which shows there is interest in the life reinsurance market.

Indeed, this trend was underscored on Oct. 25, when PartnerRe Ltd. announced that it raised $550 million in additional capital to be used for general purposes and the pursuit of growth opportunities in the global reinsurance marketplace.

For those who stay, Wilson says there are opportunities in the U.S. market that are yet to be tapped fully.

For instance, Wilson says he believes that reinsuring closed blocks of business will continue to be an opportunity.

Wilson says Swiss Re did start adjusting rates in 2003 and pricing as needed. While prices more often than not increased, in some cases they were lowered, he adds. For some direct writers, the reversal in a prolonged downward price trend was a difficult thing to accept, he continues.

Another trend Wilson sees is the tendency for direct writers to retain a greater portion of the risk they underwrite. He says such retention aligns the interest of the direct writer and the reinsurer.

Cession rates, he says, will continue to decline for two reasons: 1) the strength of the capital markets will provide direct writers with more capital to devote to the business; and 2) a switch by some large direct writers to a quota share arrangement in which direct writers and reinsurers share a proportionate share of the risk.

Wilson says more business will be securitized in the future. Reinsurers acting as consultants will be able to readily compare traditional reinsurance solutions and securitizations in order to determine what the most efficient way is to access capital. “It may be more difficult for smaller to mid-sized companies to achieve that mass,” he says.

Chris Stroup, chairman and CEO of Wilton Re, Wilton, Conn., says there will continue to be a tightening of the market as a “fair degree of discipline is exerted” and he says he hopes this discipline is maintained. Ultimately, a point of equilibrium will be reached, he continues.

Stroup says he doesn’t see much additional capacity coming from offshore or too many new players entering the market. But he adds that he does see growth in securitizations because they create less risky profiles for both direct writers and reinsurers. Stroup also notes that it is good for both to take risk out of the system.

For the duration of this year through 2006, Stroup says there will continue to be a reduction of cession rates.

The general consensus was that products including variable annuities with guarantees have little or no available reinsurance with limited exceptions such as ACE Tempest Life Reinsurance, Ltd., a life reinsurance unit of ACE Group, Hamilton, Bermuda.

And, the same may be true of UL with guarantees. The reason is there are concerns with the economic risks being taken and the level of guarantees being offered.

What will continue to be of more interest, according to interviews, is traditional mortality risk.

Long term care

Even with the aging of the baby boom generation, which will need long term care and longevity insurance products, many reinsurers say they are ambivalent about whether there will be a growing reinsurance market for these products.

Reinsurers can drive more innovative underwriting both at their level and at the consumer/primary/direct level through improved data collection and analysis, says Joseph Kelly, marketing leader for the accident & health division of GE Insurance Solutions, Avon, Conn.

A reinsurer has the capability to analyze data from multiple primary carriers and turn that data into information on co-morbidities, pricing discrepancies, potential benefits of cognitive screenings on two of the most costly claims (Alzheimer’s and dementia), and a host of additional areas, Kelly says.

The use of reinsurance in the LTC market was reported recently on National Underwriter’s Web site, where there was an account of efforts by Penn Treaty American Corp., Allentown, Pa., to reinsure LTC business sold on or after Oct. 1 with Imagine International Reinsurance Ltd., Dublin, Ireland. The arrangement would be completed through a 75% quota share arrangement. In July, according to the NU Web item, Imagine agreed to reinsure Penn Treaty’s in-force LTC business.

But others in the life reinsurance market are less sure.

It would be surprising if payout annuities or LTCI became large areas for reinsurers, says Wilton Re’s Stroup. Long tail morbidity risk is a difficult area for reinsurers to control, he adds, and discrete changes to assumptions can make large differences.

Direct Writers Respond

These trends continue to make many direct writers bridle at the change to the way business traditionally has been conducted.

A recent poll conducted by Flaspohler Research Group, Kansas City, Mo., found dissatisfaction with reinsurer relationships. In fact, 61.5% of 225 direct writers said their relationships with reinsurers were declining, while 8.7% said they were improving. The satisfaction level, according to the study, declined to 15% in 2005 from 67% in 1995.

The study also said that a competitive price is the most important factor in buying reinsurance, with a total of 56.4% citing this reason as important.

Reinsurer consolidation ranked highest in a list of concerns expressed by direct writers with a 70.1% response rate.

Even so, 59.4% of those responding to the survey said they are addressing capacity shrinkage by dealing with existing reinsurers not used recently to address the problem of capacity shrinkage in 2005.

Rating Agencies Weigh In

Rating agencies also are taking a look at the change in tone in the life re market.

Standard & Poor’s Corp., New York, recently examined the market in a report titled, “Consolidation Breeds Strength for a Stable Life Reinsurance Sector Outlook.”

Rodney Clark, a credit analyst with S&P, says an equilibrium will be reached in which direct writers assume more risk because of tighter underwriting criteria. Criteria are becoming tighter because “life insurers had become more like asset managers and are not keeping risk. We are seeing the pendulum swing.”

“In the past, reinsurance rates were so cheap that it didn’t pay to keep it [business] all. Prices are getting back to what they should be. Unless you want to be a distributor, you should be taking some of that,” adds Martha Butler, a senior director with Fitch Ratings’ Chicago office.

Although the market is concentrated, consolidation may be in its latter stages, she says. Concentration among the top 10 players has increased by almost 15% and the top 10 competitors are increasingly stratified into large, medium and small companies, she explains. Large reinsurers control the market in a semi-oligopoly, according to Butler. The top 5 companies held 79% of life reinsurance in force and wrote 81% of reinsurance assumed in 2004, she continues.

Joel Levine, a senior vice president and team leader with the life insurance group of Moody’s Investors Service, New York, says life reinsurers are “certainly firming up the terms and conditions of contracts. They are treating cedent company accounts with much less latitude. The old gentleman’s agreement is fading fast.”

Those direct writers outside the box will find out that reinsurers are looking at the relationship strictly as contractual, he adds.

Looking Forward

While life reinsurers are exerting discipline on rates when possible, there are several unknowns the industry may need to address going forward.

One is the threat from avian bird flu that is currently being found in birds in different parts of the world. The flu has killed some 60 humans in Southeast Asia but to date, there has been no human to human contact.

In an article in the July 25 issue of National Underwriter, a leading actuary with ING Re, Minneapolis, warned of the threat. “I think this is a very real risk,” said Eric Rasmussen, ING Re’s vice president of risk management.

Swiss Re’s Wilson says the industry always has to pay attention to the possibility of a pandemic. He also noted that the World Health Organization is responding quickly to that possibility and if it did become a reality, it would be factored into business considerations.

Wilton Re’s Stroup says he does not think it will be a major issue for reinsurers. Even if the strain does prove virulent, it will probably hit the very young and old populations, which are not heavily insured, he notes, adding that population mortality does not clearly translate to adverse mortality for the insured population. Even if it did, he continues, it would be a short-term event like a hurricane hitting land.

Another risk Swiss Re is raising along with the United Nations Development Program and Harvard Medical School’s Center for Health and the Global Environment is the impact of climate change on mortality and morbidity. A just released paper titled, “Climate Change Futures: Health Ecological and Economic Dimensions” discusses the potential impact.

One of the authors, Charles McNeill, a representative with the U.N. Development Program, describes how extremes such as heavy flooding expose populations to malaria and West Nile virus in places such as Latin America where they have not been seen before.

Paul R. Epstein of the Harvard Center notes that in the wake of Hurricane Katrina, the unimaginable has become imaginable.

Ecological systems are like human immune systems, he explains. They can recover from shocks such as global warming, but over time they become more fragile and at some point the continued introduction of carbon dioxide into the ecological system will not allow that system to replenish itself. Of that system, he says, “we are seeing more and more oddities” such as wind storms, an Atlantic hurricane near Brazil and a protracted heat wave in Europe in 2003 that he says caused 21,000-35,000 excess deaths.

It is a matter of “connecting the dots” and seeing how mortality and morbidity will be affected in the future, McNeill says.

And, both acknowledge, the change in climate and loss of plant life may impact the ability to develop new pharmaceuticals, impacting mortality and morbidity.

Swiss Re’s CEO, Weldon Wilson, says that for some direct writers, the reversal in a prolonged downward price trend has been a difficult thing to accept


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