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Survey Shows STOLI Is Among Reinsurers' Top Concerns

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Stranger-originated life insurance, concentration risk, and the credit risk crisis were 3 of the top concerns reinsurers and retrocessionaires mentioned as having the “most profound impact” on the sustainability of their business during the first 3 quarters of 2007, according to a recent survey conducted by Pelecanus Strategic Advisory Services, Toronto.

The preliminary results of the survey of 10 reinsurers and 4 retrocessionaires were presented by Gaetano Geretto, president of Pelecanus, during a reinsurance executive roundtable sponsored last month by the American Council of Life Insurers, Washington, in Naples, Fla.

The survey, conducted in December 2007 and January 2008, covers 4 themes: strategic issues, stakeholder management, sustainability, and risk management. The participants in the survey, according to Geretto, represent 58% of the new business assumed and 57% of the in-force business in the U.S. life reinsurance market, as measured by the 2006 survey of life reinsurers conducted by Munich American Reassurance Corp., Atlanta.

With regard to sustainability in response to environmental factors, 10 of 13 respondents cited the success of STOLI and investor-owned life insurance (IOLI) as having the “most profound impact” on their businesses. The score assigned was 1.80 where 1 represents the greatest impact and 5 the least impact.

Six of the 13 respondents cited concentration risk with a score of 2.5, and 7 named the credit risk crisis with a slightly lower importance score of 2.57.

With regard to strategic issues, all 14 respondents agreed that over the first 3 quarters of 2007, individual mortality YRT was the most important business line to the life reinsurance industry’s success, giving the product line a 1.29 ranking. Individual mortality co-insurance followed with 12 respondents ranking it 1.75 out of a possible 5. Corporate-owned life insurance ranked third with 6 respondents giving it a ranking of 3 out of a possible 5.

In a similar survey based on 2005 data, answers indicated that individual mortality YRT and individual mortality coinsurance ranked 1 and 2, while indemnity reinsurance (blocks) ranked 3 and COLI, 5.

Responses relating importance to the respondents’ own companies indicated that in both 2007 and in 2005, the 3 most important business lines were individual mortality YRT, individual mortality co-insurance and lines involving international diversification.

One statement that 12 respondents said “most represents the strategic issue of most importance over the first 3 quarters of 2007″ related to “reinsurers working with clients to recognize the real cost of underwritten risks.”

That statement addresses the issue of reinsurers offering reinsurance at a price they believe is fair so that direct writers will have the availability of reinsurance capacity they desire and creates a “win-win relationship for both parties,” explains Geretto.

When asked what the greatest opportunities for life reinsurers were in the first 3 quarters of 2007, strengthening relationships with life insurers was ranked number 1 with a 1.86 ranking (as per 7 respondents), followed closely behind by anticipating the emergent risks of life insurers, with a 1.88 ranking (as per 8 respondents). New risk management processes, including securitization, ranked third with a score of 2.27, but also had the highest number of respondents, 11 of 14. A recurring theme from the first 9 months of 2007 was more risk diversification, which placed as the fifth greatest opportunity (as per 6 respondents) with a 2.63 ranking.

When respondents addressed the same question in relation to their own company, strengthening relationships with life insurers retained first place (as per 7 respondents) with a ranking of 1.86, but the order changed after that. New risk management processes including securitizations (as per 7 respondents) garnered the second place spot followed by more risk diversification (as per 6 respondents) and anticipating the emergent risks of life insurers (as per 8 respondents).

When respondents were asked to list their most important stakeholders, shareholders received the highest rank of 1.8 (as per 10 respondents) and clients placed second with a ranking of 2.15 (as per 13 respondents).

In response to a question over the most contentious client issue faced by the respondent over the first 3 quarters of 2007, 11 respondents ranked “resistance to more explicit treaty language regarding counter-party risk” as number 1, with a rating of 1.82. Tied for second place was ‘resistance to justified price increases on new business’ with a 2.11 rating based on 9 responses and “disagreements on data reporting” with a 2.11 rating based on 9 responses.

Questions addressing the theme of risk management uncovered various management viewpoints including:

–The opinion that in the first 3 quarters of 2007, the 3 top risks that needed the most mitigation were mortality risk, lapsation risk and concentration risk.

–The greatest risk to be managed in today’s life reinsurance world is excess capacity provided to the market at unsustainable prices.

–Risk management tools to limit catastrophic events included site concentration limits in treaties, clash cover for unknown accumulations and cat cover. (Clash cover is important for reinsurers to cover them should they receive a claim on the same life through different sources or different product lines.)

Geretto did say that respondents noted that even though cat cover can be purchased, the coverage available is not broad because it generally excludes catastrophes caused by terrorism, nuclear explosions, and biological and chemical events.

Geretto concluded by noting that the 2005 survey highlighted reinsurers’ concerns regarding profitability and capacity, whereas the 2007 survey addressed the need for reinsurers to diversify their risks and create more profitable and innovative risk products for their life insurer clients.


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