Living longer is a reality for many Americans and that reality is shaping the way reinsurers will do business going forward.
Longevity is a force that will impact reinsurance products, the way reinsurers address the burgeoning secondary market and even how they balance the liabilities on their books, say leading executives in the reinsurance industry.
Many of the opportunities for reinsurers will reflect the needs of aging baby boomers who will want long term care certainty and regular income.
Michael DeKoning, president and CEO of Munich American Reassurance Company, who assumed his new position on Jan. 1, says “we are bullish on LTC.”
With 8-10 years of credible industry experience, the industry is getting a better handle on claims rates, he says, but since it is a product that may not be used for 30-40 years after purchase, it can still be difficult to assess claims utilization.
So, the industry as a whole, meaning both insurers and reinsurers, faces “the challenge of what morbidity will look like in the future.” What will help create a better understanding of future morbidity is access to relevant international statistics of morbidity data from other countries, he continues.
The sale of life insurance, particularly universal life with secondary guarantees, to older consumers has also been a recent development that is changing the way reinsurers will have to approach business they assume because of the life settlement market, he says.
Coinciding with this is the emergence of the secondary market for life contracts.
DeKoning starts by differentiating between life insurance contracts that are settled when there is no longer a need for life insurance and contracts that are initiated by investors strictly for the purpose of profit.
Reinsurers need to make sure they examine how aggressive the underwriting by a direct writer is, particularly for contracts written for those in their 60s and 70s, he explains. The question that reinsurers have to ask direct writers when they are discussing reinsurance transactions is “What kind of program do you have in place to avoid getting picked off?” Many insurers, he adds, “don’t know how often and when and where it is happening.”
Reinsurers can provide mortality and underwriting experience to partner with direct writers and help them detect investor originated transactions, he says. But, it would have to be a partnership because direct writers have the needed experience with distribution systems to detect investor initiated contracts, DeKoning adds.
Other trends that DeKoning says could impact reinsurers include alternate risk transfer solutions such as securitizations.
“Securitizations require structuring expertise as well as the creation of a legal entity needed to maintain it which can make it costly and difficult for smaller to mid size insurers,” he says. Reinsurers should be able assist through aggregating risks from many comapnies. In order for this to happen, reinsurers will need to be appropriately compensated, he continues. Eventually, however, reinsurers can become very efficient at these transactions, with transactions that are pre-blessed by rating agencies and similar to a shelf registration where there will not be the need for as much structural or legal analysis, he adds.
When asked if principles-based reserving will have an impact on reinsurers, he notes that “if it ever happens, it will.” He says the project sounds like “rules-based cash flow testing” and that net reserve reductions could occur for some products, but not necessarily for others such as LTCI which could actually see an increase in reserves. And, while PBR has worked in Canada where there is a single regulator, DeKoning says that it would be a “real challenge in a 50-state environment.”
Jim McArdle, senior vice president-sales and marketing with Transamerica Reinsurance, Charlotte, N.C., says principles-based reserving would remove a lot of arbitrage in insurance products, including reinsurance arbitrage.
But even if PBR is adopted and does change the reinsurance market, McArdle says “our core value added is risk management,” whether provided through reinsurance or through consulting. If PBR is successful, he continues, there will be less need for securitizations.