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.
With increased longevity, McArdle continues, there will be more of a need for reinsurance in the older age market, “raising the possibility of a lot of opportunity but a lot of questions as well. There is not a lot of data-rich history.”
There is a wide variance of how companies view expected policyholder performance, he adds. “At this point, there is no right answer.”
Even traditional ways of looking at medical conditions may need to be reexamined, he explains. For instance, he asks whether blood pressure as a medical measure will mean as much as it previously has. “Are you looking at the right factors when you are underwriting?” Cognitive testing shows there are other factors, such as how active a person is, that also need to be considered, he says.
Also, McArdle says, there are factors that are business and not medical related, such as a producer not wanting to upset clients with potentially insulting questions such as ‘how many words can you remember in 30 seconds.’
One industry answer to longevity needs has been variable annuities with guarantees, he says, but while some reinsurers are offering coverage on that product, it can be a challenge because of ties to the stock market. There needs to be good hedging capabilities to manage volatilities and a company needs to be big enough to absorb that volatility on its books if hedging programs do not work perfectly, he adds.
Gaetano Geretto, founder and president of Pelicanus Strategic Advisory Services, Toronto, and chair of the Society of Actuaries’ reinsurance section, says that for insurers and reinsurers who have concentrated on mortality products, longevity products can be a hedge for the block of business they hold.
Outside of the U.S. in countries such as the United Kingdom, there is a spike in reinsuring annuities, he says. One possible reason, he explains, is that in the U.K. there is a mandatory annuitization of annuities. Longevity and mortality pools of business are being used to offset each other, according to Geretto.
There will be more of a need for longevity products and reinsurance to support those products because “boomers are living longer than any of the previous generations and in the most financially lucrative times in history,” Geretto continues. That need also extends to health care, where some companies are looking at reinsurance solutions, he adds.
The growing focus on longevity may encourage more securitization of risk, he says, because there is enough data for actuaries to project future cash flow streams, Geretto says.
Larry Carson, a vice president and marketing actuary with RGA, St. Louis, and a past chair of the SOA Reinsurance Section Council, says there will be opportunity in non-traditional markets, those markets that are not traditional mortality reinsurance.
Typically, insurers look to capital solutions for very specific reasons such as capital relief from Triple-X requirements, he says. But the same reinsurance tools also offer an innovative way to treat a broader set of capital issues. For instance, Carson notes that there is no requirement that a capital solution be based on a block of business that is causing the problem, but rather-can be based on a more profitable block of business as long as the ultimate result is a reduction in reserving or capital requirements; the reinsurance will have the desired effect.
Carson says variable annuities with guarantees, and indeed, all types of annuities including fixed deferred, fixed index and immediate, can be an interesting product for reinsurers because they offer non-correlated risks to mortality reinsurance.
Growth for reinsurers will come from both international and non-traditional products and in the non-traditional area, that growth may very well be in the area of longevity, he continues.
Annuities and longevity risk is an area that reinsurers could enter because currently they have been focused on assuming mortality business, Carson continues. He notes that there is a need for such coverage among direct writers.
While capital solutions can also be provided by other institutions such as investment banks and hedge funds, Carson notes that they are also a lot more reactive to changes in capital market conditions and that a reinsurer can provide more reliable capital relief options.