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Panel Sees Blurred Capital Channels For Reinsurance

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In the future, there will be a blurring of ways that direct writers get capital relief, a panel of executives from leading global reinsurers predicted.

There will be a broader framework in which capital markets, reinsurers and direct writers will all be able to provide ways to offer or free up capital, Wolfgang Strassl, head of the divisional unit of the life and health division of Munich Re, Munich, Germany, told attendees of ReFocus 2008 here.

ReFocus is an annual life reinsurance conference cosponsored by the American Council of Life Insurers, Washington, and the Society of Actuaries, Schaumburg, Ill.

“I wonder if it will be so definable who is the reinsurer and the direct writer?” Strassl said. This blurring has happened in the U.S. health market, he added, observing that legally, there is a distinction, but practically, the 2 are not distinguishable.

The trend is global, panelists agreed. Wolf Becke, head of the life reinsurance department of Hannover Re, Hannover, Germany, citing an example in South Africa, where a reinsurer is underwriting on behalf of a client at the client’s offices. So through outsourcing, the reinsurer is both conceptually and physically taking on the job of the direct writer, he pointed out.

The blurring of more defined capital management functions is happening in other ways, according to Becke. In the event of a pandemic, the risk “is simply too big to just take on ourselves,” he said. “We will need the capital markets in order to manage this risk properly.”

Moreover, life reinsurers are focusing on certain parts of the business now, so they do not all look alike anymore, he continued.

Christian Mumenthaler, head of life and health reinsurance with Swiss Re, Zurich, Switzerland, recounted how Deutsche Bank competed and won a closed block of business last year. It’s another example of how the businesses of reinsurers and capital market providers are starting to overlap, he said.

Mumenthaler also said that Triple-X blocks of business are a challenge because in the current market environment, there is a small spread and the costs are high. Investment banks, however, are extremely interested in this business, he added.

As other capital providers become more involved in the insurance market, Mumenthaler anticipates seeing the development of indices to measure both longevity and mortality. The capital markets are not willing to take that risk at current prices, he observed.

The development of Solvency II standards in Europe was another change that the panel discussed.

Mumenthaler said Solvency II “is like a tsunami. It is a very powerful force. The U.S. should be a leader rather than trying to avoid it. Europe is not going to stop.

“I’m a big fan of Solvency II,” he continued. “It brings the regulatory view much closer to the way that we manage business and see ourselves.”

One of the biggest risks is on the asset side of the balance sheet, and the Solvency II framework will look at this better, he said.


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