Traditionally seen as a necessary purchase to access key services and data, life & health reinsurance buying patterns are changing.
For both the life & health (L&H) and the property & casualty (P&C) markets, the insurance market is heavily dependent on reinsurance. However, it’s interesting to see how different the reinsurance frameworks have turned out, in just about every aspect that one might measure.
By nature of any brief evaluation, generalisations will be made—noting that there are always exceptions to the rule—but overall there are some strong underlying themes within the evolution of the L&H reinsurance market that are worth highlighting.
When exploring the raw modeling that takes place behind the scenes of reinsurance decisions on the P&C side, the brokers run very advanced models, looking at the impact on a variety of key performance indicators (KPIs) of several stresses – from 1-in-10-year volatility stresses, to 1-in-200 catastrophic outcomes. Additional geo-spatial modeling of exposure concentrations is also common.
Yet even before this modeling takes place, it is made very clear how those KPIs are to be managed; and when the final reinsurance treaty structure is chosen, it is similarly clear how reinsurance enhances those metrics. In this sense, reinsurance can be seen as ‘needful’ – it is a tool for risk management and indeed KPI management.
Life reinsurance has evolved differently. Usually, (although note this a generalisation) much of the reinsurance placed with L&H reinsurance companies has its basis in the services that reinsurers provide to their L&H clients. It can be argued to be less about ‘needful’ reinsurance, and more about the services needed, for which reinsurance is the price.
The value-add of these reinsurance services for life companies can be significant, for example:
- use of medical underwriting manuals
- availability of automated underwriting engines
- support with product innovation and pricing of new products
- provision of claims
- rehabilitation services
By its nature, this explains why such strong relationships have developed directly between reinsurers and insurers in this space—and indeed why. According to AM Best’s 2014 report, nearly 90% of L&H reinsurance premiums are written by just seven of the major life reinsurance companies – as opposed to the P&C side where the biggest ten reinsurers only write 68% of global P&C reinsurance premiums.
These services, as well as the financial protection provided, have been extremely valuable to the L&H industry, and indeed remain so.
A Shifting EmphasisHowever, observing the market, we are starting to see a change in the buying pattern of L&H reinsurance.
In many cases – perhaps even in the majority of cases – the need for reinsurers’ services over needful reinsurance remains unchanged. Such companies will continue to maintain relationships with a very small number of reinsurers and will continue to offer large quota shares on relatively stable business in order to access these services.
But there are some insurance companies now starting to challenge their own reinsurance decisions, pushing for greater financial justification of such outcomes, and attempting to measure the value chain inherent in the exchange of reinsurance for services.
Particularly for the larger insurers, and especially large multinational insurers, their reliance on reinsurers for value-add services is reducing, and their need for financial protection from reinsurers is reducing too – as seen by the increasing retentions over the years and the increasingly common decision to write business without reinsurance at all.
And while not all companies are actively reviewing their reinsurance programs as yet, there is a lot of activity in this space.
For example, we are seeing the demand for pure non-proportional covers growing, and an increasing emphasis on the more ‘commoditised’ reinsurance protection, bought from companies providing needful reinsurance without the expense burden of the additional basket of services otherwise available.
Who’s on First?
L&H insurers’ needs are varied: their reliance on services is different; and the role of price, speed and risk-appetite in their decision making is different – so there is no implication of a cessation of how things were done in the past.
However, this shifting emphasis is allowing small and medium reinsurers more space at the table than before, and we expect to see a change in the concentration of premiums being written by a small number of large players.
Specialist broking teams in the market are helping to support this process: insurers may start to realise that their reinsurance needs have shifted, but with the limited number of reinsurers that they have direct relationships with, they do not always have access to the providers who best suit their current profile. And indeed, for the small and medium reinsurers that have an appetite to write business in an increasing number of countries without establishing offices in those countries, they are actively interacting with L&H reinsurance brokers, who in turn can bring them to the negotiating table each time they do have something to offer.
In addition to the above points, it is important to note that whereas alternative capital has fundamentally changed the P&C reinsurance landscape, the L&H market has not yet experienced such change – and nor do we expect to see change to the same extent in future.
But there are a growing number of independent funds being set up and capitalised to take long-term life risks. Further, with more multinational L&H insurance groups having set up intragroup reinsurance companies – or in the process of doing so – the profile of who is a ‘typical’ L&H reinsurer may never be the same again.
A More Diversified Future
Quoting again the number from last year’s AM Best report into reinsurance premium volumes in the L&H market, it is hard to imagine that when seven players are writing nearly 90% of the premium volumes that some sort of shift will not eventually take place.
We see the largest life companies are retaining more and relying less on reinsurance services; there are signs of growth in the alternative capital market for long-term risks; small and medium reinsurers are aggressively chasing business with higher risk profiles and more commoditised pricing; and boards and management are becoming more demanding that reinsurance decisions can be justified using the same KPIs used for any other financial decisions which have to be made.
Those within the L&H space need to be well prepared to navigate this new environment, however their reinsurance framework might evolve.
Guest blogger Greg Solomon is Regional Director, Head of Life & Health (Asia-Pacific, Middle East, Turkey, Africa) for Willis Re.