Life reinsurance has often taken the back seat compared to the non-life market. The mega-catastrophes such as hurricanes and quakes rarely impact the life insurance sector in the same way as the non-life companies, and thus it rarely hits the headlines in comparison.
This Global Reinsurance special report hopefully will put paid to this unfair image of life reinsurance. The past few years have seen 15% growth per annum, according to AM Best's Bob Garofalo. Although this level of growth is unlikely to be sustained, there is little doubt the market internationally is still on the ascendancy. Indeed, recent figures from the Association of British Insurers show steady growth in the UK primary market, with sales up 4% in 2001, to £55bn - and this in one of the more mature life markets.
The increasing privatisation of social security systems is boosting life markets around the world. Several state pension schemes in Europe are all but empty, and the greying population is putting increased pressure on already-squeezed systems. The private market is the only viable option for governments around the world, and a number of Latin American countries are following that call.
Nevertheless, all is not roses for the life sector. In his article on the Latin American market, Marcello Nusiner of AUL Re notes that personal accident (PA) business there - and around the world - has faced a capacity shortage and rising prices. London market reinsurers, the traditional market for this business, "have either disappeared, shrunk, or become much less flexible," he remarks. Catastrophic PA is experiencing an equally tough time, with withdrawals, smaller participations, and the new view of worldwide business aggregates all taking their toll. "With the new realities of the harder market, companies now have to come up with basic information about their portfolios that they previously never had to submit," he points out. This type of discipline is vital to turn around a sector of the business that has been languishing for several years.
In the Asian life markets, poor selling practices are being addressed with mandatory needs analysis. Warwick Young of RGA welcomes the move, which "has the potential to boost sums insured and the number of products sold. In addition, it can increase the desire to have a more professional sales force and reduce potential liabilities from mis-selling." Although the UK pensions mis-selling scandal of the 1990s is now as good as settled, the turmoil caused by a highly financially incentivised sales force with insufficient checks is a lesson that many developing life markets should take on board.
In the UK, last year's decision by Equitable to stop writing new business shocked the sector and across Europe, life insurer solvency is taking the spotlight. In the US, Regulation XXX - the NAIC Valuation of Life Insurance Policies Model Regulation - has addressed the minimum standard for the valuation of life insurance plans with non-level premiums or secondary guarantees. The advent of Regulation XXX meant a substantial increase in reserves for term life and universal life policies with secondary guarantees, and provoked more than a gasp of horror from the industry. It also provoked the development of new financial tools to mitigate its impact. Keith Parker of Canada Life International Re explains various mitigating strategies including the offshore option. "The [offshore] reinsurer will most likely be able to reserve on a much lower basis than that prescribed under Regulation XXX," he observes, "but this will depend on the reinsurer and regulation applicable in its offshore domicile. What effectively takes place is a form of reserve or regulatory arbitrage."
Regulatory arbitrage has also helped boost the offshore life reinsurance market in Bermuda, where several new players have set up operations in recent years. "With the [US] property/casualty market mired in ... a 12-year soft market, it made sense for reinsurers to look at the possibilities represented by life and annuity business," writes Bermuda-based re/insurance journalist Roger Crombie. "Bermuda, and some Caribbean countries which do not levy corporation tax, offered an opportunity to build reserves faster than would be possible onshore." The new breed of life reinsurers generally use a combination of capital relief and improved investment returns to gain competitive edge.
In the meantime, other life companies are turning to capital market solutions. Alex Cowley of Lehman Brothers details the Prudential Financial Inc securitisation which freed up almost $2bn in embedded value in its life insurance business. "Life insurance securitisation is poised to gain widespread use as both mutual and stock insurance companies seek to become more competitive and deploy their capital more efficiently," he comments.
This increase in competition may also be the catalyst for more broker involvement in what is currently very much of a direct market between life insurers and reinsurers. Both Guy Carpenter and Aon Life Re have recently boosted their global networks, and are looking to the increasing privatisation of social security systems to provide new business opportunities. "The continued ageing of the population, coupled with a younger workforce, confronts the reality of whether government is still going to be able to provide the type of pension benefits that have been an inherent part of the social compact between the government and its citizens," points out Joseph F Kolodney of Aon Re Worldwide. And there are other factors at work: genetic testing and manipulation is proving a minefield for disputes between potential policyholders and insurers, while long-term care is also being progressively moved from the public to the private sector.
It looks like life is in the ascendancy.
Sarah Goddard is the editor of Global Reinsurance.