The current life reinsurance market, with its ever-decreasing number of players, is facing new challenges and opportunities. Michael Pado looks at the road ahead

According to a 2005 AM Best report, life reinsurance saw double-digit growth for more than a decade. Times have surely changed. Other industry data suggests the take-up of life reinsurance has diminished steadily since 2002. Several supply and demand factors have led to this situation.

Partly fuelled by improving equity markets, low interest rates and healthy profits, primary writers are well-capitalised these days and continue to launch new products to meet production and profitability goals. Primary writers are also investing more resources into enterprise risk management and therefore they are more interested in risk mitigation strategies and credit-worthiness than in production figures.

Continuing consolidation

Ongoing consolidation among life reinsurers continues to decrease the numbers of players in this sector. The AM Best report stated that the top five life reinsurers held a 75% market share and this may in fact have risen slightly during 2006. As a result of their overwhelming control of the market, reinsurance terms and conditions have hardened significantly from 2003.

Competing alternatives to traditional life reinsurance, many facilitated by banks, have also emerged and continue to evolve. This trend has led to such risk transfer and financing devices as securitisations, cat bonds and sidecars.

In addition to considering alternative solutions to life reinsurance, many primary writers are retaining more risk. The harder terms and tougher talk of reinsurers has led many primaries to purchase less reinsurance. Many companies have moved away from first dollar quota share programmes and are now reinsuring on an excess-of-retention basis. In essence, they are all running a riskier book of business as they are more exposed to additional mortality fluctuations. Reinsurers that were top-line focused will need to adapt dramatically.

“The harder terms and tougher talk of reinsurers has led insurers to purchase less reinsurance

Managing greater exposures

The consolidation of life reinsurers has reversed much of the diversification efforts of yesteryear. This re-aggregation of risk, along with the advent of enterprise risk management has caused many chief risk officers to look at how much risk each reinsurer has taken on. A side effect of this additional due diligence, however, is a lengthening of the time from quote request to treaty signing.

Data is taking on increasing value. In fact, in some cases it is now considered to be a form of currency. Historically, the life reinsurance industry was more intent on collecting premiums but somewhat lax in collecting credible data to support this dollar flow. Today, life reinsurers and other capital providers are requiring credible data on a timely basis.

Cedants are becoming more transparent and are providing credible data with better frequency. They realise that by doing so they will gain access to greater reinsurance capacity, even if it doesn't immediately result in lower costs.

Michael Pado is president of XL Re Life America.