Global Reinsurance assembled a number of key executives from the life reinsurance industry in New York to discuss the current and future state of the industry. The participants brought a range of perspectives, with well-established players and new entrants both represented. Some of the key themes included declining demand, consolidation, competition, life settlements, unexpected mortality trends and the importance of contract certainty.
Ronald Gift Mullins, Insurance Journalist, Moderator
Eugene Woodard, President and CEO, Revios Re, North America.
Michael Pado, President, XL Re Life America.
Patrick Kelleher, Chief Financial Officer, Transamerica Re.
Rob Griffin, Senior Vice President, Guy Carpenter.
John Nigh, Managing Principal, Tillinghast-Towers Perrin.
Mark Sarlitto, General Counsel, Wilton Re.
Rodney Clark, Director, Standard & Poor's.
Ronn Mullins: Thank you for participating in this roundtable on life reinsurance. Your comments and opinions on issues, trends and opportunities in the industry are greatly appreciated. That said, lets begin. According to a survey by Munich America for the Society of Actuaries, from 2004 to 2005 total life reinsurance new business production in the US, including recurring, portfolio and retro, ordinary and group declined 50.6% year to year. Canada had a 16.1% increase. Does this mean there is across-the-board less individual and group life insurance being sold, thus fewer policies to be reinsured? What are the reasons for this decline in life reinsurance premiums? Will the trend continue?
Eugene Woodard: I think one of the trends that has been underway for many years has been the shift by consumers regarding what products they are looking to buy. For example, there is a much bigger interest now in longevity-type products than in other types of products and I suspect that is one of the drivers of the decline. Also, I think companies are having a great deal of difficulty attracting sources of production. Agency forces are dwindling because of the focus on the upper income and middle income groups. No one is serving the lower income groups, and as a result of that fewer sales are being made. It is difficult to find an agent who sells a $10,000 or even a $20,000 policy today, other than through an application form found in a magazine or from a TV advert. No, there aren't the agents who are driving those sales the way there used to be years ago. Look at the various studies and the volume is down for reinsurers so obviously there are fewer policies being reinsured and it probably does reflect the fact that there are fewer policies being sold directly.
Michael Pado: Applications are down but the industry is being buoyed somewhat by the increasing average face amounts. This situation doesn't affect all companies. If you look at the entire market, the top 50 from last year grew about 7% or so overall and the others had a 4% loss, so different companies are adapting to the market conditions and some are more successful than others.
Rob Griffin: In a National Association of Insurance Commissioners report of the 50 top life companies in the industry, I found it striking that one company in particular, First Colony, had a 49% increase in new business issued 2005 verses 2004, yet Banner Life had a 29% drop. The range was just incredible; companies were all over the place.
John Nigh: But also you are seeing the strengthening in pricing on the direct side which will affect the buyer's ability to purchase insurance. Back to Mike's point about the differential between the top 50 and the rest of the insurers, I think that is going to continue to happen. It has been my belief for a long time that you are going to see much more in the way of consolidation occurring. People are going to demand that they have good quality behind their insurance purchases, quality in the terms of the provider. The consolidation is not due to major rehabilitations taking place, but a continuation of the flight to quality.
Pat Kelleher: I tend to agree with you, John, and at the same time I would observe that the trends in the sales for the lower application counts are not something that's new. In the past several years, the traditional life reinsurance business at Transamerica has not been growing very much at all. The growth that we have been seeing is through initiatives in product development and consulting where we are helping customers to compete in the way that you are describing. If we just did flat out responses to quotations and that was the sum total of our business, Transamerica wouldn't be a growing business.
Rodney Clark: If you look at some market share statistics over the last few years you'd find there is a lot of ebbs and flows and a lot of it is extremely company specific. If you look at the top ten term life sellers five or six years ago, you would only find a couple of those names in that list today. There has been so much movement of companies in and out. Take universal life. It has been even more volatile. You would be hard pressed to find two quarters in a row where the top seller was the same company. A lot of it is market pressures, a lot of it is the things that reinsurers have in fact done in terms of raising prices, in terms of getting tough on ceding companies with respect to underwriting exceptions that have really strongly influenced what is going on in the underlying market. More probably speaking it is not as if the challenges of growing the individual life market are new, they have been there for a long time. There have been spikes around the implementation of Triple X, there are spikes around universal life's secondary guarantees, but these all tend to be short lived and even out over time. You also find agents selling the annuity and other retirement savings products when those products are really attractive and thus they are putting less energy into the life sales. It is really the individual life market that the industry as a whole hasn't quite figured out how to crack in terms of sustaining long-term growth.
Ronn Mullins: Mortality rates have come under increased scrutiny in recent years, especially for older age mortality. Insurers and reinsurers are trying to become more comfortable with death benefits they should expect to pay at ages above 70. There has not been much experience at these ages, especially at the higher issue ages. How much of a discount should these higher-age persons be given due to underwriting or should different factors, such as used for long-term care insurance, be implemented for underwriting at these ages?
Eugene Woodard: Well, in terms of the clients' mortality that we have, there doesn't appear to be a great deal of expertise in the marketplace in terms of higher-age underwriting and often we see the same underwriting criteria being applied to the older ages as to the younger ages. Consequently, there isn't a whole lot that we can use as sharp criteria for the older ages as this point. From a reinsurance standpoint, I am sure there is enough data available but unfortunately it is not in a convenient form. There could be a study done of this situation, but this would require a lot of data being available from every company, but as you know there is a reluctance to share that data, and there is no central repository where that data can be gathered and analysed and then used to write those coverages.
Pat Kelleher: I would add that there are a number of companies who specialise in that market or have worked in that market for a number of years and know it pretty well. What I would observe from working with those clients, both on the retail side and in my previous and current capacity, is that there is enough credible experience to take a position and to do it intelligently. But at older ages, what matters a lot more is consistency in underwriting because of the medical and health risks. I have seen companies, even with the same underwriting standards over time, that have pretty significant differences in experience so the discipline around the underwriting is important. I don't think we have been surprised at the emerging experience of older ages although I would say that around five years ago we revisited mortality tables and reconstructed them based on emerging experience. What that did was put us out of the market, or so I was told at the time. Recently we have become reasonably competitive and are starting to win some of those quotes so the earlier disappointing sales were probably more down to using the wrong set of expectations for mortality due to optimistic hopes rather than a good analysis of emerging experience.
John Nigh: I almost have to say that the actuaries got it wrong with the mortality. It is one of these areas that when the 75 to 80 table was developed, for example, you didn't see that older age for estate planning activity that you see today, nor did you see the level of 30-year-term policies issued up to age 65 as you do today, or having a slightly normal table that ends at age 70. It doesn't support pricing in an older age environment. Now everybody is thinking about it, so it is a learning experience and I am not surprised that you have to make sure when you are pricing a product that you price it with the expectation of how it is being sold. I mean, it is being sold to an older age market and sellers have to pay attention to that.
Rob Griffin: A distinction has to be made between the approach the reinsurers made with respect to defining the various preferred categories. They were really leading voices in the industry when the various select preferred classes began to emerge. As that market developed, yes, they got it right, and yes, they got it wrong. I think what happened with the older-age market is while they were doing all that, "oops", they found out that they had a lot of older-age business on their books. As a reinsurance broker coming from the direct side of reinsurance placing these deals and looking and working with the reinsurers in the marketplace, I have never seen such great diversity of opinion on what degree they would modify the manual life table. I mean just vastly different than what you would expect. I think some reinsurers are digging deep and strong into this marketplace to try to figure it out. This only started about three or four years ago, when people actually figured out that this was devastating, especially from a premium standpoint.
Rodney Clark: The helpful thing that Pat referred to earlier is you do get more credible experience more quickly in the older ages and we have seen that both in the primary and the reinsurance market. Some companies put on significantly more premium than they expected to in a short period of time in the older age brackets and have quickly taken a second look, compared it to the experience and come back with some revised views. I have heard the exact same thing about the extreme divergence of views at the reinsurance level in terms of older age mortality that is coming into play. We were there maybe six or seven years ago when preferred life underwriting was a relatively new phenomenon with the younger ages. Now we have seen convergence in those ages that has been in the preferred underwriting market for a while and it has taken time to catch up in the older ages, but it seems we are getting there.
Michael Pado: There is an important link between this question and the first question. Due to the lacklustre sales in the primary market, there has been a lot of product design for the older age market, especially the older age underinsured market. The fact is that these are the folks with the money and are able to buy the products and pay for them. Concurrent with that evolution is my belief that the reinsurance industry is changing as well. The primary companies have also been changing with the amount of reinsurance ceded and the style of those purchases. There was a lot of first dollar quota share insurance being purchased in 2003-2004. In 2005, there started to be a bit of a shift as primary companies stopped buying as much reinsurance and one way of doing that was simply to switch to an excess retention type of purchase. That changed the dynamic for reinsurers but it also forced reinsurers to start considering a higher average reinsured issue age mechanism and so reinsurers started to focus on higher age mortality.
The grey dollar
Ronn Mullins: You may have seen adverts on TV with some celebrity encouraging senior citizens to sign up to purchase life insurance at so much per unit per month, usually per $1,000 face value. "You cannot be turned down," the seller exclaims and confidently states that the premium will never increase, no one will call, and encourages the viewer to dial a number to sign up. Other than these TV hawkers is any insurer really focusing on selling these older citizens, say 65 and over, a life insurance policy through regular channels?
Rodney Clark: The market you are talking about has been there for a long time and is largely a non-underwritten direct marketing sales technique. You don't see many companies in the industry looking at it because very few companies in this industry, which tends to be a broker-driven market, found they had enough knowledge of direct marketing techniques to do it cost-effectively. It is a profitable end of the market if you can handle the expense side. It's this new development of trying to do it through agents and brokers where you have to have a higher face amount to make it work, that has really been the market change over the last few years and the real learning experience for everybody that has been in that market. But I don't really see the two, although they are serving the same age range, as being direct competitors of one another.
John Nigh: Back to Eugene's point earlier, I think the lower-to-middle-income bracket is largely ignored. If you go to any insurance industry in the world though, except for Korea and Japan, they are probably making the same statements, they don't see that much opportunity there. American General is a good provider to the middle income market, but there are not that many players in that middle market, and one of the answers that has been thrown out as a solution to penetrating that lower-to-middle income market has been work-site marketing, which is really not being fulfilled. Some reinsurers are trying to work to develop programmes for that market with simplified underwriting, expanded databases and other initiatives. The test will be to determine if it is successful, but at least that effort is being made very strongly by several reinsurers.
Ronn Mullins: One certainty is that older people are not going away as soon as they once did. The segment is going to get bigger and bigger so it seems to me if you are ignoring them you are ignoring a gigantic potential market.
Rob Griffin: The insurance industry is not ignoring them. In fact, the older people with money are being beaten to death with offers to protect their assets. But attempting to get the capacity in the reinsurance market on an 85-year-old who is worth $200m is a challenge. It used to be three or four years ago that you could place a case for $150m on an individual life, but today you would be lucky to get reinsurance and direct capacity in the $60m range because of the withdrawal of the Europeans from the retro markets. Very few companies have the capacity that they once had.
Michael Pado: I would agree with Rob. I don't believe the older age market is being ignored at all. I think actually the focus should be on exploring new, innovative and more cost-effective underwriting techniques to properly assess the mortality. I am sure all of you have probably heard some aspects of linking cognitive underwriting whereby a different type of non-invasive testing is applied to older age applicants. Some primary companies are exploring methods of factoring that underwriting into their primary pricing and asking their reinsurers to do so too.
Rodney Clark: An important question is does the middle income segment of the older age market need to be served with life insurance? Is there a need for those over 70 to buy pure life insurance other than in the very high estate-planning market or the very low end burial-expense market? In that middle market, the biggest thing that is needed is retirement income products that protect against longevity. That is an area where the industry is focusing. It is increasing, but it is still a relatively small number of companies that have cracked that nut and been able to exploit it successfully. They certainly can have a role in helping companies set those assumptions, price and design products, not to mention building in a bit of a natural hedge against mortality risks.
Ronn Mullins: Very well discussed. This topic is somewhat related to what we have been talking about. Life reinsurers are placing greater emphasis on doing business with ceding companies that value partnership and a healthy reinsurance community. These ceding companies openly share mortality and lapse data to allow reinsurers to validate their assumptions. They maintain underwriting discipline and share internal audit results. They find mutual agreement on treaty terms and conditions, and work actively with reinsurers to improve policy and claims administration. In your estimation are these advances actually happening or are they hoped-for advances in the life reinsurance industry?
Mark Sarlitto: Our relationships with our ceding companies have become relatively open. I think this is partly because we are a new reinsurer and we were launched at a time when there was a lot of pressure on ceding companies to demonstrate consistency in their underwriting standards and processes. We therefore developed commercial relationships that pretty much became predicated on transparency in the underwriting process and how our clients monitored and managed that process to achieve consistent outcomes. Having access to audits and on how they are thinking about their products has helped us a lot in our pricing. The relationship has been far more transparent than I would have thought.
Pat Kelleher: We have encouraged that transparency. We also demand it in terms of doing business with companies and the surprise was that most companies are very open and capable of providing that experience. We incorporated it in our pricing process. Where we have credible studies, we actually charge lower risk margins, we differentiate between customers, particularly with respect to underwriting standards, how they solicit and how they qualify or underwrite and rate insurance business. There are a few disagreements about whether claims should be paid on some policies under the insurance agreements. Nobody likes those surprises; it is just bad for business. But both ceding and reinsurance companies see the benefit of being more open and straightforward in their relationship.
Rodney Clark: It is a really important consequence of consolidation in the sector. Consolidation hasn't just affected pricing, it has affected the terms by which reinsurers are willing to do business and, therefore, the terms they are getting. It is perfectly logical in our modern high-tech era that reinsurers should be able to say, "I need data from you of a certain timeliness of a certain quality that I can build into my systems and study the experience, and if you can't provide that, I am going to decline the quote". I think more and more of that is going on and with the decline in the number of life reinsurers in the market, there is a lot more power to make those demands today than there was just a few years ago.
Eugene Woodard: In addition to consolidation, there is also the result that stems from the erosion of profit margin that is driving the concern. Reinsurers for the last few years have clearly drawn a line saying what terms and rates they are willing to tolerate and this is causing the ceding company to realise that they do have to be much more accommodating in terms of opening the doors for audits, of revealing their pricing assumptions or of allowing reinsurers to review underwriting and claims payment practices. Consequently, reinsurers are in a much better position today than they were years ago, at least in encouraging clients to do the right thing so that they can offer more competitive pricing. Like Pat, we won't quote it if we can't have access to appropriate data.
Rob Griffin: The direct insurance industry is coming up with the data needs of the reinsurance and the retro industry. Not zip codes necessarily, but we have seen in quotes and other work we have done with clients that they have gone out and got the data when they really felt it was required.
Michael Pado: My experience indicates that companies are more willing than ever to supply credible data on a timely and ongoing basis. They have displayed an increased willingness to demonstrate that they have an effective control environment on an ongoing basis. In the past, we had to rely almost solely on administrative and underwriting audits where you had to go and verify that the cedants were doing the right thing according to the treaty and terms and conditions. Now we have found that clients are more willing to supply us with a continuous stream of data that gives us greater comfort on an ongoing basis, and that has been very important. At XL, we feel strongly about the receipt of credible data on a timely basis. In fact data, which has value, is a different form of currency and non-delivery of reinsurance-related data can be viewed as tantamount to the non-payment of reinsurance premiums. After all, you cannot manage what you cannot monitor. I believe that the more prudent reinsurers will become far more specific in this regard.
Rob Griffin: In the old days, the reinsurance buying process was one of quote first, everything else later. Now it is everything else including quotes first before we go forward. I work with Guy Carpenter and we are heavily into property casualty. One of our major initiatives is contracted placement. I think this should come to the life reinsurance world. It has to happen so that everyone understands the administration and the underwriting and everything else prior to the deal being implemented.
Pat Kelleher: To a large extent it is already happening. The letter of intent that we use now is far from a placing slip like in the old days, it is a seven- or eight-page document.
Rob Griffin: Thirteen pages for some, ten pages for others. We are seeing for the first time that letters of intent are a rule and not an exception. Three or four years ago, you just did not see letters of intent. It was still a handshake, and a promise that the treaty would be done and they sometimes were languishing out there for three and four years after the deal was initiated.
Ronn Mullins: What is in the letter of intent?
Rob Griffin: Much of the guts of the reinsurance treaty and all the terms and pricing. Anything really significant should be in that letter of intent.
Michael Pado: The time that elapses from the receipt of the initial request for a proposal all the way to the signing of the letter of intent has probably doubled or tripled over what it used to be. It is just taking a lot more time because all parties are spending a great deal of time and effort in getting it right the first time to try to avoid problems down the road. In preparation for this meeting and discussion, I discovered a startling statistic that indicates maybe we had become more efficient than we thought we had. It turned out that in 2001, according to schedule S (the life supplement within the "Health Statement Test" for reinsurance reporting), there were something like 1,400 treaties that were entered into with a 2001 effective date and in 2005 there were just 700. A dramatic shift in the market, I think, in terms of the speed at which agreements are being replaced and new products are being designed.
Ronn Mullins: Is one reason that you are now greatly involved with spelling out everything that could possibly go wrong in letters of intent is that reinsurance is no longer a "gentleman's agreement" type of business? I remember 25 years ago when I worked for an insurance company that owned several reinsurance companies, the CEO of one told me, "We just shake hands on big deals and that's it, if problems come up later, we work them out between us". Of course, problems do arise, especially over claims and ceding companies are become more aggressive in asserting their rights, and reinsurers are stiffening their backs. Would this be a fair characterisation of the life reinsurance market today?
Eugene Woodard: I would put it slightly differently. It is no longer a "gentleman's agreement" business. I started in 1977 and treaties took years to finally get executed and a handshake was the rule. That was the day when reinsurers were making significant profits and ceding companies were making significant profits so even if you missed occasionally you were still comfortably well off at the end of the day. Now, without that kind of cushion, everybody has had to really tighten up and be a lot more concerned about rules being applied to underwriting, extensions being adhered to and pricing being sound and the like.
Michael Pado: There has been a greater effort towards developing neutral expectations so that you simply understand what you have agreed to up front and try to avoid problems down the road. There is nothing that prevents that from happening in a gentlemanly fashion. There has been a dramatic evolution in the ability to monitor and measure that particular risk, including concentration of risk, among some primary companies. Not everybody is paying attention to it, but those that don't want to limit their new business writings will get better at it. Those that wish to buy reinsurance know that they will need to provide credible data on a timely and ongoing basis, otherwise the capacity will just not be there.
Ronn Mullins: But it is true that there is more arbitration going on between reinsurers and ceding companies now than there ever was. I mean the two parties are not always being very gentlemanly. Why has this new combatant climate developed?
Rob Griffin: There is a tremendous effort in dealing with clients and making sure that they have adequate arbitration and adjudication wording. Some reinsurers have demanded to see all claims before they agree to pay them. But on first quota dollar share basis, that is just a burden that cannot be met, so it has to be adjusted and modified and everyone has to understand what the ramifications are if they are going to do business together.
John Nigh: What is happening today is an attempt to avoid those denials in existing treaties, the debates, the stressful conversations such as, "Well, you didn't tell me you were doing this, why should I be liable for it?" I do a fair amount of arbitration work and I have found companies, reinsurers and ceding companies alike, try really hard to not go to arbitration because that is really a court of last resort. There's no appeal. Once they get there it is like, "OK let's do it". But arbitration doesn't happen that often.