The North American life reinsurance market has been impacted by a number of different factors in recent years, but the most obvious has been the level of consolidation. Unlike in the direct life insurance market, consolidation has resulted in five players writing about three-fourths of the in-force traditional life reinsurance in the US, according to AM Best, with Swiss Re, Munich Re and RGA together maintain more than a 50% share. In Canada, these three companies dominate the life reinsurance market. The rating agency cited Manulife and Sun Life as the leading North American life retrocessionaires.
One consequence of consolidation, according to AM Best, is that life reinsurers are better positioned to rationalize prices and negotiate better treaty terms; the improved pricing environment is being driven by both reduced capacity and increasing demand. Consolidation among life reinsurers also has pressured primary writers to scrutinize their reinsurance programs, given the potential concentration risk that has emanated from life reinsurance merger-and-acquisition activity.
Moreover, the life reinsurance capacity of many of the largest companies with European parents has lessened, as the hard property/casualty markets have rendered the returns on the nonlife side more attractive. As a result, there is "competition" for capital within organizations, and given the relatively lower returns on commodity-based life reinsurance mortality business, less capital is being made available to write life reinsurance.
The life reinsurance market in general has been growing faster than the direct side, due primarily to a trend toward lower retention levels, thus pressuring individual life reinsurers' capacity as an increasing portion of term business is ceded. This trend has been fueled by several significant items, including historically favorable reinsurance pricing (better mortality assumptions by life reinsurers) and more recently, by Regulation XXX, which requires direct writers to hold increasingly high levels of redundant reserves on level term products. The latter point has led companies to primarily seek offshore reinsurance solutions to the Triple X "problem;" however, the less favorable dynamics of Letter of Credit capacity/pricing have made direct writers seek alternative solutions to offshore reinsurance.
Given the recent capacity crunch, AM Best believes there is ample room for new entrants, particularly in segments such as health reinsurance, where capacity is relatively scarce. However, AM Best also believes there is a significant barrier to entry, as it has proven difficult for start-ups to raise capital, which, for practical purposes should be in the $200m to $500m range.
AM Best notes the continued limited capacity within the health reinsurance segment, characterized by most reinsurers' accident and health pools being in run-off mode, while only a few reinsurers provide new business capacity on a selective basis for niche business lines such as long-term care and Medicare supplemental insurance. However, AM Best believes that some of this capacity might be filled via new entrants that can capitalize on strong underwriting and actuarial expertise to differentiate themselves by providing value-added services. One particular segment that shows promise is employer stop-loss business, which has benefited from significant rate hikes in recent years. AM Best believes that reinsurers may opt to increase their position in employer stop loss if direct carriers maintain better underwriting controls compared with the problems of recent history, where many MGUs were granted excessive underwriting authority.
For the few companies that have successfully entered the life reinsurance arena in recent years, AM Best believes prospects are favorable. Some companies, however, are focusing on international opportunities or specialty niches such as reinsurance on variable annuity secondary guarantees, with less emphasis on lower-margin US life mortality business. Furthermore, AM Best believes the international life reinsurance market is poised for significantly higher growth than the US market, which over time will decline from current double-digit rates and converge with the single-digit growth rate of the direct market.
