The life insurance sector in Australia and New Zealand is increasingly looking to reinsurance as a strategic capital management tool to alleviate the pressure from regulatory requirements, shareholders, and foreign investment, according to a report from reinsurance broker Guy Carpenter.
Matthew Rose, Managing Director at Guy Carpenter, noted that the underlying business model for Australian life insurers has been rapidly changing in recent years as the industry responds to declining levels of profitability.
“The challenges have been instigated by several factors, all intertwined,” he explained. “Developments in Australia highlight the lessons learned globally about the imperatives for efficient management of capital bases to create opportunities for enhanced growth.”
One factor was the increase in regulatory requirements following the global financial crisis, particularly around capital and solvency, which have resulted in a lag on returns for most Australian insurers relative to other financial services industries.
Major shareholders have also been withdrawing from life insurers in Australia recently and reallocating capital to more profitable businesses and sectors that bring a higher degree of return and certainty to their balance sheets, either by selling their ownership or utilising reinsurance to transfer risk.
In contrast, large foreign companies, which have a stronger tolerance for what they perceive as short-term pressures, are recognising long-term growth opportunities in the Australian life market, with the Chairman of Australia’s regulatory body warning that the sector could be almost fully foreign-owned within five years.
Foreign companies are willing to adopt lower return targets and accept greater volatility of results than local shareholders, and they also bring more experience and capabilities in managing global portfolios with differing capital reserve requirements across many countries, Rose explained.
“These forces of disruption create awareness of the opportunities for life insurers to manage their capital more efficiently and achieve more profitable growth,” he said. “With the Australian companies owned by entities with lower return targets, the participants create a ‘win-win’ situation with the purchase of the Australian portfolio.”
Rose suggested that insurers are now gaining an understanding of the significance of efficient restructuring of capital to more profitable businesses and its impact in reducing volatility and creating earnings growth.
“Globally, reinsurance utilization is moving away from serving solely as a risk protection and capability solution to a strategic capital management tool. With this evolution comes a reinsurer focus on larger capital transactions,” he explains.
Rose claimed that the goal of achieving efficient capital structures could be enabled by Guy Carpenter’s market insights, which help clients restructure reinsurance relationships and negotiate treaties.
“Insurers with lower capital targets and more shareholder tolerance of earnings volatility may pursue profitable growth opportunities in overseas markets through reinsurance placements or mergers and acquisitions,” he concluded. “Guy Carpenter’s tailored solutions in broking, Analytics and Global Strategic Advisory help clients find opportunities that best match their capital and risk profiles.”