Global ratings agency Standard & Poor’s (S&P) expects emerging life insurance regions, such as the Asia-Pacific, and continued growth in the longevity risk transfer space to drive the expansion of the international life reinsurance sector.
Over the last three years S&P has observed strong growth momentum in the longevity risk transfer space, driven by both traditional longevity reinsurance transactions and also a substantial increase in longevity swaps from pensions funds and corporates looking to off-load some of their longevity exposure.
Historically, longevity swap transactions have been especially prevalent in the UK, says S&P, but in more recent times these types of transactions have occurred in France, the U.S. and Switzerland. Global life reinsurance firms have participated in a large number of longevity swap deals in more recent times, and while reinsurers’ exposure to longevity swaps has increased, “this is not captured in premiums.”
“As a result, the overall underlying exposure to longevity risk has increased for the sector. We believe growth potential remains sound in the longevity (swap) space, although it is worth noting that the competitive environment is more fragmented because primary insurers, banks, and private equity companies are also active,” says S&P.
Supporting the growth of the overall life reinsurance industry in the medium to long-term, will be emerging life insurance regions, such as the Asia-Pacific, explains S&P.
Markets such as this have the potential to expand greatly in the years ahead, in light of economic development and higher rates of insurance penetration as a result of rising incomes and a heightened awareness of both exposures and available protection.
“In emerging markets, we generally see younger demographics, increasing wealth, and improving health care, which should point to improved mortality over time. Furthermore, the primary writers and reinsurers should benefit from good diversification, given that the amounts stated in insurance policies, to be paid upon death or maturity, are typically smaller than those in more developed markets,” explains S&P.
Despite the expected growth in emerging life insurance regions and the continued momentum of the longevity risk transfer space, the U.S. mortality market remains the “cornerstone of life reinsurers’ business volume,” says S&P.
Cession rates increased in the sector to about 27% to 28% in 2016, and S&P expects rates to stabilise somewhere around 25% to 28%, “which will likely lead to flat business growth in the region, allowing the market to remain a cornerstone of life reinsurers’ business volume,” explains the rating agency.
Looking forward, S&P says; “There are ample opportunities for the sector to support product development, underwriting, and claims handling, and to finance acquisition costs. Business opportunities include the mortality, morbidity, and longevity business, with some emphasis on morbidity, although this can vary widely across regions. The main growth markets here will likely be China, Southeast Asia, and India, in our view.”