Analysts at J.P. Morgan believe that the life reinsurance business is underappreciated by the market and, due partly to restriction of competition by high entry barriers, consider its long-term growth outlook to be strong.
The majority of premium and profit in life reinsurance is generated by in-force portfolios, resulting in a predictable earnings stream that will be recognised over many years.
Subsequently, new entrants face a lengthy period of investment before turning profitable. This, the report says, is difficult for many to justify and results in a less concentrated marketplace.
Furthermore, with very little life reinsurance business conducted via brokers, there’s a strong advantage for the incumbents, since it makes it more difficult for new players to access business and compete purely on price.
An additional barrier highlighted is the long term nature of the life reinsurance contracts. For a primary insurer to feel comfortable ceding liabilities that could stretch for more than 30 years, it generally would want to deal with established players with unquestionable financial strength.
Each of the four life reinsurers in Europe have at least a AA- rating with S&P, and in the analysts’ view this is a hurdle that new entrants would struggle to achieve.
The long term nature of the contracts also makes it more challenging to structure capital market solutions to compete with the traditional players.
This, the report says, is partly due to the inherent uncertainty in making very long term forecasts for biometric risks, but also because investor appetite for a product that would require capital to be tied up for a very long period is lower.
