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S&P predicts continued profits in life reinsurance driven by market concentration

15th August 2017 - Author: Luke Gallin

The concentration of the global life reinsurance market and high barriers to entry for new players will contribute to the continued profitability of the sector, according to analysis from rating agency Standard & Poor’s (S&P).

Longevity imageIn its latest global life reinsurance market report, S&P noted the impressive profitability of the sector in 2016 as returns on equity (RoE) stayed somewhat above the 10% threshold, which, the ratings agency predicts to be the case for 2017.

The concentration of the international life reinsurance arena, said S&P, is one of the driving forces behind the market’s continued profitability in recent times, and the expectation this trend will continue throughout 2017.

The top-six players in the life reinsurance market really dominate the space, claiming a combined market share of more than 90%, explained S&P.

“Although competition and pricing pressure is visible among the established players, the high barriers to entry for new entrants will likely help the industry perform in line with its sound history. Since the barriers to entry are lower for the longevity swap business, which has a larger number of competitors, we assume this segment will experience greater pressure on margins,” said S&P.

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The challenge for new market entrants concerns the huge underwriting capabilities of established players, as well as their knowledge and expertise within the sector, something that is hard to replicate. S&P says that cedents in the space really value the sophisticated underwriting, actuarial and risk transfer capabilities of their established reinsurance partners, underlined by long-standing relationships.

“We assume the number of reinsurers on the various reinsurance treaties to be about three to four at most on average globally. It is therefore unlikely that start-ups or short-term capital investors would threaten the global life reinsurance market, notwithstanding the recent acquisition of Aurigen Capital Ltd. by Partner Reinsurance Co. Ltd. (A+/Stable/–), in contrast to the situation we have seen evolve in P/C reinsurance over the past decade,” said S&P.

The ongoing low-interest rate environment, which, according to S&P has more of an impact on primary life insurers than life reinsurers, owing to the former’s focus on biometric risks and its reluctance to assume market risk, is expected to drive high demand for reinsurance protection in the mid-term.

As will regulatory requirements and challenges in some parts of the world, said S&P.

“In particular within Solvency II or IFRS 17, the capital requirements on primary life insurers for the guarantees in their back books are rather high. We assume this will stimulate demand for reinsurance solutions to soften capital needs,” continued S&P.

Despite an expectation of continued growth and profitability in the life reinsurance sector, the rating agency did highlighted that substantial adjustments to actuarial assumptions might well result in earnings volatility, as the market has witnessed previously.

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