In a year where many insurance and reinsurance segments have seen profit margins squeezed and growth challenged by a growing onslaught of alternative and new market entrants, the life reinsurance segment has remained a beacon of stability.
In contrast with many other re/insurance lines, life re/insurance has been characterised by the assumption of more stable liabilities, favourable capitalisation, a conservative investment approach, and solid market positions, according to A.M. Best.
Although the life and annuity market is more susceptible to a credit cycle downturn, larger life reinsurers continue to enjoy the advantages of meaningful economies of scale, solid capitalization, very strong market positions, as well as offer value-added services such as facultative underwriting or capital management solutions.
Interest in pension risk transfer deals has stimulated market growth as life reinsurers provide risk solutions against meaningful mortality improvements.
Capital management solutions, or financial reinsurance, provide a further source of income, A.M. Best said, particularly given the increased reserving requirements on ageing underlying books such as level term: “Additionally, block acquisitions provide an area of growth, as direct writers with legacy books or trapped capital look to reinsurers to essentially buy or co-insure blocks of business, allowing the direct writers to move capital to better-margin businesses.
“The ageing population affords yet another area for growth outside mortality reinsurance.”
While demand for life reinsurers has remained stable and growing by demographic shifts and interest in pension risk transfer, the segment has further benefited from being insulated from potential negative impact of riskier asset classes as it doesn’t heavily depend on investment yield to support its product offerings.
Life reinsurers generate earnings primarily through underwriting results and income from financial reinsurance solutions, and tend to have more conservative asset portfolios, A.M. Best explained.
Trends expected to continue in future years include acquisitions of blocks of business and increased signs of reinsurers looking to enter the direct market – perhaps spurred on by falling cession rates – currently in the mid-20% range.
The rating agency noted that; “long-established life reinsurance companies are taking on interest-sensitive businesses as well, as evidenced by RGA’s recent acquisition of Farmers New World’s asset-intensive business.”
A.M. Best said it would continue to monitor the performance of these blocks of business in light of the market dynamics of interest-sensitive businesses.