U.S. life/annuity insurers have an increased appetite for utilising reinsurance protection as a risk management tool, but consolidation in the U.S. life reinsurance sector is limiting the options for primary players, according to ratings agency A.M. Best.
A.M. Best states that U.S. life/annuity insurance companies have increased the aggregate face amount of ceded policies to reinsurance companies by 83% since 2006 to $28 trillion. Adding that a recent A.M. Best survey found that the use of reinsurance in the life/annuity sector is increasingly for risk management purposes, as opposed to capital management benefits.
But while demand for reinsurance from U.S. life/annuity insurers is on the rise, ongoing consolidation in the life/annuity reinsurance segment has resulted in a more concentrated marketplace, leaving primary insurers with fewer options when it comes to their reinsurance needs.
“As a result, counterparty concentration has grown as a concern for direct writers and new entrants to the life reinsurance market likely would be welcomed. However, the U.S. life reinsurance market presents significant barriers to entry, which A.M. Best believes adds some stability to the market,” said the ratings agency.
According to A.M. Best’s Special Report, Consolidation Narrows Reinsurance Options Despite Greater Reinsurance Risk Appetite for L/A Insurers, many life/annuity firms view their reinsurance partners as business partners, with half of survey respondents actually stating that terms and conditions of a reinsurance contract are more important than price, and security.
The report finds that most U.S. life/annuity insurers cede the majority of their business to reinsurance firms domiciled in the U.S., with approximately 30% of the business moving offshore.
“A.M. Best believes reinsurance plays an essential role in the risk-spreading process and provides insurance companies with varying degrees of financial stability. Broadening reinsurer diversification and maintaining consistent communication with their chosen reinsurers are also avenues of risk management,” said A.M. Best.
Adding; “Limiting the amount of risk per reinsurer and using reinsurers that meet stated criteria and objectives are also beneficial risk mitigation tools. A.M. Best expects rated insurers to continue measuring and monitoring performance and counterparty risk as an ongoing risk management control function.”
