Checking in the Risk.

Mortality risk management has become excess baggage for life insurers, so they are increasingly letting reinsurers handle it.

It has been well documented that life insurers are becoming asset managers, wealth enhancers, retirement specialists, money managers, estate planners and one-stop financial advisers. They now are competing against bankers and stock brokers for the same dollar and have been addressing all those intractable distribution issues.

But they still write life insurance, right?

Well, yes, they do--more in 2000 than in any other year in terms of face amount. The difference is that the writers are no longer actually insuring the bulk of that mortality risk. Instead, they are ceding the risk--what used to be the essence of the life business--to a host of reinsurers, all too happy to assume it. The year 1998 was the first in which reinsurers accepted more of the risk (51%, according to Society of Actuaries data) and reaped more of the rewards of life underwriting. The direct writers veered off into other work they see as more important for growth and survival.

The trend toward ceding risk has been fast and relentless. Eight years ago, according to the society data, direct writers reinsured only 15% of face amounts on new business. That percentage more than doubled to 32% in 1996 and then doubled again to 64% in 2000 (see "Annual New Face Amounts, Insured and Reinsured," page 80), and several major reinsurers say the number is still growing this year. And they say that size of the life insurer is not a factor; large and small companies are just as likely to join the ceding revolution. Reinsurers last year took on nearly $1 trillion in face amounts on new business written in the United States.

Simple and Complex

Why the rush to push off risk? The answer is simple. Life insurers are competing in a new era of financial modernization that forces them to address matters they didn't have to address before. The answer is also complex. They are responding to myriad forces--demographic, economic, legal, regulatory, scientific--and they have only so much capital to deploy. "Direct companies are using business models different than those of the past," said Michael Colannino, vice president of life products at Transamerica Re, Charlotte, N.C. "They used to do all things. Now they need to perform at peak levels, so they are focusing their time and resources on what they consider their distinctive competencies."

The following forces are among the ones fueling the cession of risk:

* Primary companies are changing their business models to focus on the manufacture and distribution of products. Increasingly, direct writers tap the mortality expertise of reinsurers to help in product design.

* Prices reinsurers can offer are much more attractive to direct writers today than they were five or six years ago, and competition among reinsurers is high.

* Mortality assumptions are lower than in the 1980s, but direct writers lack confidence to aggressively use them. Reinsurers are more comfortable, because they have more data to have been particularly helpful to direct writers changing their distribution or introducing preferred products or simplified-issue products. The new underwriting spurred the development and popularity of level-premium term policies in the mid-1990s, which guarantee to buyers the same premium for 30 years or even longer. Sales of level-premium term policies have soared in recent years, and Stroup said level-premium term is still the product that most direct writers seek to coinsure with reinsurers. Reinsurers are much less involved in the mortality on variable products, the other life product that gained popularity from the mid-1990s, and Stroup said mortality charges in variable products are on a yearly renewable-term basis, meaning that the cost of insurance rises every year.

Reinsurers also are not writing much on long-term-care insurance, because the market is still relatively small, Stroup said, and disability income insurance is issued by a handful of carriers that reinsure very little. Insurers also do not use reinsurance to cover guaranteed minimum death benefits in variable annuities, another fast-growing product in recent years, Stroup added.

Lincoln Re can help direct writers on every step of product development, from mortality assumptions to construction to profit testing and filing, Shanahan said. "It's what some clients are looking for," he said. 'We can pull out any of those elements. Some writers have the ability to do the pricing work, so we spend a lot of time on mortality. Then they do the profit testing and product filing."

Term life is the most common kind of product Lincoln Re helps clients to develop, especially when the client wants help with the whole package. Lincoln Re also helps develop survivorship policies and universal life, Shanahan said.

At ING Re, term products also are the mainstay, but the company has helped direct writers to develop universal life and variable universal life, particularly those sold on a second-to-die basis, Dicke said. A new thrust at ING Re is a critical-illness product, he added.

Other Factors Drive Cession

But it is not just product development that drives the cession trend. Instead, it is that direct writers want help as they reconfigure their businesses and as they respond to changes in regulation and the marketplace.

For example, reinsurance has offered capital-hungry direct writers a way to unlock capital from the reserves they maintain on their old, in-force business. Reserving requirements force these companies to keep money locked up to meet future claims.

"Reinsurance is a great way to release the embedded value," Stroup said. "You get to convert an off-balance-sheet asset and to capitalize future earnings immediately. That's the mechanism releasing the value."

Risk-based capital regulations pushed by the National Association of Insurance Commissioners and adopted by states in the early 1990s stimulated interest in reinsurance on old blocks of business. Dicke said some companies did not have enough set aside in reserves and have turned to reinsurance to ease their problems.

More recently, the NAIC's Regulation XXX set higher reserve requirements, especially for level-premium term policies of 20 years or more and for some minimally funded universal life policies. Before states began to adopt the NAIC model in early 2000, Triple X stimulated purchases of level-premium term policies. After adoptions in many states, direct writers rushed to reinsure much of that new business, Stroup said. The new regulation also promoted new designs of level-premium products, again with the help of reinsurers. Despite the stricter reserving requirements, these new designs are still offering buyers "reasonable value," Stroup said.

Dicke said Triple X may not have led to much new business, but rather a change in a market already developed. "It's just added complexities to the ways it [level-premium term] has been done," he said.

Colannino said that by the time Triple X emerged, many direct writers already were ceding risk on a first-dollar basis, so it didn't lead to significant growth in amounts reinsured. But Triple X made a difference in the products and services reinsurers offered, he said. Transamerica, for example, began using more offshore facilities and other reinsurance structures to mitigate the increased reserving requirements. Colannino said Transamerica's offshore company does not exempt it from U.S. taxes, and Transamerica backs offshore reserves with a letter of credit or similar mechanism.

At Lincoln Re, Triple X added a "tremendous workload," because it required the company to develop products at the same time it was already heavily involved in quota-share underwriting, Shanahan said. "The reinsurance market is always competitive, but Triple X added a special element on which we were competing," he said.

Pressure to perform

New regulatory requirements notwithstanding, direct writers are under increasing pressure to improve financial performance. "Demutualizations have caused some large companies to become much more aware of their performance, whether they are demutualizing or not," Dicke said. "Large mutuals run GAAP statements even though they're not required to. They have to pay much more attention to performance and the things that affect performance. That's where a lot of opportunities for reinsurers have come in. If we can provide mortality quotes that look favorable, they can cause favorable results in GAAP statements."

With all of the mergers and acquisitions of recent years, one might assume that with fewer direct writers, there would be less need for reinsurance. Those consolidations did not affect the amount of the underlying primary business, however, and they did not change the new kinds of needs direct writers have been facing, Stroup said. "Primary companies are still focused on earnings management," he said. "They still need to be viewed in the public marketplace as stable companies with predictable earnings serving customer needs, and they still need to create a fee-based income stream."

Consolidations

In the days before quota-share arrangements, consolidation might have reduced the market for reinsurers, Shanahan said. That's because the new and larger entity might have chosen a higher retention limit. But with first-dollar quota share, amounts reinsured have not changed. "What has happened is that there are fewer large players. We have gone from hundreds of clients to 30 to 50 key clients," he said.

Consolidations have brought some headaches, however. Consolidating companies often had different underwriting arrangements. These arrangements may need to be integrated or coordinated on a much more detailed basis, Shanahan said.

Colannino said consolidation may mean fewer opportunities to bid on new cases, but that those cases can be for larger face amounts. "As a reinsurer that has a larger parent company than any other, that could be a positive trend," he said. Transamerica's parent is the Dutch insurance giant Aegon.

The Aegon purchase has been a boost for the reinsurance company overall, Colannino said. "We get the benefits of a larger, stronger organization with a greater availability of capital," he said. "We'll continue to leverage the synergies of Aegon. They have global reach and help our international initiatives."

While growth in the reinsurance business has been spectacular, the rate of growth is likely to cool. "Most insurers have already gone to first-dollar arrangements with their reinsurers, so the growth from the pure mortality segment won't be in the next five years what it was in the past five years," Colannino said.

Top Life Reinsurers in the United States
The top 25 life reinsurers in the United States are ranked
by the in-force amount of reinsurance assumed in 2000.
($ Thousands)
Rank  Group or Unaffiliated      2000 Reinsurance Assumed
      Company
1     Lincoln National Corp                  $267,956,847
2     Metropolitan Life                       612,155,878
      & Affiliated
3     Swiss Reinsurance Group                 609,019,912
4     ING Group                               445,223,676
5     Employers Re Group                      382,385,343
6     Munich American                         309,888,878
      Reassurance Co
7     CNA Insurance Group                     247,907,084
8     Cigna Group                             173,799,645
9     Allianz Insurance                       168,907,526
      Life Group
10    American United Life                    159,131,534
      Group
11    Clarica Group                           145,243,566
12    Manulife Financial                      143,087,761
13    Berkshire Hathaway                      118,038,584
      Group
14    Household Insurance Group               112,411,371
15    Gerling Group                           109,872,271
16    GE Financial                            107,383,164
      Assurance Group
17    Business Men's                          107,347,635
      Assurance Co
18    Hartford Life Inc                       102,531,976
19    Great-West Life Group                    83,150,196
20    Allstate Financial Group                 67,606,330
21    American General Group                   52,797,745
22    John Hancock                             51,512,064
      Financial Svs Grp
23    Prudential of                            51,314,848
      America Group
24    Equitable Group                          47,038,755
25    Minnesota Mutual Group                   43,658,107
      Total Industry                       $5,771,773,350
Rank  1999 Reinsurance Assumed
1                 $555,219,733
2                  499,838,928
3                  522,656,449
4                  417,069,928
5                  343,081,544
6                  114,395,057
7                  261,207,775
8                  172,155,096
9                  129,905,106
10                 128,120,809
11                  36,328,882
12                 129,643,974
13                 106,272,926
14                 117,822,067
15                  84,028,076
16                  36,156,516
17                  85,881,438
18                 103,965,400

19                  42,282,200
20                  50,661,735
21                  51,981,013
22                  40,014,231
23                  39,007,926
24                  49,261,541
25                  37,337,731
                $5,078,643,753
To access this statistical study online, visit www.bestreview.com
and click on this story. The full statistical report and the data
in spreadsheet format can be downloaded.

Electronic Underwriting Promotes Consistency

While reinsurers have become the acknowledged mortality experts, they still depend on underwriters at the ceding companies to handle applications submitted by producers. Especially in high-face-amount cases, which are often written on older applicants with one or more health problems, reinsurers are increasingly concerned that the business is underwritten in the way they are pricing for it. "We've been able to work with companies to make sense of how they're going to underwrite," said Chris Shanahan, second vice president and regional managing director, individual life reinsurance pricing, Lincoln Re, Fort Wayne, Ind. "The large cases are where the pressure is to stray from the underwriting game plan. It's a place in which our interests get a little disjointed from the direct company's."

The sale of a variable universal life policy with a face amount in the tens of millions of dollars, for example, means the direct writer stands to gain a lot of assets to manage and fees to be earned for that management. Shanahan said direct writers can rationalize making compromises on underwriting to pick up those assets, but the reinsurer is not benefiting from that decision. "What's important from our perspective is that business underwritten is priced properly," he said.

When producers ask for quotes on large cases, the direct companies' underwriters are also under the highest of competitive pressure. Not only do they need to make an offer that is fair for the reinsurance business partner, but they need to make their assessment of the case quickly, lest they lose the case to another company. Reinsurers address all of those concerns by arming those underwriters with automated underwriting systems.

Patented System

Lincoln Re won a patent in March 1998 for its Lincoln Underwriting System. It delivers medical and underwriting expertise so that underwriters can process applications more quickly. Another objective is to improve the quality and consistency of complex decisions. According to a Lincoln publication, Reinsurance Reporter, about half the applications it processes annually are automatically approved using the underwriting system, while underwriters base their judgments on the system in the other cases. Under a service arrangement, a client underwriter can electronically send applicant information using the Rapid Data Capture system. Lincoln Re processes the information, flags problems and electronically identifies additional information an underwriter will need to process the application.

On May 7, ING Re launched an electronic life underwriting manual it calls Ascent--The Power Revealed. "Price is important, but so is service," said Dr. Pete Bell, senior vice president, risk selection, and medical director at ING Re, of the underwriting process. "That means getting a policy issued as quickly as possible."

The electronic tool allows an underwriter to keep a running total of mortality expectations real-time, Bell said. A prospect might have three or four medical conditions, and the tool assesses the data cumulatively as it is added.

Ascent contains more than 3,000 pages of medical, nonmedical, international and old-age text, ratings for 650 medical conditions and mortality characteristics for 239 countries. The system provides audio and video illustrations.

The financial underwriting information addresses such areas as complex trust laws and state laws, Bell said. It also provides financial calculators to help estimate the future value of estates and how much insurance should be made available.

Training Junior Underwriters

Bell said the manual uses layman's language rather than medical language as much as possible. Its questions about the prospect's medications sometimes can help an underwriter to uncover a disease the prospect may not be disclosing. International data is useful, because applicants increasingly come from other parts of the world and live in the United States only a few months a year, Bell said. ING Re designed the audio and video features to educate junior underwriters so they can learn the business more quickly, he said.

Bell said about 65 people--roughly one-third of ING Re life reinsurance staff in Denver--spent 18 months developing the electronic manual using information from client direct writers, medical directors and some wellknown outsiders.

The ceding of risk to reinsurers is a major change in the way life insurers conduct business, but the ceding companies still issue the policies, make the underwriting decisions, and pay the claims. Bell said the big advantage of this new arrangement is preserved when ceding companies make the underwriting decisions on a uniform basis. "We need consistency across underwriting shops, especially if a company has bought other companies," he said.

Reaching Out to Clients in Nontraditional Markets -

Banks, mutual-fund organizations and stock-brokerage firms all want a piece of the life insurance action. They are much less likely than direct insurance writers, however, to have expertise or experience in mortality risk management. So it should be no surprise that these other financial-services providers can be fertile ground for life reinsurers looking for new business.

"Noninsurers, banks and brokerage houses will have increasing success in distribution of insurance products," said Chris Stroup, president and chief executive officer of Swiss Re Life & Health NA, Stamford, Conn. They will stimulate growth in the primary insurance market, and that growth will be good for the reinsurance market."

Although such deals must include a direct writer, the reinsurer will likely make the necessary arrangements and offer a turnkey package to the client.

Like other reinsurers, Swiss Re has talked with many banks and other financial institutions about alliances, so they can distribute without the mortality risk. "We've made good progress," Stroup said. "In some cases, we're beyond discussion."

Arnold Dicke, senior vice president and chief actuary at ING Re, Denver, said his company hasn't seen business with banks develop as much as he had expected a few years ago, but there are signs it's starting to happen. "There were cultural differences bigger than we had realized, he said. "We think our product-development consulting approach is well-suited to these organizations."

ING's group reinsurance operation hasn't seen much growth in business with banks so far, said Terry Dickinson, second vice president of group life and special risk reinsurance. Group products sold through banks tend to be accidental death and dismemberment insurance and credit insurance, Dickinson said. "Banks have a lot of opportunity, but it will be more for individual products," he said. "The Canadian marketplace is a few years ahead of us in that." Those products, which Canadian banks have been selling for a few years, tend to e simple products with low premiums, he said.

Chris Swift, national insurance industry director at KPMG LLP, Chicago, agreed that the bank market not much penetrated, but he said the likelihood "is pretty high" that the reinsurance industry will find Lots of new business with banks, stock brokers and mutual funds in coming years. "Reinsurers wrn try to get creative to meet the market needs, the problems of capital constraints and to help smooth out results )f volatility," he said. He mentioned Swiss Re, Munich Re, Lincoln National and RGA as companies that are already "pretty aggressive and creative," and he said that offshore companies such as Ace and XL are buying primary insurance companies to deal with this emerging market.

Lincoln Re, Fort Wayne, Ind., has actually been working in the nontraditional markets since 1996 with its New Options Group. "We've put together a large number of deals," said David Burgoon, second vice president of the group and its director of business development. "Recently, we've been working with a very large mutualfund company entering the life insurance business." The mutual-fund company wants a life insurance product to improve its range of services.

Financial institutions are interested in selling life insurance, because they see money being made and because they want customers to view them as a full-service organization, Burgoon said.

The growth of New Options has exceeded lincoln Re's expectations and projections, as evidenced by the level of interest and number of deals, and that trend is likely to continue, Burgoon said. While the Gramm-Leach-Bliley financial modernization act expanded opportunities for noninsurers, the law was actually behind the curve of what was already happening in the marketplace, he said.

Banks Eye Insurance Profits

"It wasn't necessary to have GLB enacted for growth of New Options to take off," Burgoon said. "GLB gave banks in particular the ability to own insurance companies and underwrite policies. They did not have that power before GLB. They did, however, have the power to sell life insurance to customers. GLB allows banks to start thinking about participating in the core profits of the life insurance business."

New Options has had a number of discussions with prospects about creating a life insurer that the client could buy, but none has come to fruition yet, Burgoon said. The very large mutual-fund company he previously referenced already owned a dormant life company. "We helped them basically build it and bring pieces together to operate it," he said.

Burgoon's staff at New Options numbers 10. He drums up business, and the others are the "deal engineers, the ones who put the deal together. They also serve as deal managers, those who shepherd the deal as it matures, Burgoon said.

Having a group for nontraditional markets was "unheard of" in 1996, and it's still unusual for reinsurers today, he said. He declined to say how much business New Options brings to Lincoln Re, but he said the group "is not a small contributor to revenues" and that early expectations were that New Options would be quickly profitable.

According to Burgoon, New Options also has participated in the following deals:

* Helping with the start-up of a direct distributor of life insurance and with aligning it with life insurance carriers. He said it is an organization that advertises in nationwide publications like the Wall Street Journal.

* A contract with the second-largest financial-services organization in the world, based in Europe. This organization relies on Lincoln Re for its mortality management.

* Work with another very large mutual-fund company that approached Lincoln Re for mortality risk management. This and similar organizations "are very powerful and tend to operate in a stealth mode," Burgoon said. "They're not the ones you hear about. They align a great group of partners so they can have wonderful execution inside their own market, and they go about it quietly."

Transamerica Re, Charlotte, N.C., also has made entrees in nontraditional markets and sees promise in that area. The company has been investing "heavily" over the past four years in types of services that leverage its underwriting competencies, from product development to product wholesaling, said Michael Colannino, vice president of life products. "I would say this is an area we've pioneered," he said. "There are maybe only one or two others that do this. We like to go on site and work together to identify a client's needs and solutions. That requires a strong relationship, and it's been a differentiating factor for us. We have developed enough credibility and empathy over the years."