Finding the good life: life reinsurers enjoy the prospect of fresh business opportunities in the United States and elsewhere as more life insurance is sold to older policyholders.

The U.S. life reinsurance market is being reshaped by a hardening market, consolidation and expansion opportunities in foreign markets.

About $2 trillion of new life insurance is written annually in the United States. And about 60% of new life insurance is being reinsured, according to David Atkinson, executive vice president and chief operating officer for Chesterfield, Mo.-based Reinsurance Group of America Inc. Driving that level of ceding are Regulation Triple X reserve requirements for term insurance and the Illustration Regulation that forces companies to use their own recent mortality experience as a basis for future illustrations in the absence of reinsurance, he said.

An aging population and economies of scale also are helping. And, of late, some property/casualty reinsurers have been eyeing it as a way to diversify their risk. That might be a short-lived trend.

"The business model of expanding into life reinsurance to smooth out the volatility in P/C is not a long-term, sustainable model if it's not what you have a strategic advantage in," said Scott Willkomm, the newly elected chief executive officer of Scottish Re.

Taking Leave

Ten years ago, 19 reinsurers had a 1.5% or greater share of the U.S. life reinsurance market, according to a Reinsurance Group of America report; however, over the past 10 years, 14 of those 19 reinsurers have been acquired--although four have been left intact--while one reinsurer has exited and two reinsurers have entered the U.S. market, said Atkinson. Consolidation has left only 10 active reinsurers with market shares of 1.5% or more.

All that consolidation is creating a "barbell" configuration of the industry, with large, global competitors on one end and smaller companies specializing on a particular product or geographical area on the other, Scottish Re's Willkomm said.

Scottish Re is one of the consolidators. With its completion of the recently-acquired U.S. individual life reinsurance business of ING Group N.V., Scottish Re is now the third-largest life reinsurer in the United States.

At the end of 2003, the Bermuda-based reinsurer bought 95% of the outstanding capital stock of ERC Life Reinsurance Corp. Two years earlier, Scottish acquired World-Wide Reassurance Co, Ltd. and its parent company World-Wide Holdings Ltd. from Pacific Life in exchange for more than 4.5 million newly-issued ordinary shares of Scottish Re.

"I think the industry is consolidating to the point where, in five to 10 years, there will be six to eight large, global life reinsurers, and there will probably be an equal number of smaller firms that will specialize in geographic location or product," Willkomm said. "The route we had started taking at Scottish Re was as a specialist firm. However, as we have grown and matured, I think we would number ourselves among those global firms that effectively dominate the life reinsurance base."

Group life business, in particular, is showing signs of significant profitability across the continent because of fragmentation of the industry, said Willkomm.

Consolidation has shrunk capacity, said Erwin Schnauder, chief actuary, life reinsurance, for Germany-based Munich Re. That capacity crunch is working in the company's favor. "In many cases, it's allowing us to selectively add new accounts to our books as they become available on the market."

Consolidation in Europe also has direct writers spreading their business around. "Life insurers are trying to broaden their panels so they aren't so dependent on one life reinsurer in case the company decides to exit the market," said Patrick Thiele, president and chief executive officer of PartnerRe Ltd. Life insurers are more willing than ever to talk to well-rated, local reinsurers, he added. "It's a traditional market in the good sense and takes a long time for people to begin to become comfortable with their reinsurers because they know they'll be with them for the next 20 to 30 years. It's a long mating dance and because of that, it will keep a relatively limited supply."

Consolidation hardened the market. "And we're not seeing any signs of softening, said Dr. Wolfe Becke, chief executive officer and a member of the executive board of Hannover Re in Germany. "On the other hand, the life business we write is not cyclical at all, so you can't expect after a major disaster to harden the way nonlife cycles are used to. However, it's also not impossible that when nonlife markets are weakening, parallel to that we would see weakening of rates on the life reinsurance side."

Emerging Markets

Most capacity in the U.S. life reinsurance market comes from European organizations, said George McKeon, an analyst for Conning Research and author of Conning's recent "Life Reinsurance: Capacity and Other Challenges" study. If they aren't committing capital to the U.S. market, he said, they can commit it to the European market where the use of life reinsurance by primaries is growing.

"In some ways, the European life reinsurance market is where the U.S. life reinsurance market was 10 years ago," said Thiele. "There was marked change in the use of reinsurance in the United States by life insurers starting in the early '90s, whereas today a large percentage of new life business is reinsured with life reinsurers." Those changes, along with regulatory changes, in many ways helped unlock capital in U.S. life insurers, he added.

"Mostly, it's just an issue of diversification," said W. Weldon Wilson, CEO of Swiss Re Life & Health America. "To some extent, there may be writers who are looking to get away from the level term products in the U.S. I don't think it's more profitable in Europe; I think there is profit to be made everywhere."

But some say Europe, like the United States, faces limited capacity. "It takes a long time to get on panels and a lot of capital and enormous staying power, so therefore the supply of life reinsurance in Europe doesn't dramatically expand and contract as it does on the nonlife side," said Thiele.

Europe's dramatic pension and annuity issues--a side effect of its aging population--will open opportunities for insurers and reinsurers, he said.

Willkomm calls Europe a "slow burn opportunity." But he believes it will be a very significant market for life reinsurers as a business in general over the next 10 years. "But they must be willing to be patient and let the market evolve according to the laws of nature."

In addition to the European market, some life reinsurers are attracted to the small, but growing Asian market, particularly in China and India. "As the concept of life insurance emerges and becomes an increasing phenomenon across Asia, the appeal will continue to grow strong," said McKeon.

Trend Watch

Despite continued consolidation both in the United States and abroad, "there's a firm conviction that [life reinsurance will grow more rapidly than underlying life insurance and also will grow more significantly than nonlife reinsurance,] said Hannover Re's Becke. "Increasing insurers' profitability will also add to its appeal."

An aging population also spurs the life reinsurance business. "People are buying life insurance at increasingly older ages," said Swiss Re's Wilson. From 2002 to 2003, the number of applicants for insurance over the age of 60 increased by 5%, according to LIMRA, he said.

"We definitely see more business becoming available to us both from existing clients increasing their share ceded to us and from new clients who wish to keep the counterparty risk with regard to reinsurers at acceptable levels," said Munich Re's Schnauder. "It's apparent that the strong and stable reinsurers benefit the most from this development, since reliability of the partner--both in terms of capital strength and stability and durability of the partnership--is a key aspect in the process of selecting the reinsurers."

Future capacity remains uncertain. Concentration on credit risk with reinsurers will not be the issue ... capacity will be, according to a 2002 presentation by Swiss Re on the future of life reinsurance. In addition, ceding companies will seek to negotiate longer-term (five-plus years) relationships, concentrate their business to maintain the relationships, and ask "can the reinsurer supply my capital needs for the long haul?" according to the company.

Conning's McKeon expects a growing number of affiliated professional reinsurers--those companies he said that use other companies within their own fleet for many purposes ranging from true risk spreading to financial statement window dressing--as opposed to the number of actual reinsurers with any significant share. According to Conning's recent study, new recurring reinsurance by professional reinsurers grew by almost 400% between 1994 and 2003, while the number of life reinsurers with share greater than 2% dropped from 16 to 10.

Capital in major multifaceted reinsurance organizations can move and so the life portion of the business may have access to more funds than it had one to two years ago, McKeon said. "In addition, it's also attracting some new players to the market."

The bottom line, McKeon said, is "Reinsurance rates are increasing and terms and conditions are getting tighter--both of which are good for reinsurers."

Key Points

* A hardening market, consolidation and emerging non-U.S. markets are changing the life reinsurance environment.

* The amount of new business being ceded to reinsurers has reached about 60% recently.

* The United States has lost one reinsurer a year for the past decade due to companies exiting the market.

Double Play

A handful of multiline reinsurers has recently decided to enter the life reinsurance market to balance the volatility of property/casualty policies.

"This is a cycle that comes back every eight to 10 years," said Scott Willkomm, chief executive officer of Scottish Re. "In the mid '90s, many of the big European nonlife companies expanded their writing in the life reinsurance space for that very reason. And now we're hearing talk of it again with some of the Bermudian companies."

XL Capital is one. The company recently entered the life reinsurance market to build up a business that had more stable long-term earnings as a counterplay balance to the short-term or volatile earnings on the property/casualty side, said Bob Douglas, head of life reinsurance operations for the Bermuda-based company.

In the mid '90s, reinsurance mammoth Swiss Re adopted that strategy. The result? "We now have a very good mix," said W. Weldon Wilson, chief executive officer of Swiss Re Life & Health America. "I previously worked with a company that solely did life and health reinsurance, and I don't think it's as easy for them to make the transition in reverse. The skill set needed for P&C is just so specific."

Experience is proving the move to life reinsurance is paying oft with a reliable stream of profits that is a stabilizing factor to the more cycle- and cat-exposed P&C lines, said Erwin Schnauder, chief actuary, life reinsurance for Germany-based Munich Re.

Learn More

Reinsurance Company of America Inc.

A.M. Best Company # 04291

Distribution: Direct with clients

Hannover Rueckversicherung AG (Hannover Re)

A.M. Best Company # 84092

Distribution: Independent agents, direct with clients (particularly life and health), direct

Muenchener Rueckversicherungs (Munich Re)

A.M. Best Company # 86577

Distribution: Direct and reinsurance brokers

Swiss Re Group

A.M. Best Company # 85010

Distribution: Reinsurance brokers

XL Re Ltd.

A.M. Best Company # 86106

Distribution: Reinsurance brokers

PartnerRe Group

A.M. Best Company # 86411

Distribution: 35% direct and 65% reinsurance brokers

Scottish Re Holdings Ltd.

A.M. Best Company # 85133

Distribution: Sales force

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