Same stage, new roles: life reinsurers are being forced to find new roles, as direct life and annuity writers create new products, with or without the help of reinsurers.

From guaranteed minimum accumulation benefits to expanding existing life products to formerly difficult-to-insure customers, innovation among life and annuity writers is impacting reinsurers.

While some companies, such as Hartford Life, credit their traditional reinsurers with helping them bring new products to market, others, like Nationwide Financial, have devised their own hedging system in lieu of relying on reinsurance.

The life reinsurance market is highly consolidated. The top five carriers have 80% of all life reinsurance in force. But direct writers are increasingly looking for alternatives to traditional reinsurance, including using securitizations or captives instead of buying traditional reinsurance. In 2005, cession rates declined by about 10%, according to A.M. Best Co. The Reinsurance Association of America said premiums ceded to affiliated reinsurers, such as captives, rose by nearly 25% in 2005 compared with the previous year.

Life reinsurers must adapt or face becoming irrelevant, said Jim McArdle, vice president of sales and marketing for Transamerica Re.

"The reinsurance role is changing. It's up to us to figure out how best to provide value to clients. If we can do that, we will always have a role. If we don't, they will go elsewhere," McArdie said.

New Risks

For innovative products there may not be an existing reinsurance market, said Mike McLaughlin, who leads Deloitte's actuarial and insurance solutions. "Companies may have to design and price on their own, then look to convince a reinsurer. Other products, like term life or universal life, are pretty standard, and it would be normal in the course of product development to get quotes from a handful of reinsurers and see who would give you the best data to lay off some risk."

Primary writers also have gone beyond traditional reinsurance to use letters of credit or captives to provide reinsurance for the additional reserves needed for Triple X or A Triple X. Other new avenues of hedging risk, such as securitizations for variable annuity reserves, could be on the horizon, McLaughlin said.

Reinsurers are likely to get more active in covering new types of risks, said Phil Raiford, vice president and actuary with Nationwide Financial.

"The whole life reinsurance industry has grown up around the concept of transferring mortality risk. Long-term care is a longevity risk. Guaranteed minimum accumulation benefit is an equity risk," Raiford said. "In many respects, companies like Nationwide want to keep more and more mortality risk ourselves. We have a lot of equity risk; if we can balance that out with more mortality risk, that makes our overall risk profile more balanced because they are uncorrelated risks."

Targeting New Customers

In general, Tom Kalmbach, vice president and pricing actuary for Hartford Financial, said Hartford turns to reinsurance for three reasons: to protect against earnings volatility in the event of statistical fluctuations, such as a major insurance event like a pandemic; to reduce the strain of the higher capital demand on certain products, such as term life, which has required more onerous reserves after regulation Triple X; and to reduce the volatility of a risk that Hartford is less experienced with.

Hartford Life would not have been able to offer its new competitively priced term product without the reinsurance support it received from one company, Kalmbach said.

"You need a good way to deal with the capital that's needed to write term business. Many companies have gone to the securities market to finance term insurance reserves through securitizations. On the other side, companies that were maybe using traditional reinsurance were facing increases in prices. The reinsurance market was pretty consolidated and tight," Kalmbach said.

Nationwide's term business is a smaller portion of its portfolio than other products, making securitization a less attractive option.

But by working with a single reinsurance company, which Kalmbach declined to name, Hartford was able to develop a new platform to write term business. The reinsurer provided expertise on research and data, and the new underwriting process is faster and means less work for brokers. The reinsurer "is really engaged in our business, engaged in the success of the program, the cost of the program. They really approached this business opportunity of ours as a business opportunity of theirs as well, rather than just being a provider of mortality risk insurance. They wanted to make our product successful in the market, because when our product is successful, their product is successful" Kalmbach said.

In another development, Nationwide has expanded its product offerings to some breast cancer and prostate cancer patients who might not have been eligible before.

"The cancer initiative is an example of where a full service reinsurer can really help you," Kalmbach said, noting this time a pool of reinsurers helped the company create the new avenue.

Previously, patients who had been treated for low levels of breast cancer or prostate cancer either had to wait two to three years to get coverage or pay two to three times the premium. Under the Hartford's new program, these cancer patients are eligible for insurance products under standard rates.

"The mortality for them is not different from the general population, given advancements in treatment," Kalmbach said. "Reinsurance allows us to accept clients who we previously had assessed an extra cost to" The key, Kalmbach said, is reinsurers can have access to more robust data. "We have our data, but the reinsurers have access to my data, as well as my competitor's data, which can help assess a market opportunity," Kalmbach said.

Transamerica Re can help a direct writer to enter the term-life market through a program that offers everything from the product design with reinsurance to providing the underwriting platform and underwriters to look at the cases, McArdle said.

"We like to find ways to enable us to do more business, but more importantly, to allow life insurers to do more," McArdle said. "If we want to grow, we have to come up with some new risk to underwrite, or we have to provide better value to life insurers, whether it's on mortality or other types of capital solutions or new underwriting techniques that help them sell more. If they sell more, they can keep more risk, we can get more risk and we're all happy"

Going It Alone

Phil Raiford, vice president and actuary with Nationwide Financial, said reinsurers often offer a broad range of consulting services in exchange for a piece of reinsurance. "This can help companies develop and file products quicker," Raiford said.

However, Nationwide doesn't use reinsurers as consultants.

"Typically, we would use reinsurance to basically provide for some stability in the fluctuation of mortality rates," Raiford said.

For instance, Nationwide uses reinsurance above a certain limit for its variable universal life product. But the company did not rely on reinsurance when it rolled out a living benefit on certain variable annuities.

"A guaranteed minimum accumulation rider does introduce a new type of risk to Nationwide," Raiford said.

The guaranteed minimum accumulation benefits provide a guaranteed return of premium on the policy's anniversary date. So, for instance, if the company guaranteed a policyholder that he'd receive 80% of his premiums or 80% of the highest anniversary cash value in 20 years, and the actual value fell short, Nationwide would make up the difference.

"There's very limited capacity in reinsurance to transfer those risks. We have put in effect our own internal reinsurance program," Raiford said.

The company has a dedicated staff in charge of a hedging program, which relies on derivatives and other vehicles to hedge against equity returns being at sustained low levels for long periods of time.

It's an approach that other big writers of variable annuity guarantees are using, said Deloitte's McLaughlin.

"They create a package or portfolio of investments that will offset the exposure that they face under the contract guarantees," McLaughlin said. "Hartford, Hancock, Axa, AIG ... they all have hedges. They were forced to because of the absence of reinsurance."

Nationwide is also in the process of using its captive reinsurance company, NF Re in Bermuda, to provide coverage for its Triple X reserves. "This is one of the emerging areas of reinsurance, and companies are finding alternatives to reinsurance," Raiford said. For instances, companies may opt to transfer the risk to an offshore company that would set up economic reserves and provide the primary writer with a Letter of Credit for excess of the statutory Triple X reserves.

New Horizons

"Innovation certainly drives the reinsurance market," said Deloitte's McLaughlin. Life insurance is a very creative industry, he said. "These new features need reinsurance--not just mortality, but longevity risk, equity return risk, interest rate risk, inflation risk. As the direct writers come up with new innovative features, in many cases, they can't wait on reinsurance to design a feature. But a feature that's successful can become too large for a direct writer's risk appetite."

Other innovative products include life insurance policies issued to customers at advanced ages, and investor-owned life insurance.

McLaughlin also wondered why more life reinsurers didn't come up with their own hedging programs to take on risks such as GMAB. "Why couldn't the reinsurer do that? I think they probably could," he said.

McArdle, of Transamerica, said reinsurers do have their own hedging programs. However, when dealing with living benefits, insurance companies also have to predict how people will behave in the future.

"When you talk about living benefits, customers have so many options now and will have more and more options in the future, it makes it all the more difficult to be very precise because you aren't sure what the future behavior of customers will be," McArdle said. "The people themselves don't know what will be attractive to them in the future. That makes it difficult to figure out what to do with reserving and capital. It makes it difficult to price."

One way to hedge a living benefit would be to combine it in a product with a guaranteed death benefit, he said. Or the risk of mortality could be combined with the risk of longevity, if you had a life insurance policy and an immediate annuity. "You'd only pay out on one of them, either you live or you die, you aren't going to do both. Companies are already starting to look at this," McArdle said.

McArdle said the market is moving to principle-based reserves, which will present both a challenge and an opportunity. "Principle-based reserving looks into the specific risk of a product, not just the overall category it fits into. What does that mean in the future? Reinsurers have access to seeing a wide variety of products from companies, and how they've performed under different scenarios. We can play a role in the development of new products," McArdle said.

Key Points

* The top five life reinsurers together have 80% of all life reinsurance in force.

* In 2005, cession rates declined by about 10%.

* The Reinsurance Association of America said premiums ceded to affiliated reinsurers, such as captives, rose by nearly 25% in 2005 compared with the previous year.

Learn More

Hartford Financial Services Group Inc.

A.M.Best Company # 18217 (The Hartford Insurance Pool)

Distribution: Independent agents and brokers, broker/dealers, marketing organizations

Nationwide Life Group

A.M. Best Company # 70350

Distribution: Independent broker/dealers, wirehouses and other regional financial firms, financial institutions, financial planners, NLICA agents and Nationwide's property/casualty agents

Transamerica Re (a division of Transamerica Occidental Life Ins Co.)

A.M. Best Company # 06848

Distribution: Direct

For ratings and other financial strength information about these companies, visit www.ambest.com.

10 Largest Life Reinsurers by Amount in Force,
Nonaffiliated Business--2005

Company                                     AMB #   ($ Thousands)

RGA Reinsurance Co.                         9080    1,186,337,141
Swiss Re Life & Health America Inc.         7283    1,083,841,961
Munich American Reassurance Co.             6746      677,240,819
Security Life of Denver Insurance Co. (1)   7029      656,890,578
Lincoln National Life Insurance Co.         6664      536,757,903
Scottish Re (U.S.) Inc.                     8785      495,982,543
Employers Reassurance Co.                   6976      431,280,311
Transamerica Occidental Life Ins Co.        6848      382,339,386
Generali USA Life Reassurance Co.           9189      271,333,970
Transamerica Financial Life Insurance Co.   7267      266,510,381

Source: A.M. Best Co.

(1) Life reinsurance business acquired by Scottish Re year end 2004